---

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

FORM 20-F

[]
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(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,
2005**

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

For the transition period from _______________ to
_______________

Commission file number**0-32255**

BALATON POWER INC.(Exact
name of Registrant specified in its charter)

BRITISH COLUMBIA, CANADA(Jurisdiction of
incorporation or organization)

19 East Fourth Avenue Hutchinson, Kansas
67501(Address of principal executive offices)

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

|Title of Each Class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|None                | Not applicable                           

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**

Number of outstanding shares of the Companys only class of
capital or common stock as at December 31, 2005 was 76,358,117 Common Shares
Without Par Value.

---

- ii -

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 is an annual report or a transition report, indicate by
  check mark if the registrant is not required to 
  file reports pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.
  YES []          
  NO [ x ]

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

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 []          
  Non-accelerated filer [ x ]

Indicate by check mark which financial statement item Registrant
  has elected to follow: 
  Item 17 [ x ]           Item
  18 []

If this is an annual report, indicate by check mark whether the
  Registrant is a shell company (as defined in 
  Rule 12b-2 of the Exchange Act).
  YES []          
  NO [ x ]

---

TABLE OF CONTENTS to Form 20-F of Balaton Power Inc.
(Balaton)

|                 |           |                                                                                    | Page
|---------------- | --------- | ---------------------------------------------------------------------------------- | ----
|                 |           |                                                                                    |     
|**GLOSSARY**     | 1        
|                 |           |                                                                                    |     
|**PART
      I** | 3        
|                 | 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                                                         | 9   
|                 | Item 4A.  | Unresolved Staff Comments                                                          | 22  
|                 | Item 5.   | Operating and Financial Review and Prospects                                       | 22  
|                 | Item 6.   | Directors, Senior Management and Employees                                         | 28  
|                 | Item 7.   | Major Shareholders and Related Party Transactions                                  | 34  
|                 | Item 8.   | Financial Information                                                              | 35  
|                 | Item 9.   | The Offer and Listing                                                              | 36  
|                 | Item 10.  | Additional Information                                                             | 37  
|                 | Item 11.  | Quantitative and Qualitative Disclosures About Market Risk                         | 49  
|                 | Item 12.  | Description of Securities Other Than Equity Securities                             | 49  
|                 |           |                                                                                    |     
|**PART II**      | 49       
|                 | Item 13.  | Defaults, Dividend Arrearages and Delinquencies                                    | 49  
|                 | Item 14.  | Material Modifications to the Rights of Security Holders
      and Use of Proceeds | 49  
|                 | Item 15.  | Controls and Procedures                                                            | 49  
|                 | Item 16.  | [Reserved]                                                                         | 50  
|                 | Item 16A. | Audit Committee Financial Expert                                                   | 50  
|                 | Item 16B. | Code of Ethics                                                                     | 50  
|                 | Item 16C. | Principal Accountant Fees and Services                                             | 50  
|                 | Item 16D. | Exemptions from the Listing Standards for Audit Committees                         | 51  
|                 | Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated
      Purchasers       | 51  
|                 |           |                                                                                    |     
|**PART III**     | 51       
|                 | Item 17.  | Financial Statements                                                               | 51  
|                 | Item 18.  | Financial Statements                                                               | 51  
|                 | Item 19.  | Exhibits                                                                           | 51  

---

GLOSSARY

|Term                           | Definition                                                                                                                          
|------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------
|                               |                                                                                                                                     
|Acquisition                    | The Companys acquisition
        of CRL in October 2002                                                                            
|                               |                                                                                                                                     
|Act                            | Securities Act of 1933,
        as amended                                                                                          
|                               |                                                                                                                                     
|Balco                          | Bharat Aluminium Co.                                                                                                                
|                               |                                                                                                                                     
|BRIMAC                         | Balaton Remote Integrated Monitoring
        and Control System                                                                     
|                               |                                                                                                                                     
|BSA                            | Balaton Power Corporation S.A.                                                                                                      
|                               |                                                                                                                                     
|CDN GAAP                       | Generally accepted accounting
        principles in Canada                                                                          
|                               |                                                                                                                                     
|CFC                            | Controlled foreign corporation                                                                                                      
|                               |                                                                                                                                     
|CIMM                           | Canadian Institute of Mining
        and Metallurgy                                                                                 
|                               |                                                                                                                                     
|Code                           | Internal Revenue Code                                                                                                               
|                               |                                                                                                                                     
|Committee                      | Board of directors of the Company
        who will be Plan administrators                                                           
|                               |                                                                                                                                     
|Company                        | Balaton Power Inc.                                                                                                                  
|                               |                                                                                                                                     
|COMPL                          | Continental Orissa Mining Private
        Limited                                                                                   
|                               |                                                                                                                                     
|Continental                    | Continental Resources Ltd., a
        company incorporated under the laws of Québec                                                 
|                               |                                                                                                                                     
|CRL                            | Continental Resources (USA) Ltd.,
        a wholly-owned subsidiary of the Company                                                  
|                               |                                                                                                                                     
|EDTA                           | Ethylene-diamene-tetra-acetic
        acid technique, industry standard for analyses for radicals                                   
|                               |                                                                                                                                     
|Exchange Act                   | Securities Exchange Act of 1934,
        as amended                                                                                 
|                               |                                                                                                                                     
|FERC                           | United States Federal Energy
        Regulatory Commission                                                                          
|                               |                                                                                                                                     
|Gandhamardan 
      Project    | The second largest bauxite deposit
        in Asia, situated in the Gandhamardan Hill, Duragali, State of Orissa,
        India     
|                               |                                                                                                                                     
|GSI                            | Geological Survey of India                                                                                                          
|                               |                                                                                                                                     
|Investment Act                 | Investment Canada Act                                                                                                               
|                               |                                                                                                                                     
|IRS                            | United States Internal Revenue
        Service                                                                                      
|                               |                                                                                                                                     
|ISO Options                    | Incentive stock options                                                                                                             
|                               |                                                                                                                                     
|Joint Venture 
      Agreement | The joint venture agreement between
        Continental and OMC dated April 18, 1997                                                
|                               |                                                                                                                                     
|Lease                          | The mining lease issued in the
        name of OMC for over 285 hectares named Block 7 of the Gandhamardan Bauxite
        Deposit  
|                               |                                                                                                                                     
|MECL                           | Mineral Exploration Corp. Ltd.                                                                                                      
|                               |                                                                                                                                     
|NQSO Options                   | Non-qualified stock options                                                                                                         
|                               |                                                                                                                                     
|ODM                            | Orissa Directorate of Mines                                                                                                         
|                               |                                                                                                                                     
|OMC                            | Orissa Mining Corporation Limited,
        an Orissa State owned government corporation, the Companys joint
        venture partner
|                               |                                                                                                                                     
|Perial                         | Perial Ltd., a company incorporated
        under the laws of the Province of Ontario, a major shareholder of the
        Company   
|                               |                                                                                                                                     
|PFIC                           | Passive foreign investment companies                                                                                                
|                               |                                                                                                                                     
|Pisces Process                 | Fish protective water inlet device                                                                                                  

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- 2 -

|Plan             | The Companys 2004 incentive stock option plan                                                                                                                                  
|---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |                                                                                                                                                                                 
|QEF              | Qualified electing fund                                                                                                                                                         
|                 |                                                                                                                                                                                 
|Ravenscroft      | Vernon Ravenscroft                                                                                                                                                              
|                 |                                                                                                                                                                                 
|Ravenscroft Site | Ravenscrofts hydroelectric power production facility and
      site situated in Bliss, Idaho                                                                                   
|                 |                                                                                                                                                                                 
|Report           | A report prepared by E.A. Gallo, P. Geo, titled The
      Summary Report Gandhamardan Project Bargarh and Bolangir Districts, State
      of Orissa, India, dated April 8, 2003
|                 |                                                                                                                                                                                 
|SEC              | United States Securities and Exchange Commission                                                                                                                                
|                 |                                                                                                                                                                                 
|System           | Low-impact run-of-the-river hydroelectric power
      production system                                                                                                         
|                 |                                                                                                                                                                                 
|Tax Act          | Income Tax Act(Canada)                                                                                                                                                          
|                 |                                                                                                                                                                                 
|Treaty           | Canada-United States Income Tax Convention, 1980                                                                                                                                
|                 |                                                                                                                                                                                 
|US GAAP          | Generally accepted accounting principles in the United
      States of America                                                                                                  

Resource Category (Classification) Definitions

|Mineral Reserve  | The SECs Industry Guide 7  Description of Property by
      Issuers Engaged or to be Engaged in Significant Mining Operations defines
      reserve as that part of a mineral deposit, which could be economically
      and legally extracted or produced at the time of the reserve
      determination. Reserves consist of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                 | (1) Proven (Measured) Reserves. Reserves for
      which: (a) quantity is computed from dimensions revealed in outcrops,
      trenches, workings or drill holes; grade and/or quality are computed from
      the results of detailed sampling; and (b) the sites for inspection,
      sampling and measurement are spaced so closely and the geologic character
      is so well defined that size, shape, depth and mineral content of reserves
      are well-established.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                 | (2) Probable (Indicated) Reserves. Reserves for
      which quantity and grade and/or quality are computed from information
      similar to that used for proven (measured) reserves, but the sites for
      inspection, sampling and measurement are farther apart or are otherwise
      less adequately spaced. The degree of assurance, although lower than that
      for proven (measured) reserves, is high enough to assume continuity
      between points of observation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Mineral Resource | Canadian National Instrument 43-101, Standards of
      Disclosure for Mineral Projects (NI 43-101) defines a Mineral
      Resource as a concentration or occurrence of natural, solid, inorganic or
      fossilized organic material in or on the earths crust in such form and
      quantity and of such a grade or quality that it has reasonable prospects
      for economic extraction. The location, quantity, grade, geological
      characteristics and continuity of a mineral resource are known, estimated
      or interpreted from specific geological evidence and knowledge. Mineral
      Resources are sub-divided, in order of increasing geological confidence,
      into Inferred, Indicated and Measured categories. An Inferred Resource has
      a lower level of confidence than that applied to an Indicated Resource. An
      Indicated Resource has a higher level of confidence than an Inferred
      Resource but has a lower level of confidence than a Measured Resource.
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                 | (1) Inferred Resource. That part of the Mineral
      Resource for which quantity and grade or quality can be estimated on the
      basis of geological evidence and limited sampling and reasonably assumed,
      but not verified, geological and grade continuity. The estimate is based
      on limited information and sampling gathered through appropriate
      techniques from locations such as outcrops, trenches, pits, workings and
      drill holes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                 | (2) Indicated Resource.
        That part of the Mineral Resource for which quantity, grade or quality,
        densities, shape and physical characteristics can be estimated with a
        level of confidence sufficient to allow the appropriate application of
        technical and economic parameters, to support mine planning and evaluation
        of the economic viability of the deposit. The estimate is based on detailed
        and reliable exploration and testing information gathered through appropriate
        techniques from locations such as outcrops, trenches, pits, workings and
        drill holes that are spaced closely enough for geological and grade continuity
        to be reasonably assumed.                                                                                                                                                                                                                                                                             

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- 3 -

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

The SECs Industry Guide 7 
Description of Property by Issuers Engaged or to be Engaged in Significant
Mining Operations does not define or recognize resources. As used in this
Annual Report, resources are as defined in Canadian NI 43-101.

Cautionary Note to U.S. Investors concerning estimates of
Measured and Indicated Resources

This Annual Report uses the terms Measured Resources and
Indicated Resources. We advise U.S. investors that while these terms are
recognized and required by Canadian regulations, the SEC does not recognize
them. U.S. Investors are cautioned not to assume that any part or all of the
mineral deposits in these categories will ever be converted into reserves.

Cautionary Note to U.S. Investors concerning estimates of
Inferred Resources

This Annual Report uses the term inferred resources. We
advise U.S. investors that while this term is recognized and required by
Canadian regulations, the SEC does not recognize it. Inferred resources have a
great amount of uncertainty as to their economic and legal feasibility. It
cannot be assumed that all or any part of an inferred resource will ever be
upgraded to a higher category. Under Canadian rules, estimates of inferred
resources may not form the basis of feasibility or pre-feasibility studies,
except in rare cases. U.S. investors are cautioned not to assume that part or
all of an inferred resource exists, or is economically or legally
mineable.

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within
the meaning of the U.S.Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not guarantees of the Company's future
operational or financial performance and are subject to risks and uncertainties.
When used in this Annual Report, the words estimate, intend, expect,
anticipate and similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
statements, which speak only as of the date of this Annual Report. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements.

Actual operational and financial results may differ materially
from the Company's expectations contained in the forward-looking statements due
to various factors, many of which are beyond the control of the Company. These
factors include, but are not limited to, the need for additional financing to
pursue the Companys business plan, risks involved in conducting business
outside of the United States, changes in Canadian or U.S. tax or other laws or
regulations, material changes in capital expenditures, as well as the risks and
uncertainties described in the section entitled Risk Factors set forth in Item
3 of this Annual Report.

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- 4 -

PART I

ITEM
1.           IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.          
Directors and Senior Management

Not applicable.

B.          
Advisers

Not applicable.

C.          
Auditors

Not applicable.

ITEM
2.           OFFER STATISTICS
AND EXPECTED TIMETABLE

Not applicable.

ITEM
3.           KEY
INFORMATION

A.          
Selected Financial Data

The following selected financial is data derived from the
audited financial statements of the Company for the last five fiscal years ended
December 31, 2005 (see Item 17). The financial statements are presented in
United States dollars and have been prepared in accordance with generally
accepted accounting principles in Canada (CDN GAAP). Note 15 to the
financial statements provides a summary of the differences between Canadian GAAP
and U.S. GAAP. Prior to October 2002, the Company was in the business of
constructing, with plans to sell and install its Pisces Process and was also
acquiring hydroelectric power sites. In October 2002, pursuant to the
acquisition of CRL, the Companys business changed to focus on the Gandhamardan
Project in India. Accordingly, the amounts presented below for 2002 and 2001 may
not be comparable to the amounts presented for 2003, 2004 and 2005. In addition,
amounts presented for the year ended December 31, 2004 have been restated to
make certain adjustments as described in Note 16 to the annual financial
statements included in this annual report to comply with comments from the
SEC.

Restated(US$)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance Sheet DataTotal assets according tofinancial
      statements (CDN GAAP)
    
    602,464
    
    
    733,976
    
    
    1,632,818
    
    
    1,664,408
    
    
    2,389,251Total assets (US GAAP)
    
    602,464
    
    
    733,976
    
    
    1,632,818
    
    
    1,664,408
    
    
    2,389,251Total liabilities
    
    336,898
    
    
    488,617
    
    
    1,727,812
    
    
    1,663,097
    
    
    50,387Share capital
    
    4,975,033
    
    
    4,130,154
    
    
    2,738,402
    
    
    2,598,000
    
    
    2,400,000Retained earnings (deficit)
      (CDN GAAP)
    
    (6,121,824
    )
    
    (4,972,337
    )
    
    (2,910,886
    )
    
    (2,596,689
    )
    
    (61,136
    )Retained earnings (deficit) (US GAAP)
    
    (6,121,824
    )
    
    (4,972,337
    )
    
    (2,910,886
    )
    
    (2,596,689
    )
    
    (61,136
    )Period End Balances (as at)Working capital (deficiency)
    
    64,390
    
    
    44,183
    
    
    (1,694,886
    )
    
    (1,598,581
    )
    
    (50,387
    )Resource properties
    
    -0-
    
    
    -0-
    
    
    1,145,163
    
    
    1,145,163
    
    
    2,389,251Shareholders equity
    
    265,566
    
    
    245,359
    
    
    (94,994
    )
    
    1,311
    
    
    2,389,251


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- 5 -

Restated(US$)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Operations DataRevenue
    
    -
    
    
    -
    
    
    
    
    
    24,899
    
    
    35,158Production costs
    
    -
    
    
    -
    
    
    
    
    
    22,398
    
    
    30,687Write-down of resource
      properties
    
    
    
    
    
    
    
    
    
    
    1,895,987
    
    
    -General and administrative expenses
    
    914,749
    
    
    1,239,605
    
    
    195,286
    
    
    232,587
    
    
    20,755Consulting Fees and
      Commissions
    
    63,000
    
    
    245,882
    
    
    72,000
    
    
    -
    
    
    -Professional Fees
    
    171,738
    
    
    207,376
    
    
    34,980
    
    
    -
    
    
    -Interest
    
    -
    
    
    13,050
    
    
    11,931
    
    
    -
    
    
    -Write down of Loan Receivable
    
    -
    
    
    355,548
    
    
    -
    
    
    -
    
    
    -Income (loss) according to
      financialstatements (CDN GAAP)
    
    (1,149,487
    )
    
    (2,061,451
    )
    
    (314,197
    )
    
    (2,126,073
    )
    
    (31,671
    )Loss per common share (CDN
      GAAP) 2
    
    (0.02
    )
    
    (0.03
    )
    
    (0.01
    )
    
    (0.05
    )
    
    (0.01
    )Loss per common share (US GAAP)2
    
    (0.02
    )
    
    (0.03
    )
    
    (0.01
    )
    
    (0.05
    )
    
    (0.01
    )Number of outstanding shares
    
    76,358,117
    
    
    74,128,260
    
    
    66,762,2141
    
    
    64,988,194
    
    
    55,878,194


Notes:

|(1) | During the year 2003, a shareholder subscribed for
      1,200,000 common shares for net cash proceeds of $77,490 to the Company.
      Such shares were not issued to the shareholder until after the year-end.
      As such, the number of issued and outstanding shares and retained earnings
      as at December 31, 2003 do not reflect this transaction.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                 
|(2) | Stock options and warrants outstanding were not included
      in the computation of diluted loss per share as their inclusion would be
      anti-dilutive.                                                                                                                                                                                                    

See Item 17 for accompanying audited year-end financial
statements (prepared in accordance with CDN GAAP) for further details.

B.          
Capitalization and Indebtedness

Not applicable.

C.          
Reasons for the Offer and Use of Proceeds

Not applicable.

D.          
Risk Factors

The following provides a discussion of certain risks facing the
Company. Additional risks that are currently unknown or that are currently
deemed immaterial may also materially adversely affect the business, result of
operations, financial condition and cash flow of the Company.

Company with No History of Earnings.The
Company has no operating history, no revenues and is subject to all the risks
inherent in a start-up business enterprise including lack of cash flow and no
source of revenue. The Company does not currently generate any revenue from the
sale of its products and will require significant additional capital to place
its property into production.

Liquidity; Need for Additional Financing.Historically,
  the Company has funded its operations through the sale of equity capital. The
  Company has had and will continue to have capital requirements in excess of
  its currently available resources. The Company is not able to meet its financial
  commitments as they become due. The Company is dependent on the proceeds of
  future financing to finance CRLs operations. To the extent that any such
  financing involves the sale of equity capital, the interests of the Companys
  then existing shareholders could be substantially diluted. There is no assurance
  the Company will be successful in raising additional financing.

---

- 6 -

Reliance Upon Directors and Officers;
Management.The Company is wholly dependent at present upon the
personal efforts and abilities of its officers and directors, who exercise
control over the day-to-day affairs of the Company. The loss of any director or
officer could have an adverse effect on the Company.

Issuance of Additional Shares. The Company
is authorized to issue 700,000,000 common shares. On December 31, 2005 and June
30, 2006 the Company had 76,358,117 common shares issued and outstanding. The
Board of Directors has the power to issue additional shares. However the Company
presently has no commitments or contracts to issue any additional shares to
other persons. The Company may in the future attempt to issue shares to acquire
products, equipment or properties, or for other corporate purposes. Any
additional issuance by the Company from its authorized but unissued shares would
have the effect of diluting the interest of existing shareholders.

Indemnification of Officers and Directors for Securities
Liabilities.The laws of the Province of British Columbia provide
that the Company could indemnify any director, officer, agent and/or employee as
to those liabilities and on those terms and conditions as are specified in the
British Columbia Business Corporations Act. Further, the Company may
purchase and maintain insurance on behalf of any such persons whether or not the
corporation would have the power to indemnify such person against the liability
insured against. The foregoing could result in substantial expenditures by the
Company and prevent any recovery from such officers, directors, agents and
employees for losses incurred by the Company as a result of their actions.
Further, the Company has been advised that in the opinion of the Securities and
Exchange Commission (the SEC), indemnification is against public policy
as expressed in the Securities Actof 1933 (the Act), as
amended, and is, therefore, unenforceable.

The Companys Management May Not Be Subject to U.S. Legal
Process. As Canadian citizens and residents, certain of the
Companys directors and officers may not subject themselves to U.S. legal
proceedings so that recovery on judgments issued by U.S. courts may be difficult
or impossible. While reciprocal enforcement of judgment legislation exists
between Canada and the U.S., the Companys insiders may have defences available
to avoid, in Canada, the effect of U.S. judgments under Canadian law, making
enforcement difficult or impossible. The Companys management may not have any
personal assets available in the U.S. to satisfy judgments of U.S. courts.
Therefore, the Companys shareholders in the United States may have to avail
themselves of remedies under Canadian corporate and securities laws for
perceived oppression, breach of fiduciary duty and like legal complaints.
Canadian law may not provide for remedies equivalent to those available under
U.S. law.

Exploration of Resource Property. Exploration of
natural resources involves a high degree of risk. Initially the Company is
required to obtain the approval from the State of Orissa to the agreement with
OMC before it will have the opportunity for exploration and future development
of CRLs Gandhamardan Project in Orissa State, India. Substantial expenditures
are required to establish resources and reserves through drilling, to develop
processes for extraction and, in the case of new properties, to develop the
extraction and processing facilities and infrastructure at any site chosen for
extraction. No assurance can be given that Mineral Resources will be converted
to Mineral Reserves, that funds required for the development can be obtained on
a timely basis, that funds will be adequate to complete a feasibility study and
/or that bauxite can be economically extracted from the Gandhamardan
Project.

Operating Hazards and Risks. Exploration and development
  of natural resources involves many risks, which, even with a combination of
  experience, knowledge and careful examination, may not be mitigated. Operations
  in which the Company has a direct or indirect interest will be subject to all
  the hazards and risks normally incidental to exploration, development and production
  of resources, any of which could result in work stoppages, damage to persons
  or property and possible environmental damage.

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Although the Company has or will obtain liability insurance
  in an amount which it considers adequate, the nature of these risks is such
  that the liabilities might exceed policy limits, the liabilities and hazards
  might not be insurable against, or the Company might not elect to insure itself
  against such liabilities due to high premium costs or other reasons, in which
  event the Company could incur significant costs that could have a material adverse
  effect upon its financial condition.

Fluctuating Prices. The Companys revenues, if
any, are expected to be in large part derived from future resource efforts
including those of CRLs projects. Commodity prices fluctuate and are affected
by numerous factors beyond the Companys control including international,
economic and political trends, expectations of inflation, currency exchange
fluctuations, interest rates, global or regional consumptive patterns,
speculative activities and increased production due to extractive developments
and improved extractive production methods. The effect of these factors on the
price of bauxite, and therefore the economic viability of the Companys
exploration projects, cannot be accurately predicted.

Competition. The resource industry is intensely
competitive in all of its phases, and the Company competes with many companies
possessing greater financial resources and technical facilities than itself.
Competition could adversely affect CRLs ability to develop the Gandhamardan
Project.

Options and Joint Ventures. In order to conserve
financial resources, the Companys efforts are focused on CRL, which intends to
enter into option, joint venture, or development agreements to form a consortium
to finance the exploration and possible development of the Gandhamardan Project
following obtaining approval from the State Government of Orissa for the
agreement between OMC and CRL. If such agreements are entered into, CRLs
current interest in the Gandhamardan Project would be reduced and CRL would
share with others in the development of the Project. There is no assurance that
a consortium will be formed, or if formed, that it will be formed on terms
favourable to CRL, or that the development of the Gandhamardan Project will
proceed.

Title to Assets. While the Company has or will
receive title opinions for any properties in which it has or will acquire a
material interest, such opinions cannot be viewed as a guarantee of title. Title
may not be affected by unregistered interests and claims to title, which could
adversely affect the Companys ability to develop its properties.

Inadequate Working Capital. The Companys other
projects, Pisces Process and its Hydro electric site, would require raising
funds in addition to the funds required for CRLs project in India. It will be
necessary for CRL to raise additional funds this year to move forward on the
Gandhamardan Project. The Company and/or CRL may be required to raise funds
through private placements or public offerings of treasury shares, through debt
financing, if available, or sale of a portion of its interest in its projects.
If the Company is not successful in raising further funds, it may not be able to
complete its development plans.

Lack of Experience in Fish Protection and Hydroelectric
sites.The Company has not constructed, installed or sold any Systems,
the Pisces Process (other than its tested prototypes) or BRIMACs and does not
generate or distribute electricity to anyone. There is no assurance that the
Company will ever construct, install or sell any Systems, the Pisces Process or
BRIMACs and the Company has not received any significant expression of interest
for the systems.

Indian Government Regulations.CRL is subject to
all governmental regulations in India on the development of the Bauxite Project.
The level of regulation by the government in India relating to the bauxite
project could affect the Companys ability to obtain partners or consortium
members for the construction of the aluminium complex.

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Reliance on Indian Government Agencies.
The Company relies heavily on the cooperation of the State Government of Orissa,
OMC and other governmental agencies in the finalization of joint venture
relationships and the issuance of permits and licenses for the development of
the Gandhamardan Project. The Company is dependent upon the Government of Orissa
to approve the agreement between OMC and CRL. There is no assurance that the
Government of Orissa will give its approval to OMC to enter into an agreement
with CRL.

Inflationary and Other Economic Pressures. The
Company is not currently generating revenues from the sale of its Pisces Process
Systems or from its subsidiary CRL. Future revenues may be generated from CRLs
Gandhamardan Project. Any such revenues could be affected by world commodity
prices. No immediate effect in respect to inflation and changes on prices is
realized. However inflationary pressures affect the Companys operation and
development expenditure, which is primarily incurred in U.S. dollars. The
directors estimation of inflation is considered with respect to the general
state of the world economy and of the United States in particular.

Government Policies.Activities conducted by
residents and non-residents in India and the flow of investment into the country
and the return of capital out of the country are subject to regulation. All such
controls and regulations are subject to change from time to time. Any change in
government regulation or the economic and political stability of the host
country India, could have a material adverse effect on the business of the
Company and could impact investments by U.S. residents in the Companys common
shares.

Currency exchange rate fluctuations and higher inflation
may adversely impact our future operating results and financial condition.The exchange rate between the Rupee and the U.S. dollar has changed
substantially in the last two decades and could fluctuate substantially in the
future. On an annual average basis, the Rupee declined against the U.S. dollar
from 1980 to 2002. In May 2002, however, the Rupee began appreciating relative
to the U.S. dollar. Because some of our assets may be held in Indian Rupees,
devaluation or depreciation of the value of the Indian Rupee will adversely
affect the value of these assets in foreign currency terms. In addition, our
market valuation could be materially adversely affected by the devaluation of
the Indian Rupee if U.S. investors analyze our value and performance based on
the U.S. dollar equivalent of our financial condition and operating results. We
expect that a substantial portion of our expenses, including personnel costs,
may be denominated in Indian Rupees. As such, any appreciation of the Rupee
against the U.S. dollar would reduce the cost advantage derived from our
Rupee-denominated expenses and would likely adversely affect our financial
condition and results of operations. In addition, an increase in inflation would
adversely affect world economies generally, which would adversely affect our
business.

We are subject to risks of operating in India.A
large part of our assets and business operations are expected to be located in
India. Consequently, our financial performance and the market price of our
shares may be affected by social and economic developments in India and the
policies of the Government of India, including taxation and foreign investment
policies, as well as changes in exchange rates, interest rates and controls.

Political instability related to the current multi-party coalition
  government could halt or delay the liberalization of the Indian economy and
  adversely affect economic conditions in India generally. The Government has
  traditionally exercised and continues to exercise significant influence over
  many aspects of the economy. Our business, and the market price and liquidity
  of our shares, may be affected by interest rates, changes in Government policy,
  taxation, social and civil unrest and other political, economic or other developments
  in or affecting India. Since 1991, successive Indian governments have pursued
  policies of economic liberalization, including significantly relaxing restrictions
  on the private sector. We cannot assure you that these liberalization policies
  will continue in the future. The rate of economic liberalization could change,
  and specific laws and policies affecting our business, foreign investment, currency
  exchange rates and other matters affecting investment in our securities could
  change as well. A significant change in India's economic liberalization and
  deregulation policies could adversely affect business and economic conditions
  in India generally, including our business.

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Patents. BSA filed on March 1999 for a
patent on its Pisces Process and was in a patent pending status until November
4, 2003 when the patent was issued. The Company has a license to manufacture and
sell the Pisces Process detailed in Item 4 of this document. There is no
assurance, however, that third parties may not infringe on the patents. In order
to protect the patent rights, the Company or the patent owners may have to file
lawsuits and obtain injunctions. If the Company does that, it may have to spend
large sums of money for attorneys fees in order to obtain the injunctions. Even
if the Company or patent holders obtain the injunctions, there is no assurance
that those infringing on the patents will comply with the injunctions. Further,
the Company or patent holders may not have adequate funds available to prosecute
actions to protect the patents, in which case those infringing on the patents
could continue to do so in the future.

ITEM
4.           INFORMATION ON
THE COMPANY

A.          
History and Development

The Companys legal and commercial name is Balaton Power Inc.
The Company was incorporated under the Company Act (British Columbia)
(now the British Columbia Business Corporations Act) under the laws of
the Province of British Columbia on June 25, 1986.. The Companys principal
place of business is 19 East Fourth Street, Hutchinson, Kansas, U.S.A., 67501,
telephone number (620) 662-3697.

The Company is in the start-up stage and has initiated limited
operations. Prior to the acquisition/merger with CRL in October 2002 (the
Acquisition), the Company was in the business of constructing,
installing and selling low impact run-of-the-river hydroelectric power
production systems (the System) which incorporated a patent pending
fish protective water inlet device (the Pisces Process). Following the
Acquisition, the Company changed its focus to pursuing the exploration and
development of the Gandhamardan Project. The Acquisition of CRL, the
Gandhamardan Project and other important events in the development of the
Companys business are noted below.

The Company commenced business with certain hydroelectric power
assets known as the Pisces System and the Balaton Remote Integrated Monitoring
and Control System BRIMAC. The Company's intent was to use these systems in
connection with the development of hydroelectric power projects in the Pacific
Northwest region of the United States. On January 14, 2001, the Company entered
into a power purchase agreement with Idaho Power Company and an agreement in
principle with Vernon Ravenscroft (Ravenscroft) of Bliss, Idaho, which
superseded an earlier agreement dated August 25, 2000, to acquire a one-third
interest in Ravenscrofts hydroelectric power production facility and site (the
Ravenscroft Site). Between 2000 and 2002, the Company spent $160,000
earning its interest in the Ravenscroft Site. Despite such expenditures,
substantial obligations remained with no funding to fulfil them. As such, the
Company decided that it was in its best interest to sell the Ravenscroft Site
back to Ravenscroft. During 2002, the Company sold its interest in the
Ravenscroft Site for $20,000 and the Company was released from any ongoing
commitments. During 2002, the Company also entered into agreements to acquire
eleven unlicensed hydropower sites. These acquisitions were completed, however
none of the sites have been developed. Subsequent to October 2002 all but one of
the hydropower sites have expired or terminated except for one site known as the
Snoqualmie River, however the Company has no near future plans to develop this
site.

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- 10 -

On September 30, 2002, the Company entered into a Stock
Exchange Agreement with Perial Ltd. (Perial) for the purchase of CRL.
The Company issued a total of 33,000,000 common shares in its own capital to
acquire CRL, of which 25,000,000 shares were allocated to Perial and 8,000,000
shares were issued as finders fees to non-related parties of the Company. At
that time CRL was a joint venture partner with OMC, which held an interest on a
significant bauxite deposit in Orissa, India, known as the Gandhamardan (the
Gandhamardan Bauxite Depositor theGandhamardan Project). The
Acquisition was treated as a capital transaction by the Company and not a
business combination. Prior to the Acquisition, CRL sold all of its oil and gas
assets to its then parent company, Perial, for a promissory note in the amount
of $481,724 and the assumption of CRLs outstanding debts. The note is
non-interest bearing and is repayable through the payment of a 25% interest in
production from the oil and gas assets.

CRLs sole asset at the time of the Acquisition, on or about
October 2002, was a 50% interest and effective control of Continental Orissa
Mining Private Limited (COMPL), which CRL acquired during 2002 in
consideration for agreeing to direct the exploration and development of the
Gandhamardan Project.

During 2004 and 2005 the Company focussed on establishing a
strong working relationship with OMC, the 50% owner of COMPL. The Company and
OMC have discussed the principal terms upon which the exploration and possible
development of the Gandhamardan Project, although no written agreement has yet
been signed. Also during 2004 and 2005 management held discussions with
potential partners to provide financial and technical resources to assist in the
exploration and potential development of the Gandhamardan Project. These
discussions in 2004 and 2005 took substantially all of the time of the Company's
management.

During 2004, COMPL was voluntarily dissolved to make way for a
new entity that will facilitate future joint venture agreements with OMC. As at
the date of this report, the Company has not established the new entity.

The Company is currently seeking a manager, joint venture
partner or purchaser for its hydroelectric power assets, which includes the
Pisces Process and BRIMAC. The Company does not intend to install the System at
any sites, and does not plan to develop any of its own hydroelectric sites. The
System is designed to produce green/renewable electricity. A green system is
one, which generates electricity from non-carbon based fuels, does not adversely
impact the flows of rivers or aquatic life and is considered low impact on the
environment. As of the date hereof, the Company has not constructed, installed
or sold any Systems, the Pisces Process (other than its tested prototypes) or
BRIMACs and does not generate or distribute electricity to anyone. There is no
assurance that the Company will ever construct, install or sell any Systems, the
Pisces Process or BRIMACs and the Company has not received any significant
expression of interest for the Systems.

B.          
Business Overview

The Companys principle business is focussed on the exploration
and development of the Gandhamardan Project located in the State of Orissa in
India through CRL. The Company is currently seeking approval from the Government
in the State of Orissa to an agreement with OMC as described below relating to
the Gandhamardan Project.

Gandhamardan Project

On April 18, 1997, Continental entered into an agreement with
  OMC to form a 50-50 joint venture company in the State of Orissa with its primary
  purpose to explore and develop the Gandhamardan Project (the Joint
  Venture Agreement). Continental managed the daily operations of COMPL,
  the joint venture company.

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Under the Joint Venture Agreement, OMC had an option to participate
  in Continentals proposed aluminium complex (including refinery, power
  plant and smelter). This option was to be exercised within one year from the
  date of transfer of leases concerning the Gandhamardan Project, of which such
  option could be extended by mutual consent. Pursuant to the Joint Venture Agreement,
  Continental bore all costs associated with the preparation of a feasibility
  report and exploration of the deposit. In 2002, Continental transferred its
  interest in the deposit to CRL, an unrelated company, with the result that CRL
  and OMC became joint venture partners. On September 30, 2002, the Company entered
  into a Stock Exchange Agreement with Perial for the purchase of CRL in consideration
  for 33,000,000 common shares. See History and Development above
  for terms of the acquisition of CRL. During 2004, COMPL was voluntarily dissolved
  at the request of OMC. CRL and OMC plan to incorporate a new entity that will
  direct the development of the Gandhamardan Project according to the terms and
  conditions of a new agreement submitted to the Orissa Government for approval.

During 2004 CRL met with OMC to discuss terms and conditions
for a new joint venture agreement to explore and develop the Gandhamardan
Project. Based upon these discussions, CRLs interests in the mining phase would
increase and place 100% of the downstream facilities (alumina plant and
aluminium shelter) in favour of CRL. The new proposed joint venture agreement
has been approved by CRL and OMC but is awaiting final approval from the
Government of Orissa. No assurance can be made that the Government of Orissa
will give its approval to the new propose joint venture agreement.

During 2005 CRL set up and staffed an office in Bhubaneswar,
Orissa and proceeded with the initial start up of the Gandhamardan Project.
Included in the staff in the Bhubaneswar is a geological team that has obtained
more than 1400 maps and reports covering the Gandhamardan area and has
catalogued them with reference numbers for evaluating the top sites for alumina
refinery, power plants, railroad spurs, water pipeline and aluminium
smelter.

The Company believes that the most efficient way to potentially
develop the Gandhamardan Project is through the establishment of a consortium,
as it will allow the members to spread the financial burden for building the
aluminium complex. The Company has not yet confirmed specific consortium
partners although several parties have expressed interest. There is no assurance
that the Company will be able to form a consortium, or what the terms of any
consortium formed will be. If the Company is unable to locate suitable partners,
the Company will have to seek additional financing to carry out the Gandhamardan
Project.

CRLs Gandhamardan Project is summarized in the following
information from a report prepared by E.A. Gallo, P. Geo. entitled Summary
Report Gandhamardan Project Bargarh and Bolangir Districts, State of Orissa,
India, dated April 8, 2003 (the Report). This Report summarizes
exploration on the property by past operations, and was prepared and is
disclosed by the Company under Canadian securities regulations. This Report has
been filed on SEDAR and can be reviewed in its entirety through the website
www.SEDAR.com. E.A. Gallo, a geologist, had worked extensively on the project
and had visited the Gandhamardan area and made several trips to India to become
knowledgeable on the Gandhamardan area.

No new exploration activity has been conducted since April 8,
  2003 on the Gandhamardan area that would alter or change E.A. Gallos Report.
  We believe that Mr. Gallos Report fairly represents an overview of the
  Gandhamardan area currently.

Property Description And Location

The Gandhamardan Projects bauxite deposit is located at the
top of Gandhamardan hill near the town of Duragali, State of Orissa, India. This
hill, which has a plateau top, is linearly aligned in a Northeast-Southwest
direction. The hill straddles the boundary between Balangir District to the
Southeast and Sambalpur District to the Northwest in the west central part of
the State of Orissa, in eastern India.

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Gandhamardan is bounded by Latitudes 20 degrees and 50 minutes
and 20 degrees 55 minutes North, and Longitudes 82 degrees 451 and 82 degrees 54
minutes East. It plots on Survey of India topographic sheet Identification
Number NTS 64L/l3. Gandhamardan hill extends in a Northeast-Southwest direction
for a length of 9.8 kms. Width ranges from 0.4 to 2.6 kms and averages 0.75 km.
The top of the hill is a plateau, with an areal extent of 7.4 square kms. The
bauxite zone covers an area of 734 hectares. Due to its large size and lineal
alignment, the deposit has been divided into 10 l-km wide blocks, numbered 1 to
10.

Vegetation on the plateau consists primarily of tiger-grass,
dwarf palm, chachar, chhena, bantulsi, etc., with small, isolated clumps of
stunted hardwood trees such as char and kendu. The stunted trees rarely exceed 4
meters in height. Vegetation on the hill flanks contrast greatly with that on
the plateau. The flanks are densely forested by mature hardwood trees such as
char, kendu, tenk, and sal. Underbrush consists mainly of bamboo clumps, leafy
vines, shrubs, and medicinal herbs. Gandhamardan hill is a designated forest
reserve. Regulations allow mining operations to be conducted in such reserves,
however, the operator must establish a reserve area elsewhere that is equal in
area to the mining lands.

Gandhamardan hill stands approximately 1,200 meters above sea
level and 700 meters above a plain at the base of the hill. The plateau top has
a gentle relief of about 50 meters.

Accessibility, Physiography and Infrastructure

The property on which the Gandhamardan Project sits is easily
accessed by 4-wheel drive vehicle along a poorly maintained road up the
Northwest flank of the hill. This road departs the village of Duragali, at the
base of the hill, and winds 4 kms to the top. Duragali is connected by paved
road to Paikmal, a town with all modern facilities, including power, water,
transportation, communication, food, shelter, supplies, services, and labour.
Paikmal is connected by paved roads to the State Capital, Bhubaneswar, about 300
kms to the East, and to port cities along the Bay of Bengal, equidistant to the
Southeast.

At the time the exploration work was performed in 1980, the
hilltop could also be accessed up the Southeast side. This road currently has 3
wash-outs. After repairs, this road will also be navigable by 4-wheel drive
vehicle. The Southeast road is preferable, as it provides a slightly shorter
route to the hill top, and access by paved roads southerly to the towns of
Lakhna and Nawaspara, 32 and 39 kms distant, respectively. Both these towns lie
along the South Eastern Railway line. This rail line was recently constructed by
the Indian Government to facilitate the development of bauxite deposits in
Orissa State by linking them to the port city of Vishakhapnam on the Bay of
Bengal.

The climate in the Gandhamardan area is sub-tropical, with
summer temperatures averaging 33 degrees C, and winter temperatures averaging 18
degrees C. Annual rainfall averages 150 cms, most of which falls during the
monsoon season, between July and August. The months of January and February
experience little or no rain. Previously, the monsoon rains came in 3-year
cycles, however, they have failed to come for the past several years, resulting
in severe drought conditions.

Geological Setting

The general geology of the Orissa region consists primarily of
Precambrian rocks of the Indian Shield. These rocks have been divided into 4
distinct sectors, based on their lithologies and structure. The sectors are
named after the geographic region in which they occur - West, South, Coastal,
and North sectors.

The West sector is where Gandhamardan is located. This sector
  is underlain primarily by Archean granitic gneisses, khondalites, charnockites,
  and migmatites. These rocks trend in a general Northeast-Southwest direction,
  gently curving eastward at their northern end. Khondalites are rocks formed
  by high-grade metamorphism of argillaceous, arenaceous, and calcareous sediments.

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They are unique to this part of the world, and they host major
  deposits of bauxite. The West sector is separated from the South and North sectors
  by the Eastern Ghat Boundary Fault and the North Orissa Boundary Fault, respectively.

The South sector is also underlain predominantly by Archean
rocks. They are comprised of marbles, calc-granulites, carbonatites, gneisses,
khondalites, and charnockites. This sector is composed of 4 fault blocks, each
with distinct trends. The rocks in 2 of the blocks trend East-West. Trends in
the other 2 blocks are Northeast-Southwest, and Northwest-Southeast,
respectively. The North Orissa Boundary Fault separates the South sector from
the North sector.

The Coastal sector is underlain primarily by quaternary
laterite and alluvium. They appear to overlie the eastward extension of the
South sector rocks.

The North sector is composed mainly of Archean granites and
greenstones. The granites occur as large batholiths, and the greenstones as
broad, intervening belts. The greenstones are comprised of mafic volcanics and
banded iron formation. This assemblage of granites and greenstones is very
similar to that which occurs in the Superior Province in Northwest Ontario.
Ultramafic bodies intrude the granites and the volcanics. The western third of
the North sector is underlain by Grenville-type metasediments consisting of
marble, quartzite, phyllite, and slate.

The local geology at Gandhamardan and the geology of the
property are the same. Both consist exclusively of khondalites, represented by
garnetiferous quartz-feldspar-sillimanite gneisses and schists with or without
ilmenite and graphite. Subordinate garnetiferous quartzites are also present.
The rocks have a pronounced Northeast-Southwest strike, conformable to the
regional trend, and curve slightly to the east at their northern extremity. The
rocks have been tightly folded, and now dip steeply to the Southeast at 45
degrees to 70 degrees.

Prolonged exposure to the elements has altered the khondalite
at the top of Gandhamardan hill, resulting in the formation of bauxite as an
extensive layer blanketing the parent rock throughout the plateau.

The bauxite is overlain by laterite and the laterite by a thin
discontinuous layer of lateritic soil. This soil is rusty-red in colour,
granular, and high in silica and iron content. It reaches a thickness of up to
several centimetres. The laterite is also rusty-red in colour and high in silica
and iron. The weathered surface is irregular, porous, and craggy. The upper
portion of the laterite is hard, reflecting a relatively higher silica content
than the lower portion. Iron content decreases with depth, while aluminous
content increases. The laterite varies in thickness from 0.3 to 12.0 meters, and
averages 5.0 meters. The laterite grades downwards into bauxite.

The bauxite layer ranges from 4.3 to 35.0 meters in thickness,
and averages 16.6 meters. It varies in colour from pinkish-red to
yellowish-brown, buff, or brown. It is medium to fine grained, massive and
compact. Vesicular and pisolitic textures may be displayed. Hardness varies from
2.5 to 3.5. Banding and foliation are sometimes evident. The bauxite is composed
mainly of the minerals gibbsite and hematite, which together comprise about 95%
of the bauxite layer. The remaining 5% is a mixture of several oxide minerals in
minor and trace amounts.

The table below shows the mineralogical composition of the
bauxite.

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- 14 -

CATEGORY
      MINERAL
      COMPOSITIONMajor
      Gibbsite
      (Al2O3.3H2O)
        AlO (OH)Hematite
      Fe2O3Minor
      Goethite
      HfeO2Boehmite
      A1O (OH)Anatase
      TiO2Quartz
      TiO2Trace
      Zircon
      ZrSiO4Ilmenite
      FeTiO3Kaolinite
      Al4(SiO10) (OH)8Lepidocrocite
      FeO (OH)
      A = Ca, Fe, Mg, or MnGarnet
      A3B2(SiO4)3
      B = Al, Fe, Ti, or Cr


Source: MECL Exploration Report, Vol.
I, 1980

The basement khondalite rock is composed of a heterogeneous mix
of minerals, including quartz, orthoclase, sillimanite, garnet, ilmenite, and
graphite. Quartz predominates, forming up to 60% of the rock locally. The
khondalite is gneissic, and the quartz is closely associated with orthoclase and
sillimanite in gneissic bands of leucocratic minerals. Orthoclase locally forms
up to 35% of the rock, sillimanite up to 20%, garnet up to 20%, and ilmenite and
graphite together up to 3%. The contact between the khondalite and the bauxite
is fairly sharp, although the khondalite immediately beneath the bauxite is
partly altered. Orthoclase in altered khondalite displays varying stages of
bauxitization, while sillimanite displays varying stages of gibbsitization.

History

The potential for bauxite at Gandhamardan was first recognized
in the 1940s by the Geological Survey of India (GSI), which
recommended that the area be thoroughly prospected.

In 1948, Orissa Directorate of Mines (ODM) sank
several pits, which intersected only laterite.

In 1959, ODM identified bauxite at Gandhamardan and immediately
undertook a programme of exploration and evaluation. GSI and Mineral Exploration
Corp. Ltd. (MECL) participated, as did Aluminium Corp. of India, an
aluminium producer.

ODM drilled 75 holes in 1959, and reported a resource of 6
million tonnes grading +50% Al2O3to a depth of 17 meters.

Subsequent phases of drilling were conducted between 1961-65.
  In the late 1960s, Aluminium Corp. of India undertook detailed exploration
  with MECL, after which MECL reported a resource of 26 million tonnes of metallurgical
  grade bauxite, using a cut-off of +46% Al2O3.

The deposit attracted no further attention until 1975, when the
economic potential of the large, low-silica bauxite deposits in Orissa became
recognized. Bharat Aluminium Co. (Balco) expressed interest in
Gandhamardan as a source of feed for their aluminium plant at Korba, situated
350 kms by rail to the North, in the adjoining State of Madhya Pradesh. At
Balcos request, an integrated exploration programme was undertaken jointly by
MECL, GSI and ODM. The programme included line-cutting, topographic surveying,
geological mapping, pitting, drilling, sampling, mineralogical studying, and
metallurgical testing.

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- 15 -

Balco commissioned a feasibility study on a portion of the
deposit in 1980, and upon its conclusion, prepared to bring it into production.
However, due to opposition of local villagers, Balco did not continue with the
project.

The property remained idle until 1997, when Continental
Resources Ltd. (Continental) and OMC agreed to jointly develop
Gandhamardan pursuant to the Joint Venture Agreement. Continental commissioned
SNC-Lavalin to undertake a feasibility study on the deposit, however the study
was never done due to numerous delays. The author of the Report, E.A. Gallo, a
Canadian geologist, visited the property at this time, and during one of the
visits, collected 6 samples, 2 from Pit GP-2, and 2 from each of 2 scarp sites.
These samples were collected in the presence of Mr. Gallo, who transported them
to a Canadian commercial laboratory. Analyses were performed for 12 radicals,
including Al2O3, SiO2,
Fe2O3, TiO2, and LOI, by the x-ray
fluorescence, fused-disc method. In 2002, Continental transferred its interest
in the deposit to CRL, an unrelated company, with the result that CRL and OMC
became joint venture partners.

Sampling Procedure and Analyses

Under the direct supervision of ODM and MECL geologists,
samples of the bauxite zone were taken from selected scarp sites and from each
pit and drill hole. Scarp samples of the bauxite were taken by ODM wherever
accessible at the ends of cross lines. Channel samples were cut vertically along
1 meter intervals, forming channels 15 cms wide, 5 cms deep, and 1 meter long. A
total of 130 samples were cut from 17 scarp sites, across a cumulative length of
121 meters. The bauxite zone in the scarp faces is not fully exposed, the lower
half being buried by talus. Recognizing this limitation, ODM nevertheless
calculated average grades from the assay results.

ODM also sampled the pits. Channel samples were cut in the same
manner employed in scarp sampling. All 4 walls of each pit were sampled. As a
check, and for comparison, the walls of 1 pit were sampled at 25 cm intervals.
Surplus material from the channel samples was combined to form composite
samples, which were also analysed. A total of 1,772 pit samples were collected
and analysed. The bauxite zone exposed in the pits ranged from 2.0 to 30.0
meters in thickness, and averaged 18.7 meters. ODM calculated average grades
from the pit sample results.

Both ODM and MECL sampled the drill holes in their respective
programmes, employing the same technique. Casing shoes were used in place of
core barrels. The drill cuttings were carefully removed from the shoe, put into
paper sleeves in the order drilled, identified by hole number and footage, and
boxed. Cuttings were collected continuously across 1 meter intervals. If the
upper or lower contact of the bauxite zone did not coincide exactly with a
whole-integer meter mark then that particular sample was taken as a fraction of
a meter. Within the bauxite zone, if non-ore material was recognized or
suspected, then 2 sub-samples were taken from that 1 meter interval, separated
by their geologic contact.

All collected samples were geologically classified before being
prepared for analyses. Samples of the drill cuttings were crushed to -60 mesh,
and quartered using a Jones Sample Splitter. Three-quarters of the sample was
shipped to Balco for storage, and the remaining quarter was further crushed to
-120 mesh. This -120 mesh fraction was further reduced by coning and quartering,
and a 50-gram portion was weighed out, bagged, and shipped to the laboratory for
analyses. Pit and scarp samples were prepared in a similar manner, except for
their primary crushing, which was to -10 mesh rather than -60.

Samples were shipped for analyses to ODMs own laboratory
  in Bhubaneswar or to MECLs laboratory in Nagpur. Minor and trace element
  analyses were conducted at a commercial laboratory in Bangalore operated by
  Esson and Co. All samples were analysed for Al2O3, SiO2,
  Fe2O3, TiO2, and LOI. Composite samples were
  analysed as well for V, Zn, S, P2O5, K2O, Na2O,
  CaO, adherent moisture, and organic carbon.

---

- 16 -

Analyses for all these radicals were determined by chemical
method, employing the ethylene-diamene-tetra-acetic acid technique
(EDTA), the industry standard at that time. LOI was determined
thermally, by calculating the percentage loss on ignition of the resultant ash
compared to the weight of the preheated sample.

Resource Calculations

Cautionary Note to U.S. Investors concerning estimates of
Measured and Indicated Resources

This section uses the terms Measured Resources and Indicated
Resources. We advise U.S. investors that while these terms are recognized and
required by Canadian regulations, the SEC does not recognize them. U.S.
Investors are cautioned not to assume that any part or all of the mineral
deposits in these categories will ever be converted into reserves.

Cautionary Note to U.S. Investors concerning estimates of
Inferred Resources

This section uses the term Inferred Resources. We advise U.S.
investors that while this term is recognized and required by Canadian
regulations, the SEC does not recognize it. Inferred Resources have a great
amount of uncertainty as to their economic and legal feasibility. It cannot be
assumed that all or any part of an inferred resource will ever be upgraded to a
higher category. Under Canadian rules, estimates of inferred resources may not
form the basis of feasibility or pre-feasibility studies, except in rare cases.
U.S. Investors are cautioned not to assume that part or all of an Inferred
Resource exists, or is economically or legally mineable.

The Company has not received any estimates of Mineral Reserves,
as that term is understood by the SEC (see Glossary to this Annual Report). The
Company has not made an independent resource calculation, and the following
estimates can be viewed as historical estimates.

ODM and MECL independently calculated resource estimates, based
exclusively on data obtained from the holes drilled at 200-meter intervals. Data
obtained from the closer-spaced drill holes were also utilized, but only as a
check on the validity of the calculations. Data from the inclined drill holes,
and from the pits were similarly utilized for checking purposes.

The resource estimates are in-situ geological resources. No
mining constraints were considered. The cut-off grades of +40%
Al2O3, and -5% SiO2used in the calculations
were specified by Balco, and weredetermined in anticipation of the bauxite being
processed at their plant in Korba. Korba produces alumina.

A tonnage factor of 2.0 tonnes per cubic meter of bauxite was
used in the calculations. This figure was based on bulk density tests performed
on pit samples, and on specific gravity and porosity tests performed on pit and
drill hole samples.

Three conventional techniques were followed in preparing the
resource estimates: (i) average factor and area of influence method; (ii) cross
section method; and (iii) isocline (isochore) method. The first two methods are
similar in that they calculate area and multiply it by thickness to determine
volume. Both methods are well suited to estimating a resource such as
Gandhamardan, which is a uniform, homogeneous, horizontally-lying body.

---

- 17 -

The average factor and area of influence method is based on the
assumption that all unit blocks are uniform in shape and in grade. An area of
influence is established for each vertical drill hole, as one-half the
horizontal distance to an adjacent hole. In the case of peripheral holes, it is
the horizontal distance to the physical limit of the bauxite zone. This area is
multiplied by the thickness of the bauxite intersected in that hole to give the
volume, which is then converted to tonnage. Average grades are calculated by
weighting grades against tonnages.

The cross section method utilizes cross sections, in this case
prepared on a scale of 1:1,000. A cross-sectional area of bauxite is determined
for each hole by taking one-half the distances to adjacent holes, and
multiplying this area by the linear strike influence of the hole. The volume so
obtained is then converted to tonnage.

The isocline method is based on the assumption that unit values
gradually change from one point to another. Isograde maps and isochore maps are
prepared, in this case 1% Al2O3and 5 meters,
respectively. The area encompassed between the respective isoclines and the two
corresponding mid-points of assay value and thickness is used to estimate the
resource.

The resource estimates calculated followed the Russian system
of classification. Resource estimates made today classified by standards
established by the Canadian Institute of Mining and Metallurgy (CIMM)
parameters used to determine specific categories in the Russian system are
analogous to those employed in the CIMM system. Under the CIMM classification
system, MECLs A Category resource would become a Measured Resource, the B and
Cl would become an Indicated Resource, and the C2 would become an Inferred
Resource.

Four categories of resources were established, based on the
Russian system, and termed A, B, Cl, and C2. MECLs 1980 Exploration Report,
Volume I states A Category reserves are considered suitable for mine planning,
and considers them to be 90% accurate. MECLs Report describes the B Category
resources as being sufficiently detailed to allowbroad outlining of the
future mining activities and development of the deposit. B Category resources
were calculated in areas where technical data were less detailed than in A
Category areas, and were deemed to be 70% accurate.

Cl Category resources were estimated for areas where the
bauxite was sufficiently explored to provide a rough estimation of the nature
of mineralization, shape and structure of the ore body (ibid). Accuracy of the
CI resources is considered to be 50%.

C2 Category resources are estimated for irregular parts of the
bauxite zone, where insufficient exploration data  do not permit proper
evaluation of shape, quality, etc. (ibid). The resources of Block 10 fall into
this category. Here the plateau is irregular in shape, and the bauxite varies in
thickness.

B.K. Mohanty in ODMs Resource Evaluation Report, 1981, states
the total calculated tonnage as 207.37 million tonnes (including what would be
categorized as inferred resources) with a weighted average grade of 45.75%
Al2O3, 2.23% SiO2, 23.23%
Fe2O3, 2.58% TiO2, 22.95% LOI. In the same
report, S. M. Patnaik tabulates resource estimates for each of the 10 Blocks.
His figures are shown in the table below. His calculated total tonnage is 213.43
million tonnes (including what would be categorized as inferred resources) with
a weighted average grade of 46.50% Al2O3, and 2.49%
SiO2. The three other radicalswere not calculated.

---

- 18 -

BLOCKNUMBER
    LENGTH(KMS)
    AVERAGEWIDTH(KMS)
    AREA(KMS2)
    AVERAGECOVERTHICKNESS(METERS)
    AVERAGEBAUXITE**THICKNESS**(METERS)
    RESOURCES(MILLIONTONNES)
    AVERAGE GRADEAl2O3(%)
    SiO2(%)1 2 3 4 5 6   
      7(1)8 9 10  
      Total
    0.65 1.00 1.00 1.00 1.00
      1.00 1.00 1.00 1.00 1.20
    0.25 0.48 0.98 1.05 1.12
      0.67 2.20 0.90 0.78 0.65
    0.07 0.48 0.98 1.05 1.12
      0.67 1.28 0.82 0.36 0.33
    4.00 3.70 5.10 5.85 5.32
      4.03 7.23 5.91 5.17 7.63
    11.10 18.78 16.20 15.54 17.71
      11.72 16.33 20.43 18.75    9.81
    1.00   15.46
       27.23  24.36  28.85  28.08
       44.75  27.65    8.40   
      7.70 213.48
    44.28 45.46 45.85 46.28 46.20
      46.43 47.16 47.00 47.05 47.30 46.50
    2.90 2.40 2.12 2.17 2.67
      2.71 2.58 2.62 2.65 2.81 2.49


|(1) | Mining lease currently held by OMC and subject agreement
      with the Company. The remaining blocks are not currently subject to mining
      leases.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

MECL calculated resources independently, and categorized them
according to the Russian system. MECLs 1980 Exploration Report, Volume I gives
their total calculated resource (including what would be categorized as inferred
resources) as 201.3 million tonnes averaging 46.40%Al2O3,
2.44% SiO2, and estimates the Fe2O3,
TiO2, and LOI contents to be 23.41%, 2.47% and 24.59%, respectively.
MECLs resource estimates by category are shown in the following table:

Cautionary Note to U.S. Investors Concerning Estimates of
Measured and Indicated Resources

This following table uses the terms Measured Resources and
Indicated Resources. We advise U.S. investors that while these terms are
recognized and required by Canadian regulations, the SEC does not recognize
them. U.S. Investors are cautioned not to assume that any part or all of the
mineral deposits in these categories will ever be converted into reserves.

CATEGORY
    TONNAGE(MILLIONTONNES)
    AVERAGE GRADEAl2O3
    SiO2
    Fe2O2
      TiO2
    LOIA (Measured) B (Indicated) Total
    27.9 45.8 73.7
    46.67 46.85 46.76
    2.45 2.61 2.53
    23.71 22.96 23.34
    2.27 2.50 2.39
    24.73 24.51 24.62


Note: e = estimated figure

Cautionary Note to U.S. Investors Concerning Estimates of
Inferred Resources

This following table uses the term Inferred Resources. We
advise U. S. investors that while this term is recognized and required by
Canadian regulations, the sec does not recognize it. Inferred resources have a
great amount of uncertainty as to their economic and legal feasibility. It
cannot be assumed that all or any part of an inferred resource will ever be
upgraded to a higher category. Under Canadian rules, estimates of inferred
resources may not form the basis of feasibility or pre-feasibility studies,
except in rare cases. U.S. investors are cautioned not to assume that part or
all of an inferred resource exists, or is economically or legally mineable.

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- 19 -

CATEGORY
    TONNAGE(MILLIONTONNES)
    AVERAGE GRADEAl2O346.18
    SiO22.38
    Fe2O223.51e
    TiO22.51e
    LOI24.59eC1 + C2
      (Inferred)
    127.5


Note: e = estimated figure

The three resource calculations mentioned above are in fairly
close agreement (207.37 million tonnes, 213.43 million tonnes and 201.30 million
tonnes). The total tonnage figures differ by a maximum of only 6%, and the
calculated weighted average grades by 1.4% for Al2O3, 9.0%
for SiO2, 0.8% for Fe2O3, 1.2% for
TiO2, and 6.7%for LOI.

The Company has not made an independent resource calculation
and the foregoing estimates can only be viewed by the Company as historical
estimates.

Data Verification

In examining the technical reports authored by ODM and MECL, it
became apparent to E.A. Gallo, Canadian geologist, the author of the April 2003
Report, that the exploration evaluation programmes were conducted in a thorough,
competent manner by knowledgeable, capable persons. The programmes followed a
logical sequence of steps, justified by positive results, to determine the
nature and extent of the Gandhamardan Project, and its suitability for the
production of alumina by the Bayer Process.

Gallos discussions with OMC technical staff verified the
integrity of the data.

Three site visits by Gallo in 1997-2001 verified the presence
of bauxite, the extent of the deposit, the grid that was established, the holes
that were drilled, and the pits that were sunk. Six bauxite samples were
personally collected by Mr. Gallo, and transported to a Canadian commercial
laboratory for analyses. The analytical results for these samples are in general
agreement with the results reported by ODM and MECL.

Planned Development

State Government of Orissa exploration agencies have performed
exploration work at the Gandhamardan Project to prove the quality and quantity
of Al2O3 in place. Reports prepared by independents have
presented data that qualifies the deposit as proven. Only a modest amount of
confirmatory work is required before the deposit can be brought into production.

Despite the vast data collected from over 600 drill holes
measuring a total of 6,685.87 meters, core analysis of 5,178 meters, 135 pit
samples and 130 scarp samples, a baseline study (the Baseline Study) is
still required on the Gandhamardan Bauxite Deposit before mining is commenced.
The Baseline Study will constitute the final phase before the mining
start-up.

A Baseline Study can take up to two years to complete at an
estimated cost of $2,000,000. The Baseline Study will include (a) various
environmental studies; (b) preparing local people with the overall understanding
that their lifestyle will not be disturbed but that benefits would raise their
standard of living; and (c) some topside sampling and chemical analysis. The
following work programs for item (a) should be completed before the sampling can
begin:

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- 20 -

|Air quality                       | Dust measurement and assessment                                                                
|--------------------------------- | -----------------------------------------------------------------------------------------------
|                                  |                                                                                                
|Water quality and measurements    | Surface water                                                                                  
|                                  |                                                                                                
|Ground Water                      | Drill wells and obtain data on existing wells                                                  
|                                  | Study streams and possible effects of drainage from
      mining operations                    
|                                  |                                                                                                
|Possibilities of flash flooding   |                                                                                                
|                                  |                                                                                                
|Soil quality and quantity         | Determine if there are any hazards that might be caused
      by mining                        
|                                  |                                                                                                
|Geo Technical                     |                                                                                                
|                                  |                                                                                                
|Including rock and soil stability | Especially around temple sites                                                                 
|                                  |                                                                                                
|Sociological Impact Study         |                                                                                                
|                                  |                                                                                                
|Effects on traditional religious  | Effects on lifestyle                                                                           
|                                  | Implement an assertive positive campaign                                                       
|                                  | Drill new water wells for locals                                                               
|                                  | Mobile medical unit for locals                                                                 
|                                  |                                                                                                
|Cultural and historical inventory | Social economical impact to ensure the locals their
      lifestyle wont be harmed but improve
|                                  |                                                                                                
|Noise Pollution                   | Audio assessment                                                                               
|                                  |                                                                                                
|Forest, Herbs and Plants          | Native plant inventory including herbs for medicinal
      purposes                            
|                                  | Endangered plants                                                                              
|                                  | Reforestation program                                                                          
|                                  | Vegetation  study for possible cash crop                                                      
|                                  |                                                                                                
|Wildlife                          | Effects on wildlife habitat                                                                    
|                                  | List any endangered species, if any or those at risk                                           
|                                  |                                                                                                
|Blasting                          | Determine if any blasting in certain areas might affect
      temples and surrounding areas    

Contractors will be engaged to follow through with the
individual studies. If necessary, bids will be taken where appropriate. The
Company plans to seek participants for a consortium to facilitate the building
of the mining and aluminium complex upon receipt of the approval of entering
into a new agreement with OMC.

CRL is subject to all governmental regulations in India on the
development of the bauxite project. The level of regulation by the government of
India relating to the bauxite project could have an adverse effect on the
Companys ability to obtain partners or consortium members for the construction
of the aluminium complex.

The mining industry is highly competitive with numerous
companies seeking to explore and develop resource properties. Many of these
companies are larger than us with greater financial resources.

Hydroelectric Assets

The Company is currently reviewing alternative methods to
continue development of its hydroelectric assets. However, the Company does not
intend to inject any further funding into the development of its hydroelectric
assets, as its main focus is the Gandhamardan Project.

The Company plans to seek a buyer for one of the hydroelectric
  sites in the state of Washington during 2006. This hydroelectric site, project,
  was approved by the U.S. Federal Energy Regulatory Commission (FERC).
  The Company does not plan to use its own funds to further develop its hydroelectric
  assets at this time, however, consultants are currently seeking partners to
  assist the construction of this hydroelectric site or purchase of these sites.

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- 21 -

The Pisces Process

The Pisces Process, a patented fish protective water inlet
device, is a mechanical system designed to steer fish stocks around the water
intake to prevent, reduce and/or eliminate their impingement and/or entrainment
at irrigation, industrial use and hydroelectric production facility water
intakes. Model testing of the Pisces Process was conducted in the spring of 2000
at a laboratory in North Vancouver, British Columbia, Canada. Initial results
show that the Pisces Process works in the manner for which it was designed. The
Company has not conducted any further tests and does not intend to on the Pisces
Process.

Patents and License

Rodney Smith, a former director and officer of the Company, and
Colin Hall transferred all their right, title and interest in the Pisces Process
and its derivatives to Balaton Power Corporation S.A. (BSA), a former
controlling shareholder of the Company. BSA has achieved patent pending status
on March 18, 1999 of its application filed with the United States Patent and
Trademark Office (Case Docket No. SMTT 321) and is patent-protected in 104
countries around the world for a float mounted intake system which will be
marketed under the name of the Pisces Process. On November 4, 2003 BSA was
issued its Patent for the Pisces Process moving from a patent pending
status.

BSA entered into a licensing agreement with the Company on July
31, 2000, whereby the Company has the right to manufacture and sell the System,
the Pisces Process and BRIMAC and to implement the System at Company owned
hydroelectric power production sites in the United States and Canada. See Item
10.C Material Contracts for a description of the terms of this license.

While the Company holds a patent on the Pisces Process, the
Company is not dependent on this process for the Company to become a viable
entity. The Company will however keep the patent fees paid and keep the patent
current for potential development at a later date or potential sale.

C.      Organizational Structure

The following table shows the organizational structure of the
Companys significant subsidiaries.



D.      Property, Plants and
Equipment

Office Lease

The Company subleases its office space at 19 East Fourth
Avenue, Hutchinson, Kansas, U.S.A. 67501. The Company leases its office space in
Hutchinson pursuant to the terms of a written lease agreement.

---

- 22 -

The terms of the lease is three (3) years with monthly rental
payments of $4,800 the first and second years and $5,400 the third year. The
lease expires in January 2007.

Gandhamardan Project

For a description of this property, see Item 4.B Business
Overview, Gandhamardan Project.

ITEM 4A.       Unresolved
Staff Comments

Not Applicable

Item
5.           Operating and
Financial Review and Prospects

The following discussion should be read together with the
Companys financial statements for the three years ended December 31, 2005
included elsewhere in this document and with the section entitled Risk Factors
in Item 3 of this document. The financial statements have been prepared in
Canadian GAAP, however, Note 15 of the annual financial statements to included
herein provides a reconciliation to U.S. GAAP.

The Companys audited financial statements for the fiscal year
ended December 31, 2004 have been restated to make certain adjustments as
disclosed in Note 16 of the annual financial statements included herein pursuant
to comments from the SEC.

General Discussion

The Company is in the start-up stage and has initiated limited
operations. Prior to the acquisition of CRL in October 2002 (the
Acquisition), the Company was in the business of constructing,
installing and selling low impact run-of-the-river hydroelectric power
production systems (the System) which incorporated a patent pending
fish protective water inlet device (the Pisces Process). Following the
Acquisition of CRL in October 2002, the Company changed its focus to the
exploration and development of the Gandhamardan Project. The Company is
currently seeking approval from the Government in the State of Orissa to an
agreement with OMC relating to the Gandhamardan project.

During the year ended December 31, 2005, the Company continued
to work on the Gandhamardan Project through its wholly owned subsidiary CRL.
Although the Pisces Process remains an asset the Company plans to seek out the
market potential for the Pisces Process after arrangements for the OMC and CRL
agreement on the Gandhamardan Project have been consummated. Due to the limited
market potential for the Pisces Process, the Company wrote down the value of the
Pisces Process during its audit of the year ended December 31, 2002. The Company
is also pursuing the sale of the last remaining hydroelectric site. See
Information on the Company for more detailed information regarding the Company
and its business.

The Companys subsidiary, CRL, plans to form a consortium or
enter into a joint venture with a major aluminium company to develop the
Gandhamardan Bauxite following the approval by the Government of Orissa of the
agreement between OMC and CRL. There is no assurance that the Government of
Orissa will approve the agreement between OMC and CRL and if it is approved
would be on the same terms and conditions mutually accepted by both OMC and CRL.
Plans for the bauxite project would include mining, alumina plant and aluminium
smelter and auxiliary plants (power plants etc.). During fiscal years 2004 and
2005 several interested parties entered into discussions for possible
participation in the consortium, which continued into 2006. Four trips were made
by CRL to India to meet with OMC to discuss terms and conditions for a new joint
venture agreement to develop the Gandhamardan Project in 2004 and 2005.

---

- 23 -

Based upon these discussions, CRLs interest in the mining
phase would place 100% of the downstream facilities (alumina plant and aluminium
smelter) in favour of CRL.

A.          
Operating Results

No revenues were reported in 2003, 2004 or 2005 from its
operations. No revenues are anticipated in 2006 other than from the potential
for the opportunity of CRL to promote interests in the Gandhamardan Project. The
Company ceased promoting the Pisces Process in October 2002 and has since
devoted over 95% of its focus on its subsidiary, CRLs bauxite deposit in India
and the remaining percentage of time to the hydro electric project held by its
subsidiary Snoqualmie River Hydro Inc.

The financial statements accompanying this Form 20-F are
consolidated with its wholly owned subsidiary, CRL for the years 2005, 2004 and
2003. During the 2004 fiscal year the Company wrote off $1,145,163 and related
liabilities of investment in the joint-venture company, COMPL, which was
voluntarily dissolved. It is planned that CRL will incorporate another entity to
enter into a new agreement with OMC. As of the date of this Form 20-F, the new
agreement has yet to be finalized. The Company anticipates that CRL will enter
into a new agreement with OMC during the third or fourth quarter of 2006 with
the approval of the State Government of Orissa. The Company believes that the
impact of foreign currency fluctuations will not adversely affect the Company.
The Canadian/US dollar exchange rate did improve in favour of the Canadian
dollar during fiscal year 2005. The Company does not take any steps to hedge
against currency fluctuations. In addition the Company does not anticipate the
impact of inflation to be material to the Company in its efforts to attract
partners for its consortium for the development of the Gandhamardan Project. The
Indian currency is not expected to have an adverse affect on the Company during
the initial phases of negotiating with potential partners or adding members to a
consortium for the development of the project in India by CRL.

The Company relies heavily on the cooperation of the State
Government of Orissa, OMC and other governmental agencies in the finalization of
joint venture relationships and the issuance of permits and licenses for the
development of the Gandhamardan Project. The political climate in India with
respect to the development of resources is currently positive. Orissa, a state
in the eastern part of India, is a resource rich state that has had negotiations
with several entities including CRL for the development of resources including
bauxite.

During 2005, the Companys main expenses were general and
administrative in the amount of $914,749 compared to $1,239,605 in 2004 and
$195,286 for 2003. The increase in expenditures from 2003 to 2004 was related to
expanded start up costs in India on CRLs bauxite project and general corporate
expenses regarding debt settlement for legal, accounting and consulting fees
incurred. Expenditures were lower in 2005 because of the amount of initial
expenditures paid in 2004. The 2005 expenditures included trips to India and
starting up an office and staffing it in Bhubaneswar to facilitate the project.
In addition the Company incurred significant legal fees in both 2004 and 2005
relating corporate filings, debt settlements and outstanding legal matters
against the Company one of which was a lawsuit by a past officer of the Company.
The largest debt settlement in 2004 was in the amount of $400,725 with respect
to services rendered for the Gandhamardan Project. Such debt was settled through
the issuance of 1,602,900 units, each unit consisting of one common share and
one common share purchase warrant in the capital of the Company at a price of
$0.40 per share exercisable until July 13, 2006. Subsequently, the Company
recovered 362,100 of these units as they were issued in error. See Note 16 of
the financial statements included in this annual report for more
information.

In 2005 the Company settled two major legal issues. The first
  was the settlement of a $163,436 loan with RoyCap for $100,000 in cash paid
  out over a year and the issuance of 100,000 shares of the Companys common
  stock. As of year end (December 31, 2005) the Company had paid $50,000 toward
  this settlement. Note 7 of the financial statements provide additional detail
  to this transaction.

---

- 24 -

The second major settlement was with past president Ron Brown
  for his lawsuit for wrongful termination. This settlement was $100,000 in cash
  paid in two equal instalments and 0.5% of any proceeds received by the Company
  or its subsidiaries from the sale, transfer or production of raw materials from
  the bauxite project in India. Additional information regarding this settlement
  is provided in note 14 of the financial statements.

Consulting fees lowered dramatically from 2004 ($245,882) to
2005 ($63,000) and 2003 ($34,980). The use of consultants in 2004 in India in
relation to the Gandhamardan Project was the reason these fees were higher. In
2005 the consulting fees were more in line with the amount incurred in 2003 and
both were primarily related to public relations and administrative activities
for the Company. Professional legal and accounting fees also decreased from
$207,376 for 2004 to $171,738 in 2005. This decrease was primarily related to
the settlement of legal and accounting fees in arrears in 2004. Professional
fees in 2003 were lower as this was the first year of operations following the
acquisition of CRL when the day-to-day operations was not as much.

The Company in 2004 had write-down a $481,724 note receivable
to $126,176 from Perial Ltd. This $355,548 reduction in the note receivable is a
result of a settlement where the Company has received a 6.25% working interest
in a producing oil well. For further information see Notes 4 and 5 of the
financial statements included in this annual report.

The Company plans to raise additional working capital for its
day-to-day operations, which would include expenditures on the project in India
by way of debt settlements or private placement of its common stock. Significant
funding will be required for the exploration and development of CRLs bauxite
project for which it is planned to resolve through a joint venture or the sale
of interest to members that would join CRLs consortium. Currently the Company
does not have the necessary funds to carry the corporate operations expenditures
for the next twelve months. The Company has warrants and options outstanding
from previous private placements that could be exercised adding additional
working capital to the Company. Unless CRL is successful in forming a consortium
or entering into a joint venture arrangement for the exploration and development
of the Gandhamardan Project, the Company will be required to assist CRL in
raising approximately $2 million in working capital for the bauxite project in
India. However, no assurance can be given that it will be able to raise such
funds.

The Company intends to hire employees on an as needed basis. At
present, the Company does not expect to hire any employees as it intends to
utilize consultants to facilitate any work required on its projects, primarily
the Gandhamardan Project.

*B.*         
*Liquidity and Capital Resources*

As of December 31, 2005 the Company had adequate cash to
maintain normal operations for the next year exclusive of exploration and
development expenses relating to the Gandhamardan Project. The Company had
current assets of $401,288 of which $332,240 is cash on December 31, 2005 and
working capital of $64,390. The decrease in the Companys cash position from
December 31, 2004, is due to the utilizing of the funds raised during 2004 from
the warrants exercised for the Companys subsidiary CRLs operations in India as
well as the daily administrative operations. Total assets of the Company as of
December 31, 2004 totalled $733,976 compared to $602,464 on December 31, 2005.
The $131,512 decrease in total assets from 2004 to 2005 is due to a reduction in
cash of $108,692 when comparing these two years plus lower amounts due from
loans receivables in 2005. The Company is of the opinion as of July 31, 2006
that it will be necessary to raise additional working capital through the sale
of its common stock to fund the Companys operations. No assurance is given that
the Company will be able to raise additional working capital especially on terms
acceptable to the Company.

---

- 25 -

During the 2004 fiscal year the Company raised a total of
$430,000 through private placements of the Companys common stock. Specifically,
on March 30, 2004, the Company closed a private placement of 1,000,000 units at
$0.25 per unit raising a total of $250,000. Each unit consisted of one common
share and one common share purchase warrant exercisable for 18 months from the
date of issuance at $0.40 per share. On August 31, 2004, the Company closed a
private placement of 600,000 units at $0.30 per Unit raising a total of
$180,000. Again, each unit consisted of one common share and one common share
purchase warrant exercisable for a period of two years from the date of issuance
at $0.40 per share.

During the 2005 fiscal year the Company raised a total of
$240,000 through private placements of 750,000 units of the Companys common
stock and is reported as $189,990 in note 9 of the financial statements with the
difference being that portion allocated to paid in capital. Each unit consisted
of one common share and one common share purchase warrant exercisable until
September 9, 2007 at $0.44 per share. The Company also settled debt of $269,824
during the 2005 fiscal year through the issuance of 479,857 common shares of the
Companys stock and is reported as $254,889 in note 9 of the financial
statements with the difference being that portion allocated to paid in capital.
In addition to the private placement and the debt settlements the Company also
took in during the 2005 fiscal year $400,000 from warrants exercised to purchase
1,000,000 common shares.

As at December 31, 2004, the Company had an accumulated deficit
of $4,972,337 compared to $6,121,824 on December 31, 2005. This increase in
deficit is due directly to the increased expenditures related to the
Gandhamardan Project, which resulted in losses totalling $1,149,487 in 2005.

During the year the Company reduced its liabilities through
debt settlements. On December 31, 2004, the Companys liabilities were $488,618
compared to $1,700,817 on December 31, 2003. During the fiscal year ended
December 31, 2005 the Company entered into a settlement agreement with RoyCap
Inc. to further reduce its debt by $179,779 plus other debt settlements for
legal services totalling $75,110. The RoyCap debt was incurred in February 2002
from loans that was to be paid by the Company through the issuance of shares
that failed because of the price of the Companys stock.

In October 2002 the Company exchanged an interest in an oil and
gas well located in Pawnee County, Kansas for a promissory note from Perial Ltd
for $481,724. The terms of the note were to be paid from revenues generated from
the gas production from the well however, this productive formation had a
H2S problem that resulted in the well not being economic. The Company
agreed to accept a 6.25% interest in another formation that produces oil and
could generate revenues. See note 5 of the financial statements for further
information.

During the 2004 fiscal year the Company purchased 500,000
common shares of stock in a private corporation known as Cumberland Continental
Corp. a company that has invested in the software industry. Cumberland has plans
to go public which will create liquidity for the investment made by the
Company.

The Companys principal commitment is CRLs obligations to OMC
on the Gandhamardan Project. CRL expects that a consortium will be formed, which
will help shelter CRL from the majority of potential feasibility study
expenditures; interested third parties have approached CRL to conduct a
feasibility study. Further, if a working relationship is established between CRL
and a major aluminium company, the Companys liquidity with respect to the
Gandhamardan Project will improve significantly. However, if the Company is
unable to form a consortium to complete the feasibility study and, if warranted,
to further explore and develop the project, the Company will have to seek
additional financing which would strain the Companys financial resources.

---

- 26 -

Critical Accounting Policies

The following sets forth the Companys most significant
accounting policies. Note 2 of the Companys financial statements included
herein sets out the Companys other significant accounting policies.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Stock Based Compensation

Effective January 1, 2004, the Company adopted Financial
Accounting Standard Board (FASB) Statement No. 123(R). This pronouncement
requires all share-based payments be recognized in the income statement based on
their fair values. The Company has employed the modified prospective method
for accounting for these share-based payments. This method entails recognizing
the fair value of share-based payments after the effective date (January 1,
2004) with no restatement for prior transactions of this nature.

The fair value of stock options is determined by the widely
used Black-Scholes Option Pricing Model with assumptions for risk-free interest
rates, dividend yields, volatility of the expected market price of the Companys
common shares and an expected life of the options. The fair value of direct
awards of stock is determined by the quoted market price of the Companys
stock.

Option-pricing models require the use of highly subjective
estimates and assumptions including the expected stock price volatility. Changes
in the underlying assumptions can materially affect the fair value estimates
and, therefore, existing models do not necessarily provide reliable measurement
of the fair value of the Companys stock options.

Foreign Exchange

Although the functional currency of the Company is the Canadian
dollar, the financial statements use the US dollar as the unit of measurement.
Monetary assets and liabilities denominated in foreign currencies are translated
at year-end exchange rates. Other balance sheet items denominated in foreign
currencies are translated at the rates of exchange in effect at the transaction
date. Income and expenses denominated in foreign currencies are translated at
average rates prevailing during the year. Translation gains and losses are
included in income.

*C.*         
*Research and Development, Patents and Licenses*

The Company has a license to one patent, Pisces Process, a fish
protective water inlet device designed to steer fish stocks around the water
intake to prevent, reduce and/or eliminate their impingement and/or entrainment
at irrigation, industrial use and hydroelectric production facility water
intakes. Currently the Company is not actively pursuing this sector of business
as its current focus has been shifted to the development and promotion of CRLs
Gandhamardan Project. The Company plans to seek ways to promote the Pisces
Process at a later time.

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- 27 -

*D.*         
*Trend Information*

The Company subsidiary, CRL, continues to have capital
requirements in excess of its current resources. As CRL continues to develop the
Gandhamardan Project, it will continue to have increased expenses and
corresponding losses. Currently and for the foreseeable future, the Companys
only source of working capital is from the sale of its securities.

The Company believes that the impact of foreign currency
fluctuations will not adversely affect the Company. The Canadian/U.S. dollar
exchange rate has been improving in favour of the Canadian dollar. The current
exchange rate is $1.12 Canadian dollars for each U.S. dollar. The Company does
not take any steps to hedge against currency fluctuations. There is currently no
concern about the effects of the Indian Rupee on the Companys subsidiarys
operations or plans for operations in India.

*E.*         
*Off-Balance Sheet Arrangements*

The Company does not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.

As used in this Item 5.E., the term off-balance sheet
arrangement means any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with the company is a party, under which the
company has:

(a) ****Any obligation under a guarantee contract that has any of the
characteristics identified in paragraph 3 of FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (November 2002) (FIN 45),
as may be modified or supplemented, excluding the types of guarantee contracts
described in paragraphs 6 and 7 of FIN 45;

(b) ****A retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit, liquidity or
market risk support to such entity for such assets;

(c) ****Any obligation under a derivative instrument that is both indexed to
the companys own stock and classified in stockholders equity, or not
reflected, in the companys statement of financial position; or

(d) ****Any obligation, including a contingent obligation, arising out of a
variable interest (as referenced in FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (January 2003), as may be modified or supplemented)
in an unconsolidated entity that is held by, and material to, the company, where
such entity provides financing, liquidity, market risk or credit risk support
to, or engages in leasing, hedging or research and development services with,
the company.

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- 28 -

F.          
Tabular Disclosure of Contractual Obligations

Payments due by periodLess Than
    One to
    Three to
    More thanContractual
      Obligations
    Total
    One Year
    Three Years
    Five Years
    Five YearsRelated Party Loans
    81,124
    
    81,124
    Nil
    Nil


This loan is to SJT Company LLC, a shareholder of the
Company.

G.          
Safe Harbour

The safe harbour provided in Section 27A of the Act and Section
21E of the Exchange Act applies to forward-looking information provided pursuant
to Item 5.E and F above.

ITEM
6.           DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES

A.          
Directors and Senior Management

Michael Rosa, Director, President and Chief Executive
Officer

Michael Rosa, age 72, who resides in Surrey, British Columbia,
Canada, has served as director of the Company since January 31, 2003. Mr. Rosa
is an experienced corporate director and has been involved in natural resource
projects and other entrepreneurial activities. Mr. Rosa drilled 17 oil wells in
Texas and has been involved in two gold projects one in Oregon and the other in
British Columbia. His resource experience is beneficial in assisting the Company
in the development of the Gandhamardan Project and also in evaluating other
resource projects that may be presented to the Company. Mr. Rosa is not an
officer or director of any other company.

Robert Wyllie, Director and Chief Financial Officer

Robert Wyllie, age 43, who resides in Mississauga, Ontario,
Canada, has served as a director of the Company since January 31, 2003 and as
Chief Financial Officer since November 21, 2003. From August, 1990 to April
1999, Mr. Wyllie was Technical Co-ordinator at Ciba Specialty Chemicals
(formerly Allied Colloids Canada Inc.). From September 1999 to April 2003, Mr.
Wyllie held the position of Installation Technician at DealerVoice Marketing
Technologies Inc. Mr. Wyllie is currently a Professional Foreign Exchange
Contracts Trader. Mr. Wyllie also serves as a director of Perial, a major
shareholder of the Company.

David C. Wynn, Director

David C. Wynn, age 39, who resides in Chantilly, Virginia,
U.S.A., was elected as a director of the Company on June 25, 2004, at the
Companys shareholder meeting. From December 1989 to October 1996, Mr. Wynn
worked for First Virginia Mortgage Company, the first four years as an Insurance
Specialist, one year as a Real Estate Tax Specialist and the last two years as
an Investor Accountant. From October 1996 to March 1999, Mr. Wynn worked for
Washington Mortgage Financial Group, first as an Escrow Clerk and then a Local
Area Network Administrator. From March 1999 to May 2005, Mr. Wynn was Senior
Computer Analyst at the Lockheed Martin Corporation in the Lockheed Martin
Simulation Division. Mr. Wynn is currently Systems Administrator at Value
Options Inc.

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- 29 -

Nicole Bouthillier, Director

Ms. Nicole Bouthillier, age 56, has been an independent
business consultant in Montreal since 2001. Prior to starting her own consulting
business she worked for Scotia McLeod as an Investment Executive starting with
them in 1987. Ms. Bouthillier became a director on November 22, 2005 following
the death of Mr. Richard Burdett. She will serve the remainder of his one
term.

Karen Evans, Secretary

Ms. Karen Evans, age 64, is the Secretary of the Company. She
replaced Lois Zelenka on January 15, 2005 following Ms. Zelenkas retirement.
Ms. Evans has over 20 years experience in management capacity in operating
retail establishments. Currently she is CEO of Titan Employment Services a
position she has retained for the past five years.

B. Compensation

The Company has no standard arrangement pursuant to which
directors and officers are compensated by the Company for their services in
their capacity as directors and/or officers other than the unissued treasury
shares reserved for the grant of directors stock options. There has been no
other arrangement pursuant to which directors were compensated by the Company in
their capacity as directors and/or officers during the Companys financial year
ended December 31, 2005. The Company intends to form a compensation committee
when working capital is sufficient to carry on the Companys operations to
consider compensation to management, officers and directors.

The shareholders approved at the Annual General Meeting in June
2004 the issuance of options to the Companys officers and directors to purchase
1,300,000 shares at $0.40 expiring on June 25, 2009 and also approved at the
Annual General Meeting in August 2005 the issuance of options to the Companys
officers and directors to purchase 400,000 shares at $0.40 expiring on August
22, 2008.

Summary Compensation Table

During the Companys financial year ended December 31, 2005,
the aggregate direct remuneration paid or payable to the Companys directors and
executive officers by the Company and its subsidiaries, all of whose financial
statements are consolidated with those of the Company, was nil. The compensation
paid to the Companys directors and officers during the most recently completed
financial year is as set out below:

Name and
      Principal Position
    Year
    Annual
      Compensation
    Long Term Compensation
    All Other
      Compen- sation ($)Awards
    PayoutsSalary ($)
    Bonus ($)
    Other Annual
      Compen -sation ($)
    Securities Under
      Options Granted (#)
    Restricted Shares or
      Restricted Share Units (#)
    LTIP Payouts
      ($)Michael Rosa(1)President and Chief Executive
      Officer
    2005 2005
    Nil Nil
    Nil Nil
    Nil Nil
    400,0002400,0002
    Nil Nil
    Nil Nil
    Nil NilRichard Burdett3Past President and Chief
      Executive Officer


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- 30 -

Name and
      Principal Position
    Year
    Annual
      Compensation
    Long Term Compensation
    All Other
      Compen- sation ($)Awards
    PayoutsSalary ($)
    Bonus ($)
    Other Annual
      Compen -sation ($)
    Securities Under
      Options Granted (#)
    Restricted Shares or
      Restricted Share Units (#)
    LTIP Payouts
      ($)Robert Wyllie Chief Financial Officer
    2005
    Nil
    Nil
    Nil
    400,0002
    Nil
    Nil
    NilNicole Bouthillier Director
    2005
    Nil
    Nil
    Nil
    Nil
    Nil
    Nil
    NilDavid Wynn Director
    2005
    Nil
    Nil
    Nil
    400,0002
    Nil
    Nil
    NilKaren Evans4Secretary
    2005
    Nil
    Nil
    Nil
    Nil
    Nil
    Nil
    Nil


Notes:

| | (1) | Mr. Rosa was appointed President and Chief Executive
      Officer on November 22, 2005 following the death of Mr. Richard Burdett.
      Subsequent to the end of the fiscal year Mr. Rosa received $2,000 per
      month as compensation.                          
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                       
| | (2) | These stock options have an exercise price of $0.40 per
      share. On June 25, 2009 each of the above directors will have 300,000
      option expire and on August 22, 2008 each director will have 100,000 of
      the options outstanding issued to them expire.
| |     |                                                                                                                                                                                                                                                                       
| | (3) | Mr. Richard Burdett passed away on October 27, 2005. His
      options expire one year from the date of his death.                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                       
| | (4) | Karen Evans was appointed as Secretary in January 2005
      following the retirement of Lois Zelenka.                                                                                                                                                                

No stock options were exercised during 2005. See Share
Ownership below for more information on our outstanding stock options.

Neither the Company nor any of its subsidiaries have any plan
or arrangement with respect to compensation to its directors or executive
officers which would result from the resignation, retirement or any other
termination of the executive officers employment with the Company and its
subsidiaries or from a change of control of the Company or any subsidiary of the
Company or a change in the executive officers responsibilities following a
change in control, where in respect of any executive officer the value of such
compensation exceeds $100,000.

C.          
Board Practices

All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified. Mr.
Rosa and Mr. Wyllie have both served as directors of the Company since January
31, 2003. Mr. Wynn joined the Companys Board of Directors on June 25, 2004. Ms.
Nicole Bouthillier joined the Companys Board of Directors on November 22, 2005
subsequent to the death of Mr. Burdett, who was a director and officer since
February 1, 2003. The Companys officers are elected by the Board of Directors
after each annual meeting of the Companys shareholders and hold office until
their death, or until they resign or have been removed from office. The Company
has an audit committee on which Nicole Bouthillier and David C. Wynn are
members. The Company currently does not have a compensation or executive
committee. There are no director service contracts that provide for benefits
upon termination.

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- 31 -

D.          
Employees

The Company has no employees other than its officers and
directors. The Company has three directors/officers involved in management and
administration of the Company, Mr. Michael Rosa, Robert Wyllie and Karen Evans.
These employees are not compensated for their services, and will not be
compensated until the Company obtains funding for the development of the
Gandhamardan Project.

E.          
Share Ownership

Common Shares

Security Holdings of Directors and Officers (as at July 30,
2006)

Name of Insider
    Shares owned or beneficially
      controlled(1)
    Percentage of 76,358,117 outstanding
      common sharesMichael Rosa
    50,000
    less than 0.1%Robert Wyllie
    50,000
    NilDavid C. Wynn
    120,000
    less than 0.1%Nicole Bouthillier
    Nil
    NilKaren Evans
    Nil
    NilTOTAL:
    220,000
    Less than .2%


| | (1) | Numbers do not include shares held through
  options.                                
| | --- | -------------------------------------------------------------------------------------
| |     |                                                                                      
| | (2) | Shares owned by officers and directors do not hold any
      different voting rights.

Options:

On May 15, 2006 the Company had stock options expire for a
total of 2,500,000 shares. Previous officers and directors of the Company held
these stock options. These stock options were initially scheduled to expire on
September 30, 2005. However, these stock options were extended twice -- first
until December 31, 2005 and then again until May 15, 2006 at which time they
expired.

The following chart details all outstanding options as at June
29, 2006 for the stock options granted in 2004 and 2005.

Under the 2004 Share Option PlanName of Officer/Director
    Amount of Securities
    Exercise Price
    Expiration Date For Options
    Percentage of Options
      IssuedRichard F. Burdett  former Office &
      Director
    300,000
    US$0.40
    October 27, 2006
    17.65Michael Rosa
    300,000
    US$0.40
    June 25, 2009
    17.65David C. Wynn
    300,000
    US$0.40
    June 25, 2009
    17.65Robert Wyllie
    300,000
    US$0.40
    June 25, 2009
    17.65Lois Zelenka
    100,000
    US$0.40
    June 25, 2009
    5.88


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- 32 -

Under the 2005 Share Option PlanName of Officer/Director
    Amount of Securities
    Exercise Price
    Expiration Date For Options
    Percentage of Options
      IssuedRichard F. Burdett  former Officer & Director
    100,000
    US$0.40
    October 27, 2006
    5.88Michael Rosa
    100,000
    US$0.40
    August 22, 2008
    5.88David C. Wynn
    100,000
    US$0.40
    August 22, 2008
    5.88Robert Wyllie
    100,000
    US$0.40
    August 22, 2008
    5.88Total
    1,700,000
    -
    -
    100.00


Stock Option Plans and Long-Term Incentive Plan Awards

The Company has not in the past adopted any stock option plans,
retirement, pension, or profit sharing plans for the benefit of the Companys
officers and directors other than as described herein. However, the Company has
granted incentive stock options on an individual basis to provide compensation
for performance.

No share options were granted to the directors and officers
during the financial year December 31, 2003 and no share options were exercised
by the directors and officers during the financial year ended December 31, 2003.
The value of the unexercised in-the-money options of the directors and officers
at December 31, 2003 was nil.

2004 Stock Option Plan

At the 2004 annual meeting of the Company the shareholders
approved for the Company to adopt a stock option plan (the Plan) in
order to attract and retain employees and consultants and to provide additional
incentive for directors, officers, employees and consultants, upon whose efforts
and judgment the success of the Company is largely dependent, in order to grant
either non-qualified stock options (NQSO Options) or incentive stock
options (ISO Options) under the features provided for by the Code. Both
NQSO Options and ISO Options (together, the Options) are available for
grant under the Plan.

The Committee

The Plan provides for the granting by the Committee of Options
to directors, officers, employees and consultants of the Company. The common
shares subject to the Plan will be registered at the Company's expense pursuant
to the Act and applicable state securities acts, or will be issued by the
Company pursuant to exemptions from the registration requirements of the Act and
applicable state securities acts. The Committee administers and interprets the
Plan and has authority to grant Options to all eligible persons. The Committee
also determines, at the time the Option is granted, the number of shares
granted, the type of option (NQSO Options or ISO Options), the purchase or
exercise price, the vesting and expiration period of the option and other
applicable terms of the option grant. At the present time, the entire board acts
as the Committee.

Stock Options

The Plan provides for the issuance of either NQSO Options or
  ISO Options to employees, directors and consultants of the Company and its subsidiaries,
  including any officer or director who is an employee of the Company for the
  purchase of common shares from the number of common shares which have been set
  aside for such purpose.

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- 33 -

Under the provisions of the Plan, it is intended that the ISO
  Options granted there under will qualify as options granted pursuant to Section
  422 of the Code, which will provide certain favourable tax consequences to participants
  who are granted and elect to exercise such Options. The Committee may grant
  either NQSO Options or ISO Options for such number of shares to eligible participants
  as the Committee from time to time shall determine and designate. Common shares
  involved in the unexercised portion of any terminated or expired Option may
  again be subjected to Options. The Committee is vested with discretion in determining
  the terms, restrictions and conditions of each Option. The option price of the
  common shares to be issued under the Plan will be determined by the Committee,
  provided that such price may not be less than 85% of the fair market value of
  the shares on the day prior to the date of grant for NQSO Options and 100% for
  the fair market value for ISO Options. Furthermore, if the participant owns
  greater than 10% of the total combined voting power of all classes of capital
  stock of the Company, the exercise price of ISO Options may not be less than
  110% of the fair market value of the common shares on the day prior to the date
  of the grant. The fair market value of a share of the Company's common shares
  will initially be determined by averaging the closing high bid and low asked
  quotations for such share on the date of grant in the over-the-counter market
  (NASD Electronic Bulletin Board).

Options granted under the Plan are exercisable in such amounts,
at such intervals and upon such terms as the Committee shall provide in such
Option. With respect to ISO Options, the aggregate fair market value (determined
as of the date the ISO Option is granted) of the stock with respect to which any
ISO Option is exercisable for the first time by a participant during any
calendar year under the Plan (and under all incentive stock option plans of the
Company and its subsidiaries qualified under the Code) shall not exceed
$100,000. Upon the exercise of a NQSO Option or an ISO Option, the option price
and any applicable withholding taxes must be paid in full by:

- cash or check for an amount equal to the aggregate stock option exercise
  price for the number of shares being purchased;
- in the discretion of the Committee, upon such terms as the Committee may
  approve, common shares owned by the optionee, duly endorsed for transfer to
  the Company, with a fair market value on the date of delivery equal to the
  aggregate purchase price of the shares with respect to which such stock option
  or portion is thereby exercised; or
- in the discretion of the Committee, upon such terms as the Committee may
  approve, a copy of instructions to a broker directing such broker to sell the
  common stock for which such Option is exercised, and to remit to the Company
  the aggregate exercise price of such Option;
- other consideration having equivalent value at the time of purchase as the
  Committee may determine.

An employee or consultant option will terminate at the earliest
of the following dates:

- the termination date specified in the applicable option agreement;
- three (3) months after employment or consultant agreement with the Company
  or its subsidiaries terminates; or
- one (1) year after employment or the consultant agreement with the Company
  or its subsidiaries terminates due to retirement, permanent and total
  disability and death.

---

- 34 -

Options otherwise expire a maximum of ten (10) years after the
date on which the Option is granted, the actual term to be determined by the
Committee. An Option is not transferable or assignable except by will or the
laws of descent and distribution.

Options will become exercisable by the participants in such
amounts and at such times as shall be determined by the Committee in each
individual grant. Options are not transferable except by will or by the laws of
descent and distribution.

Stock Subject To The Plan

The total number of common shares allotted and reserved for
issuance under the Plan is 3,000,000 common shares, equivalent to approximately
4.39% of the issued and outstanding share capital of the Company, as at June 30,
2004. On June 30, 2006 the 3,000,000 common shares allocated for the Stock
Option Plan represented 3.90% of the issued and outstanding shares. Such common
shares will be reserved for Options to be granted at the discretion of the
Committee. Options to purchase an aggregate of 1,700,000 common shares have been
granted under the Plan and are outstanding as of June 30, 2006.

ITEM
7.           MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.          
Major Shareholders

The Company is controlled by Perial Ltd. by virtue of its
beneficial ownership of 25,000,000 common shares or 32.88% of all issued and
outstanding shares as at June 29, 2006. There are currently no agreements in
place that could result in a change of control of the Company. The common shares
held by Perial do not have different voting rights than those held by other
shareholders. As at June 29, 2006, the total number of common shares held by US
residents is 20,193,746 or 26.5%, held by 142 shareholders.

The following table sets forth the common share ownership of
each person known by the Company to be the beneficial owner of five percent or
more of the Companys common shares. Each person has sole voting and investment
power with respect to the shares of common stock shown, and all ownership is of
record and beneficial.

Name and address of owner
    Number of Shares
    Position
    Percent of Class
    Increase/Decrease in
      percentage held over 2002Perial Ltd. 
        191 Eglinton Avenue East Suite
      302 Toronto, Ontario Canada M4P 1K1
      25,000,000
      Shareholder
      32.88%
      5.6% Decrease


On October 31, 2002, CRL sold its oil and gas properties to
Perial to facilitate the reorganization of CRL and the Company. Perial acquired
from its then wholly owned subsidiary, CRL, all of the oil and gas interests
held by CRL in exchange for a promissory note and the assumption of debt. No
gain or loss was recognized on this transaction. The note is non-interest
bearing and is payable from 25% of the gross production revenue of the oil and
gas properties.

B.          
Related Party Transactions

Except as disclosed herein, directors, senior officers and principal
  shareholders of the Company, or any associate or affiliate of the foregoing,
  have not participated in and have no other interest, direct or indirect, in
  any material transactions in which the Company has participated, or in any proposed
  transaction which has materially affected or will materially affect the Company
  during the previous three fiscal years.

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- 35 -

A shareholder of the Company, SJT Company, LLC. made loans to
the Company to meet its day-to-day working capital requirements during 2003 and
2004. The amounts loaned bear interest at 6.5% per annum and are repayable on
December 31, 2007. As at July 31, 2006, approximately $81,124 was owed by the
Company.

On December 31, 2005 the Company entered into a settlement
agreement with Perial Ltd, a major shareholder of the Company, for a note
receivable tied to gas production from a well in Pawnee County, Kansas. The gas
well became non-commercial and it was agreed to convert the note receivable to
an interest in a producing oil well. The interest in the oil well is 6.25%,
which caused a reduction in the value of the receivable of $355,548. For further
information see notes 4 and 5 of the financial statements.

On July 31, 2000, BSA purchased 12,500,000 shares of the
Company for a price of $.001 per share and subsequently issued a license to the
Company to manufacture and sell the System, the Pisces Process and the BRIMAC
and to implement the System at Company owned hydroelectric power production
sites in the United States and Canada. As further consideration, the Company is
obligated to make a payment of $150,000 to BSA as advance payment of royalties
of five percent (5%) of gross revenues. Under the terms of the agreement, the
Company has paid $50,000 to BSA and has agreed to pay the balance of $100,000
upon receipt of funding by the Company in the aggregate amount of not less than
$4,000,000. During January 2003 he parties amended the agreement to reduce the
royalty to 2% and eliminated all further obligations of the Company. The Company
issued 500,000 common shares to BSA in consideration for this amendment

There are no additional interests of management in transactions
involving the Company except for those stated in the Notes to the Financial
Statements.

C.          
Interests of Experts and Counsel

Not applicable.

ITEM
8.           FINANCIAL
INFORMATION

A.          
Consolidated Statements and Other Financial Information

See Item 17 Financial Statements and Item 3.A Selected
Financial Data of this document.

Legal Proceedings

No material legal proceedings to which the Company is a party
are pending nor are any known to be contemplated and the Company knows of no
legal proceedings pending or threatened, or judgments entered against, any
director or officer of the Company in his or her capacity other than as
disclosed herein.

On July 27, 2000, the Company entered into an employment agreement
  with Ron Brown, the Companys former President and later Vice President.
  Under the terms of the agreement Mr. Brown agreed to perform the services commonly
  associated with President and Chief Executive Officer in consideration of a
  salary of at least $15,000 per month, reimbursement of all expenses incurred,
  a life insurance policy in the amount of $1,500,000, medical and health benefits
  for Mr. Brown and all of his family members, and a vehicle allowance.

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- 36 -

In addition to the foregoing, the Company was obligated to issue
  to Mr. Brown options to acquire 5% of the shares issued and outstanding after
  the first year, 5% of the shares issued and outstanding after the second year,
  and 5% of the shares issued and outstanding at the end of the third year (or
  a total of 15% of the total outstanding shares of the Company after three years).
  The term of the agreement was from June 30, 2000 to May 31, 2003. The Company
  had the right to terminate the agreement for just cause or for any act or omission
  that was a breach under the agreement that was not remedied within thirty days.
  It was also a term of the agreement that Mr. Brown could be terminated for cause.
  On February 12, 2001, Mr. Brown was terminated for cause. Mr. Brown brought
  an action in the Chancery Court for Williamson County, Tennessee, Case No. 27720,
  seeking a declaratory judgment that the foregoing employment contract was in
  full force and effect. On September 1, 2005 the Company entered into a Settlement
  Agreement with Mr. Brown, under which the Company agreed to pay Mr. Brown $100,000
  in cash consideration and a sum or sums equal to .5% (one half of one percent)
  of any payment, proceeds or other consideration directly or indirectly received
  by Balaton or any of its subsidiaries or affiliates relating to the sale or
  production from the Gandhamardan Project. The .5% of the proceeds continues
  until Mr. Brown receives $5,000,000 in total consideration in addition to the
  $100,000 in cash. The Company paid Mr. Brown the $100,000 in two equal payments
  with the first payment of $50,000 in October 2005 and the second payment of
  $50,000 in May 2006.

On March 29, 2004, an action was brought by Roderick Christie
against the Company in the Supreme Court of British Columbia. The Statement of
Claim alleges that Christie acquired 260,000 shares of the Company from Balaton
Power Corporation S.A. and that the Company has an obligation to transfer these
shares to Mr. Christie but has refused to do so. Mr. Christie seeks $260,000 in
damages or 260,000 common shares in the Company plus that amount of Canadian
currency that is equal to the difference between the price at which the shares
are trading at the time of delivery and $1.00. The Company has filed a Statement
of Defence and brought on a court application to have Mr. Christie's claim
struck or security for costs posted in court, and Mr. Christine has filed a
cross application for judgment. As at the date of this annual report, neither
applications have proceeded.

Dividends Policy

No dividend has been paid on the Common Shares since inception,
and none is contemplated in the foreseeable future.

B.          
Significant Changes

Not Applicable.

ITEM
9.           THE OFFER AND
LISTING

A.          
Offer and Listing Details

For the five most recent full financial years, the annual high
and low market prices for the Companys common stock were as follows in U.S.
Dollars:

2005
    2004
    2003
    2002
    2001High (U.S. $)
    $0.80
    $1.00
    $0.17
    $0.95
    $1.25Low (U.S. $)
    $0.35
    $0.16
    $0.06
    $0.02
    $0.50


For the two most recent full financial years, the high and low
market prices for each full financial quarter for the Companys common stock
were as follows

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- 37 -

2005
      2004Q1
      Q2
      Q3
      Q4
      Q1
      Q2
      Q3
      Q4High (U.S. $)
      $0.80
      $0.63
      $0.58
      $0.47
      $0.84
      $1.00
      $0.60
      $0.82Low (U.S. $)
      $0.48
      $0.40
      $0.36
      $0.35
      $0.16
      $0.31
      $0.31
      $0.41


For the most recent six months, the high and low market prices
for each month for the Companys common stock were as follows:

June 06
    May 06
    Apr 06
    Mar 06
    Feb 06
    Jan 06High (U.S. $)
    $0.31
    $0.40
    $0.39
    $0.40
    $0.41
    $0.39Low (U.S. $)
    $0.22
    $0.27
    $0.31
    $0.27
    $0.30
    $0.31


B.          
Plan of Distribution

Not applicable.

C.          
Markets

The shares of the Company have traded on the Over-the-Counter
Bulletin Board Quotation System under the symbol BPWRF since November 26,
2001.

D.          
Selling Shareholders

Not applicable.

E.          
Dilution

Not applicable.

F.          
Expenses of the Issue

Not applicable.

ITEM
10.           ADDITIONAL
INFORMATION

A.          
Share Capital

Not applicable.

B.          
Memorandum and Articles of Association

Information regarding the Companys Memorandum and Articles of
Association is set out in the Companys Annual Report on Form 20-F filed July
15, 2002 and is incorporated herein by reference and is hereby confirmed that
this information has not changed since the filing on July 15, 2002.

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- 38 -

C.          
Material Contracts

Joint Venture Agreement dated April 18, 1997

On April 18, 1997, Continental entered the Joint Venture
Agreement with OMC to form a 50-50 joint venture company in the State of Orissa
with its primary purpose to explore and exploit the Gandhamardan Bauxite
Deposit. Continental managed the daily operations of COMPL, the joint venture
company. Under the Joint Venture Agreement, OMC had an option to participate in
Continentals proposed aluminium complex (including refinery, power plant and
smelter). This option was to be exercised within one year from the date of
transfer of leases concerning the Gandhamardan Project, of which such option
could be extended by mutual consent. Pursuant to the Joint Venture Agreement,
Continental bore all costs associated with the preparation of a feasibility
report and exploration. Continental transferred its interest in the deposit to
CRL, an unrelated company, with the result that CRL and OMC became joint venture
partners. During 2004, COMPL was voluntarily dissolved at the request of OMC.
CRL and OMC plan to incorporate a new entity that will direct the development of
the Gandhamardan Project according to the new terms and conditions of the new
agreement being submitted to the Orissa Government for approval between OMC and
CRL. As of July 30, 2006 the approval for the new agreement between OMC and CRL
has not been received from the Orissa Government.

License Agreement with Balaton Power Corporation, S.A.
dated July 31, 2000

On July 31, 2000, BSA entered into a Licence Agreement with
Rodney Smith, a former director and officer of the Company, and Colin Hall,
whereby Mr. Smith and Mr. Hall transferred all their right, title and interest
in the Pisces Process design and its derivatives to BSA. During 2003 BSA
achieved patent pending status of its application filed with the United States
Patent and Trademark Office (Case Docket No. SMTT 321) and is patent-protected
in 104 countries around the world for a float mounted intake system which will
be marketed under the name of the Pisces Process. The Pisces Process is a
mechanical device designed to steer fish stocks around the water intake to
prevent, reduce and/or eliminate their impingement and/or entrainment at
irrigation, industrial use and hydroelectric production facility water intakes.
Model testing of the Pisces Process was conducted in the spring of 2000 at the
Northwest Hydraulic Consultants laboratory in North Vancouver, British
Columbia, Canada.

Licensing Agreement dated January 29, 2001

BSA entered into a licensing agreement with the Company whereby
the Company has the right to manufacture and sell the System, the Pisces Process
and the BRIMAC and to implement the System at Company owned hydroelectric power
production sites in the United States and Canada. In consideration of the
license, the Company is obligated to make the payment of $150,000 to BSA as
advance payment of royalties of five percent (5%) of gross revenues. Under the
terms of the agreement, the Company has paid $50,000 to BSA and has agreed to
pay the balance of $100,000 upon receipt of funding by the Company in the
aggregate amount of not less than $4,000,000. In January 2004 the parties agreed
to reduce the royalty to 2%, and waive all further obligations of the Company,
in consideration for 500,000 common shares of the Company. These shares were
issued during the first quarter of 2003.

Stock Exchange Agreement dated September 30, 2002

On September 3, 2002 the Company entered into an agreement to
acquire 100% of CRL from Perial in consideration for 33,000,000 common shares of
the Company. 25,000,000 of these shares were issued to Perial and 8,000,000 were
issued as a finders fee. The transaction was completed on October 31, 2002 and
resulted in the change of control of the Company and the focus of the Companys
business on the Gandhamardan Project. See Information on the Company for a
description of this transaction.

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- 39 -

Loan Agreement dated February 11, 2002

On February 11, 2002, the Company entered into a loan agreement
arranged by S.J. Roth Capital Placement Inc. with RoyCap Inc. (the Lender).
Under the terms of the agreement, the Lender was to make four consecutive loans
to the Company, each loan in the amount of $125,000 (the Loans). Each
Loan was evidenced by a Promissory Note, accruing interest at approximately 7.3%
per annum and maturing and payable December 31, 2002. Each Loan had conversion
privileges whereby the Lender could convert each of the Loans or any portion
thereof outstanding, including interest, into Units. Each Unit
consisted of one common share of the Company and one share purchase warrant
entitling the Lender to purchase from the Company one additional common share at
an exercise price of $0.50 at any time prior to the expiry date of December 31,
2004. Out of the four loans to be made to the Company only a total of $163,436
was advanced to the Company. On May 4, 2005, pursuant to a settlement agreement
with RoyCap Inc., the Company settled the Loans for $100,000 and the issuance of
100,000 common shares in the capital of the Company.

D.          
Exchange Controls

The Company is a corporation incorporated under the laws of the
Province of British Columbia, Canada. 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. Any such 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 theInvestment 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. The disclosure herein is general only, it is not a substitute for
independent advice from an investors own advisor and does not anticipate
statutory or regulatory amendments. The Company does not believe the Investment
Act will have any affect on it or 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 entity) that is not a Canadian
  as defined in the Investment Act (i.e. 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. The size and nature of a proposed transaction may give rise to an
  obligation to notify the Director to seek an advance ruling. An investment in
  the Companys common shares of the Company 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 a certain figure, 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 which for 2006 exceeds $265 million.

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- 40 -

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 of the Company. 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 acquirer 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, as the rules
governing these businesses are different.

Certain transactions relating to the Common Shares 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

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 the
Corporation, 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 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 there under, 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, 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.

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- 41 -

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 the Corporation 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 the
Corporation's voting shares). The Corporation 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 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 the Corporation is not derived principally from real property situated
in Canada at the relevant time. Management believes that the value of the
Corporation'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 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 the Company. 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 the Company 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 the Company,
based upon their individual circumstances.

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- 42 -

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 the Company 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 who own (directly and indirectly, pursuant
to applicable rules of constructive ownership) no more than 5% of the value of
the total outstanding stock of the Company. This summary 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 the Company

In general, U.S. Holders receiving dividend distributions
(including constructive dividends) with respect to common shares of the Company
are required to include in gross income for 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 the Company has current or accumulated earnings and
profits, without reduction for any 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 the Company, they will be treated first as a
return of capital up to the U.S. Holders adjusted basis in the common shares
and thereafter as 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.

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- 43 -

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 the Company 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 the Company 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 the Company) deduction of the United States
source portion of dividends received from the Company (unless the Company
qualifies as a foreign personal holding company or a passive foreign
investment company, as defined below). The Company 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 the
Company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 the Company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 the
Company 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 income, high
withholding tax interest, financial services income, shipping income, and
certain other classifications of income. Dividends distributed by the Company
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 the Company should consult their
own tax advisors regarding their individual circumstances.

---

- 44 -

Disposition of Common Shares of the Company

In general, U.S. Holders will recognize gain or loss upon the
sale of common shares of the Company 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 the Company.
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 the Company 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 the Company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 the Companys gross income for such year is
derived from certain passive sources (e.g., from certain interest and
dividends), the Company 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 the Company does not actually distribute such income. The Company
does not believe that it currently qualifies as a foreign personal holding
company. However, there can be no assurance that the Company 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
the Company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 the Company 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 the Company 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. the Company does not believe that it currently qualifies as a foreign
investment company. However, there can be no assurance that the Company 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.

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- 45 -

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. Each U.S. Holder
  of the Company is urged to consult a tax advisor with respect to how the PFIC
  rules affect such U.S. Holders tax situation with respect to ownership
  of the Companys shares.

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 the Company. 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 the Company 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 the Company qualifies as a PFIC on his pro rata share of the Company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) the Company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 the Company 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, the Company
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 the Company is a controlled foreign corporation, the U.S. Holders
pro rata share of the Companys post-1986 earnings and profits as of the
qualification date. The qualification date is the first day of the Companys
first tax year in which the Company 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 the Company in which the Company 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 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 the Company 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 the Company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.

---

- 46 -

In order for a U.S. Holder to make (or maintain) a valid QEF
election, the Company 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. The Company intends to make the necessary information
available to U.S. Holders to permit them to make (and maintain) QEF elections
with respect to the Company. The Company 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 the Company, 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 an QEF election is made by a U.S. Holder and the Company 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 the Company
does not qualify as a PFIC. Therefore, if the Company 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 the Company 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 the Company.
Therefore, if such U.S. Holder reacquires an interest in the Company, that U.S.
Holder will be subject to the rules described above for Electing U.S. Holders
for each tax year in which the Company 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 Balaton
common shares and (ii) certain excess distributions, as defined in Section
1291(b), by the Company.

A Non-Electing U.S. Holder generally would be required to pro
rate all gains realized on the disposition of his Balaton common shares and all
excess distributions on his Balaton 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 the Company (i) which began after December
31, 1986, and (ii) for which the Company 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 the Company is a PFIC for any taxable year during which a
Non-Electing U.S. Holder holds the Company common shares, then the Company will
continue to be treated as a PFIC with respect to such Balaton 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 the
Companys common shares had been sold on the last day of the last taxable year
for which it was a PFIC.

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.

---

- 47 -

However, if the market-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 the Companys 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 the
Company 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 the Company 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 the Company 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 the
Companys 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 the Company 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
Balaton 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 the Company 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 the Company, certain adverse rules may apply in the
event that both the Company and any foreign corporation in which the Company
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. The Company 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 the Company 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 lower-tier PFIC shares
  and (ii) any gain deemed to arise from a so-called indirect disposition
  of such shares.

---

- 48 -

For this purpose, an indirect disposition of lower-tier PFIC
  shares would generally include (i) a disposition by the Company (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 the Company (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 the Company and does not dispose of its common shares. The Company 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 Balaton common shares while Balaton 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 Balaton
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 Balaton
(United States Shareholder), Balaton 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 Balaton 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 Balaton 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 Section1291 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. The Company does not believe that it currently
qualifies as a CFC. However, there can be no assurance that Balaton will not be
considered a CFC for the current or any future taxable year.

F.          
Dividends and Paying Agents

Not applicable.

G.          
Statement by Experts

Not Applicable.

---

- 49 -

H.          
Documents on Display

Exhibits attached to this Form 20-F are also available for
viewing at the offices of the Company, 19 East Fourth Avenue, Hutchinson, Kansas
67501 or on request of the Company at the same address, attention: Corporate
Secretary. Copies of the Companys financial statements and other continuous
disclosure documents required under the British Columbia Securities Act
are available for viewing on the internet at www.SEDAR.com. or at
www.sec.gov.

I.          
Subsidiary Information

Not applicable.

ITEM
11.           QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not subject to any material market risks at this
time.

ITEM
12.           DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

A.          
Debt Securities

Not applicable.

B.          
Warrants and Rights

Not applicable.

C.          
Other Securities

Not applicable.

D.          
American Depositary Shares

Not applicable.

PART II

ITEM
13.           DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM
14.           MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM
15.           CONTROLS AND
PROCEDURES

Based on an evaluation of the effectiveness of the design and
  operation of the Companys disclosure controls and procedures as of December
  31, 2005 our chief executive officer and our chief financial officer concluded
  that the Companys disclosure controls and procedures did not operate effectively
  in timely alerting management to material information relating to us required
  to be included in our SEC filings.

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- 50 -

The Company has identified a material weakness in its disclosure
  controls and procedures and internal control over financial reporting relating
  to internal processes in timely responding to securities regulators. In July
  2005 the Company received a comment letter from the SEC regarding the Companys
  2004 Form 20F filing including the accompanying audited financial statements.
  Before the 2005 audit could be completed the 2004 audit had to be restated,
  which has taken a substantial amount of time causing the filing of the 2005
  Form 20F to be not filed timely. The revisions to the Companys financial
  statements are described in Note 16 to the financial statements included herein.
  In addition an amended 2004 Form 20F will be filed following the filing of this
  2005 Form 20F.

The company is reviewing its disclosure controls and procedures
and its internal controls over financial reporting due to this material weakness
and plans to institute additional disclosure controls and procedures and
internal controls over financial reporting to remedy this material weakness.

ITEM
16.          
[RESERVED]

ITEM 16A.       AUDIT
COMMITTEE FINANCIAL EXPERT

The Company does not have a financial expert serving on its
audit committee. The Company has had some difficulty in attracting financial
experts to serve on its board of directors, due to the Companys small size. The
Companys financial statements are not complex, and the Company does not view
the retention of a financial expert as critical to its further development.
Regardless, the Company is currently considering appointing a director to the
board and to the audit committee who would be a financial expert.

ITEM 16B.       CODE OF
ETHICS

The Company has not formally adopted a written code of ethics.
The Company is reviewing the adoption of a formal code of ethics. The Company
has guided its conduct by the provisions of the British Columbia Business
Corporations Actand the securities legislation applicable to it. Due to its
size, management had not deemed it necessary to adopt a formal written code of
ethics at this time.

ITEM 16C.       PRINCIPAL
ACCOUNTANT FEES AND SERVICES

A.          
Audit Fees

The aggregate fees billed by the auditors to the Company were
US$60,000 and US$20,000 for the fiscal years ended 2005 and 2004, respectively.
These fees relate to only to the audit of the Companys financial statements and
are separate from any accounting, bookkeeping or tax preparation fees incurred
by the Company.

B.          
Audit-Related Fees

Nil

C.          
Tax Fees

Nil

D.          
All Other Fees

Nil

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- 51 -

ITEM 16D.       EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

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

None.

PART III

ITEM
17.           FINANCIAL
STATEMENTS

This Annual Report on Form 20-F includes the Companys audited
financial statements for the years ended December 31, 2005 and 2004, including
the following:

|1. | Independent Auditors Report
        of Danziger and Hochman dated June 23, 2006.                              
|-- | ---------------------------------------------------------------------------------------------------------------
|   |                                                                                                                
|2. | Consolidated Balance Sheets as at
        December 31, 2005 and December 31, 2004.                             
|   |                                                                                                                
|3. | Consolidated Statements of Operations
        and Deficit for the years ended December 31, 2005, 2004 and 2003.
|   |                                                                                                                
|4. | Consolidated Statements of Cash
        Flows for the years ended December 31, 2005, 2004 and 2003.            
|   |                                                                                                                
|5. | Notes to the Consolidated Financial
        Statements.                                                        

ITEM
18.           FINANCIAL
STATEMENTS

Not applicable.

ITEM
19.           EXHIBITS

The following financial statements, related schedules and
exhibits are included in this Form 20-F:

EXHIBIT
      NUMBER
    DESCRIPTION OFEXHIBIT4.1
    Stock Exchange Agreement dated September 30, 2002 between
      Balaton Power Inc. and Perial Ltd.(1)4.2
    Stock Option Plan(1)12.1
    Certification of Chief Executive
          Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    Certification of Chief Financial
          Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


---

- 52 -

EXHIBIT NUMBER
      DESCRIPTION OFEXHIBIT13.1
      Certification of Chief
        Executive Officer pursuant to pursuant to 18 U.S.C. Section 1350, as adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
      Certification of Chief
        Financial Officer pursuant to pursuant to 18 U.S.C. Section 1350, as adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


|(1) | Filed as an exhibit to the Companys Annual Report on
      Form 20-F for the fiscal year ended December 31, 2003 (SEC File No.
      000-32255) filed on July 15, 2004, and incorporated by reference
      herein.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

BALATON POWER INC.

Consolidated Financial Statements

(United States Dollars)

December 31, 2005

---

BALATON POWER INC.

INDEX

December 31, 2005

|                                                                       | PAGE  
|---------------------------------------------------------------------- | ------
|                                                                       |       
|INDEPENDENT AUDITORS REPORT  DECEMBER 31,
      2005 AND 2004        | 1     
|                                                                       |       
|AUDITORS REPORT  DECEMBER 31, 2003                                   | 2     
|                                                                       |       
|FINANCIAL STATEMENTS                                                   |       
|                                                                       |       
|Consolidated Balance Sheets - Statement I                              | 3     
|Consolidated Statements of Operations and Deficit - Statement
      II | 4     
|Consolidated Statements of Cash Flows  Statement
      III            | 5     
|                                                                       |       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             | 6 - 19

---

INDEPENDENT AUDITORS REPORT

To the Directors of BALATON POWER INC.

We have audited the consolidated balance sheets of BALATON
  POWER INC. as at December 31, 2005 and 2004 and the consolidated statements
  of loss and deficit and cash flows for each of the years then ended. These consolidated
  financial statements are the responsibility of the companys management.
  Our responsibility is to express an opinion on these financial statements based
  on our audits.

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

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company, as
  at December 31, 2005 and 2004, and the results of its operations and cash flows
  for each of the years then ended, in accordance with Canadian generally accepted
  accounting principles.

The financial statements as at December 31, 2003 and for the
  year then ended were audited by other auditors who expressed an opinion without
  reservation on those statements in the report dated May 18, 2004.



|                 | /s/ Danziger & Hochman
|---------------- | ----------------------
|Toronto, Ontario | Chartered Accountants 
|June 23, 2006    |                       

Comments by Auditors for U.S. Readers on Canada  United
  States Reporting Difference

In the United States, reporting standards for auditors require
  the addition of an explanatory paragraph (following the opinion paragraph) when
  the financial statements are affected by conditions and events that cast substantial
  doubt on the Companys ability to continue as a going concern, such as
  those desCRLbed in Note 1 to the financial statements. Our report to the directors
  dated June 23, 2006, is expressed in accordance with Canadian reporting standards
  which do not permit a reference to such events and conditions in the auditors
  report when these are adequately disclosed in the financial statements.



|                 | /s/ Danziger & Hochman
|---------------- | ----------------------
|Toronto, Ontario | Chartered Accountants 
|June 23, 2006    |                       

Page 1

---

AUDITORS REPORT

To the Shareholders of 
  Balaton Power Inc.

We have audited the consolidated balance sheets of Balaton Power
  Inc. as at December 31, 2003 and 2002 and the consolidated statements of operations
  and deficit and cash flows for the years then ended. These consolidated 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 generally accepted
  auditing standards in both Canada and the United States. Those standards require
  that we plan and perform an audit to obtain reasonable assurance as to whether
  the financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation.

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as at
  December 31, 2003 and 2002 and the results of its operations and its cash flows
  for the years then ended in accordance with Canadian generally accepted accounting
  principles.



|                            | /s/ Harris & Partners, LLP
|--------------------------- | --------------------------
|                            |                           
|Richmond Hill, Ontario      | Harris & Partners, LLP    
|May 18, 2004                | Chartered Accountants     
|(except as to Note 16 which |                           
|is as of June 22, 2004)     |                           

Comments by Auditors for U.S. Readers on Canada  United
  States Reporting Difference

In the United States, reporting standards for auditors require
  the addition of an explanatory paragraph when the financial statements are affected
  by conditions and events that cast doubt on the Companys ability to continue
  as a going concern, such as those desCRLbed in Note 1 to the financial statements.
  Our report to the shareholders dated May 18, 2004, is expressed in accordance
  with Canadian reporting standards which do not permit a reference to such events
  and conditions in the auditors report when these are adequately disclosed
  in the financial statements.



|                            | /s/ Harris & Partners, LLP
|--------------------------- | --------------------------
|                            |                           
|Richmond Hill, Ontario      | Harris & Partners, LLP    
|May 18, 2004                | Chartered Accountants     
|(except as to Note 16 which |                           
|is as of June 22, 2004)     |                           

Page 2

---

|BALATON POWER INC.          | Statement I
|--------------------------- | -----------
|Consolidated Balance Sheets |            
|As at December 31, 2005     |            
|(United States Dollars)     |            

|                                               |   | 2005       |   |   | 2004       |  
|---------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                               |   |            |   |   |            |  
|ASSETS                                         |   |            |   |   |            |  
|CURRENT                                        |   |            |   |   |            |  
|Cash                                           | $ | 332,240    |   | $ | 438,932    |  
|Loans receivable (note
      3)                |   | 34,556     |   |   | 63,968     |  
|Prepaid expenses                               |   | 34,492     |   |   | 29,900     |  
|                                               |   |            |   |   |            |  
|                                               |   | 401,288    |   |   | 532,800    |  
|Note receivable (note 4)                       |   | -          |   |   | 126,176    |  
|Investments (note 5)                           |   | 201,176    |   |   | 75,000     |  
|                                               |   |            |   |   |            |  
|                                               | $ | 602,464    |   | $ | 733,976    |  
|                                               |   |            |   |   |            |  
|LIABILITIES                                    |   |            |   |   |            |  
|CURRENT                                        |   |            |   |   |            |  
|Accounts
      payable and accrued liabilities | $ | 255,774    |   | $ | 227,714    |  
|Convertible debt (note
      7)                |   | -          |   |   | 179,779    |  
|Loan payable (note
      8)                    |   | 81,124     |   |   | 81,124     |  
|                                               |   |            |   |   |            |  
|                                               |   | 336,898    |   |   | 488,617    |  
|                                               |   |            |   |   |            |  
|SHAREHOLDERS EQUITY                           |   |            |   |   |            |  
|SHARE SUBSCRLPTION RECEIVABLE                  |   | -          |   |   | (92,900    | )
|SHARE CAPITAL(note
      9)                    |   | 4,975,033  |   |   | 4,130,154  |  
|CONTRIBUTED SURPLUS                            |   | 1,412,357  |   |   | 1,180,442  |  
|DEFICIT Statement II                          |   | (6,121,824 | ) |   | (4,972,337 | )
|                                               |   |            |   |   |            |  
|                                               |   | 265,566    |   |   | 245,359    |  
|                                               |   |            |   |   |            |  
|                                               | $ | 602,464    |   | $ | 733,976    |  

APPROVED ON BEHALF OF THE BOARD

/s/ Robert Wyllie, Director

/s/ Michael Rosa, Director

|{See accompanying notes.} | Page 3
|------------------------- | ------

---

|BALATON POWER INC.                                | Statement II
|------------------------------------------------- | ------------
|Consolidated Statements of Operations and Deficit |             
|For the Year Ended December 31, 2005              |             
|(United States Dollars)                           |             

|                                    |   | 2005       |   |   | 2004       |   |   | 2003       |  
|----------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                    |   |            |   |   |            |   |   |            |  
|                                    |   |            |   |   |            |   |   |            |  
|REVENUE                             | $ | -          |   | $ | -          |   | $ | -          |  
|                                    |   |            |   |   |            |   |   |            |  
|EXPENSES                            |   |            |   |   |            |   |   |            |  
|Administration and general          |   | 914,749    |   |   | 1,239,605  |   |   | 195,286    |  
|Consulting fees and commissions     |   | 63,000     |   |   | 245,882    |   |   | 72,000     |  
|Professional fees                   |   | 171,738    |   |   | 207,376    |   |   | 34,980     |  
|Interest                            |   | -          |   |   | 13,040     |   |   | 11,931     |  
|Write
      down of loan receivable |   | -          |   |   | 355,548    |   |   | -          |  
|                                    |   |            |   |   |            |   |   |            |  
|                                    |   | 1,149,487  |   |   | 2,061,451  |   |   | 314,197    |  
|                                    |   |            |   |   |            |   |   |            |  
|NET LOSS FOR THE YEAR               |   | (1,149,487 | ) |   | (2,061,451 | ) |   | (314,197   | )
|                                    |   |            |   |   |            |   |   |            |  
|DEFICIT, BEGINNING
      OF YEAR    |   | (4,972,337 | ) |   | (2,910,886 | ) |   | (2,596,689 | )
|                                    |   |            |   |   |            |   |   |            |  
|                                    |   |            |   |   |            |   |   |            |  
|DEFICIT, END OF YEAR                | $ | (6,121,824 | ) | $ | (4,972,337 | ) | $ | (2,910,886 | )
|                                    |   |            |   |   |            |   |   |            |  
|LOSS PER COMMON SHARE               |   |            |   |   |            |   |   |            |  
|Basic                               | $ | (0.02      | ) | $ | (0.03      | ) | $ | (0.01      | )
|Diluted                             | $ | (0.02      | ) | $ | (0.03      | ) | $ | (0.01      | )
|                                    |   |            |   |   |            |   |   |            |  
|AVERAGE NUMBER OF COMMON SHARES     |   |            |   |   |            |   |   |            |  
|OUTSTANDING                         |   | 75,125,178 |   |   | 69,679,959 |   |   | 65,689,379 |  
|                                    |   |            |   |   |            |   |   |            |  
|AVERAGE NUMBER OF DILUTED SHARES    |   |            |   |   |            |   |   |            |  
|OUTSTANDING                         |   | 85,107,418 |   |   | 77,845,996 |   |   | 76,088,860 |  

---

|BALATON POWER INC.                    | Statement III
|------------------------------------- | -------------
|Consolidated Statements of Cash Flows |              
|For the Year Ended December 31, 2005  |              
|(United States Dollars)               |              

|                                                      |   | **2005**   |   |   | **2004**   |   |   | **2003** |  
|----------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | -------- | -
|                                                      |   |            |   |   |            |   |   |          |  
|CASH PROVIDED BY (USED IN)                            |   |            |   |   |            |   |   |          |  
|OPERATING ACTIVITIES                                  |   |            |   |   |            |   |   |          |  
|Net loss for the year                                 | $ | (1,149,487 | ) | $ | (2,061,451 | ) | $ | (314,197 | )
|Adjustments for items
      not affecting cash        |   |            |   |   |            |   |   |          |  
|Gain on disposition
      included in administration  |   |            |   |   |            |   |   |          |  
|and general expense                                   |   | -          |   |   | ( 56,613   | ) |   | -        |  
|Shares issued for
      services                      |   | 269,826    |   |   | 525,859    |   |   | 117,402  |  
|Write
      down of loan receivable                   |   | -          |   |   | 355,548    |   |   | -        |  
|Settlement of convertible
      debt                  |   | (179,779   | ) |   | -          |   |   | -        |  
|Fair value of stock options granted                   |   | 166,968    |   |   | 602,964    |   |   | -        |  
|                                                      |   |            |   |   |            |   |   |          |  
|                                                      |   | (892,472   | ) |   | (633,693   | ) |   | (196,795 | )
|Changes in non-cash working capital components        |   |            |   |   |            |   |   |          |  
|Prepaid
      expenses                                |   | ( 4,592    | ) |   | (28,659    | ) |   | 8,200    |  
|Accounts payable and accrued liabilities              |   | 28,060     |   |   | 24,762     |   |   | 34,715   |  
|                                                      |   |            |   |   |            |   |   |          |  
|Cash provided by
      (used in) operating activities |   | (869,004   | ) |   | (637,590   | ) |   | (153,880 | )
|                                                      |   |            |   |   |            |   |   |          |  
|INVESTING ACTIVITIES                                  |   |            |   |   |            |   |   |          |  
|Investment in shares of private company               |   | -          |   |   | (75,000    | ) |   | -        |  
|                                                      |   |            |   |   |            |   |   |          |  
|FINANCING ACTIVITIES                                  |   |            |   |   |            |   |   |          |  
|Loan receivable                                       |   | 29,412     |   |   | (63,968    | ) |   | -        |  
|Loan payable                                          |   | -          |   |   | 51,124     |   |   | 30,000   |  
|Issue of share capital, warrants and share            |   |            |   |   |            |   |   |          |  
|subsCRLptions                                         |   | 732,900    |   |   | 1,159,676  |   |   | 100,490  |  
|                                                      |   |            |   |   |            |   |   |          |  
|                                                      |   | 762,312    |   |   | 1,146,832  |   |   | 130,490  |  
|                                                      |   |            |   |   |            |   |   |          |  
|NET INCREASE (DECREASE) IN CASH                       |   | (106,692   | ) |   | 434,242    |   |   | (23,390  | )
|                                                      |   |            |   |   |            |   |   |          |  
|CASH, BEGINNING OF YEAR                               |   | 438,932    |   |   | 4,690      |   |   | 28,080   |  
|                                                      |   |            |   |   |            |   |   |          |  
|CASH, END OF YEAR                                     | $ | 332,240    |   | $ | 438,932    |   | $ | 4,690    |  

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|1. | DESCRLPTION OF BUSINESS, BASIS OF PRESENTATION
        AND GOING CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | On October 31, 2002 Balaton Power Inc. (BPI)
        acquired Continental Resources (USA) Ltd., (CRL) in an arms
        length transaction, in exchange for 25,000,000 restricted common shares
        to the shareholders of CRL and as well issued an additional 8,000,000
        restricted shares as finders fees. Balaton Power Corporation S.A.,
        in order to facilitate the transaction, also sold 10,000,000 of its 13,000,000
        common shares to various parties connected to CRL at $0.001 per share.
        the acquisition was treated as a reverse takeover of the Company. However,
        in accordance with EIC-10, the transaction is a capital transaction in
        substance rather than a business combination. The purchase method has
        been applied by CRL and the net liability of BPI has been charged to the
        deficit. The transaction was an asset acquisition by the Company and not
        a business combination. Accordingly, while the Company will have issued
        sufficient shares such that control of the Company was acquired by the
        shareholders of CRL, the transaction was not accounted for as a reverse
        takeover.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The consolidated financial statements of the combined
        entity are issued under the name of the legal parent, BPI, but are considered
        a continuation of the financial statements of the legal subsidiary CRL.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company through CRL, its subsidiary, is negotiating
        with Orissa Mining Corp. to develop a bauxite deposit in the state of
        Orissa in India subject to Orissa State government approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The business of mining and exploring for minerals involves
        a high degree of risk and there can be no assurance that current exploration
        programs will result in profitable mining operations. The recoverability
        of the carrying value of exploration properties and the Companys
        continued existence is dependent upon the preservation of its interest
        in the underlying properties, the discovery of economically recoverable
        reserves, the achievement of profitable operations, or the ability of
        the Company to raise alternative financing, if necessary, or alternatively
        upon the Companys ability to dispose of its interests on an advantageous
        basis. Changes in future conditions could require material writedowns
        of the carrying values.                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The consolidated financial statements have been prepared
        in accordance with accounting principles generally accepted in Canada
        and include the accounts of the Company and its wholly-owned subsidiary,
        Continental Resources (USA) Ltd. A summary of the differences between
        accounting principles general accepted in Canada (Canadian GAAP)
        and those generally accepted in the United States (US GAAP)
        which affects the Company is contained in note 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Page 6

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|1. | DESCRLPTION OF BUSINESS, BASIS OF PRESENTATION
        AND GOING CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Going Concern                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The financial statements of the Company have been prepared
        on a going concern basis which contemplates the realization of assets
        and discharge of obligations in the normal course of business as they
        come due. No adjustments have been made to assets or liabilities in these
        financial statements should the Company not be able to continue normal
        business operations.                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company has incurred several years of losses and
        during 2005, utilized $869,004 of cash in operations. At December 31,
        2005, the Company reported a deficit of $6,121,824 and continues to expend
        cash amounts that significantly exceed revenues. These conditions cast
        substantial doubt on the ability of the Company to continue in business
        and meet its obligations as they come due. Management is considering various
        alternatives, including possible private placements to raise capital in
        fiscal 2006. Nevertheless, there is no assurance that these initiatives
        if undertaken will be successful.                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Companys continuance as a going concern is
        dependent on the success of the efforts of its directors and principal
        shareholders in providing financial support in the short term, the success
        of the Company in raising additional long-term financing either from its
        own resources or from third parties, the commercialization of the Companys
        projects and the Company achieving profitable operations. In the event
        that such resources are not secured, the assets may not be realized or
        liabilities discharged at their carrying amounts, and differences from
        the carrying amounts reported in these financial statements could be material.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, the disclosure of contingent assets and liabilities at the
        date of the financial statements and reported amounts of revenues and
        expenses during the reporting period. Actual results could differ from
        those estimates.                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Cash and cash equivalents include deposits at Canadian
        and United States financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Page 7

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Effective January 1, 2004, the Company adopted Financial
        Accounting Standard Board (FASB) Statement No. 123(R). This pronouncement
        requires all share-based payments be recognized in the income statement
        based on their fair values. The Company has employed the modified
        prospective method for accounting for these share-based payments.
        This method entails recognizing the fair value of share-based payments
        after the effective date (January 1, 2004) with no restatement for prior
        transactions of this nature.                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The fair value of stock options is determined by the
        widely used Black-Scholes Option Pricing Model with assumptions for risk-free
        interest rates, dividend yields, volatility of the expected market price
        of the Companys common shares and an expected life of the options.
        The fair value of direct awards of stock is determined by the quoted market
        price of the Companys stock.                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Option-pricing models require the use of highly subjective
        estimates and assumptions including the expected stock price volatility.
        Changes in the underlying assumptions can materially affect the fair value
        estimates and, therefore, existing models do not necessarily provide reliable
        measurement of the fair value of the Companys stock options.                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Income taxes are calculated using the asset and liability
        method of tax accounting. Under this method, current income taxes are
        recognized for the estimated income taxes payable for the current period.
        Future income tax assets and liabilities are determined based on differences
        between the financial reporting and tax bases of assets and liabilities
        and on unclaimed losses carried forward and are measured using the substantially
        enacted tax rates that will be in effect when the differences are expected
        to reverse or losses are expected to be utilized. A valuation allowance
        is recognized to the extent that the recoverability of future income tax
        assets is not considered more likely than not.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Earnings (Loss) Per Common Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Basic earnings (loss) per share is computed by dividing
        the earnings (loss) for the period by the weighted average number of common
        shares outstanding during the period, including contingently issuable
        shares which are included when the conditions necessary for issuance have
        been met. Diluted earnings per share is calculated in a similar manner,
        except that the weighted average number of common shares outstanding is
        increased to include potentially issuable common shares from the assumed
        exercise of common share purchase options and warrants, if dilutive. The
        number of additional shares included in the calculation is based on the
        treasury stock method for options and warrants.             

Page 8

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|3. | LOANS RECEIVABLE  RELATED PARTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The loans receivable are due from shareholders of the
        Company and are non-interest bearing and due upon demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|4. | NOTE RECEIVABLE  RELATED PARTY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On October 31, 2002, Perial Ltd. ("Perial"), the former
        parent of CRL, purchased the oil and gas properties of CRL to facilitate
        the reorganization of CRL and Balaton Power Inc. Perial acquired from
        its then wholly-owned subsidiary, CRL, all of the oil and gas interests
        held by the subsidiary in exchange for a promissory note and the assumption
        of debt. No gain or loss was recognized on this transaction. The note
        is non-interest bearing and is payable from 25% of the gross production
        revenue of certain oil and gas properties.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In December 2005, the Company agreed to accept a 6.25%
        working interest in a oil well owned by Perial Ltd. Cash flows are expected
        from the sale of oil extracted from the well. This settlement resulted
        in a writedown of the note receivable from $481,724 to $126,176 (see note
        5).                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|5. | INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                               |   | 2005    |  |   | 2004   | 
| | --------------------------------------------- | - | ------- |  | - | ------ | 
| |                                               |   |         |  |   |        | 
| | Interest in oil well                          | $ | 126,176 |  | $ | -      | 
| | Common shares in Cumberland Continental Corp. |   | 75,000  |  |   | 75,000 | 
| |                                               |   |         |  |   |        | 
| |                                               | $ | 201,176 |  | $ | 75,000 | 

On October 31, 2002, the Company exchanged
  a claim in an oil well in Pawnee County, Kansas and associated debt for a promissory
  note from Perial Ltd. The recognized value of the promissory note was $481,724.
  In a settlement agreement reached on December 31, 2005 between Perial Ltd. and
  the Company, the Company agreed to accept a 6.25% working interest in the well
  as full payment for the promissory note. Cash flows from the investment are
  expected to come from the sale of oil extracted from the well.

Page 9

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|5. | INVESTMENTS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In 2004, the Company purchased 500,000 common shares
        in a private company called Cumberland Continental Corp. through a private
        placement for $75,000. The investment has been recorded at cost. Cumberland
        Continental Corp. is in the computer software business and is currently
        attempting a registration on the Nasdaq OTCBB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|6. | LICENSE AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company was party to a license agreement with Balaton
        Power Corporation S.A. (BPCSA) to manufacture, market, sell/lease
        and otherwise commercialize BPCSAs proprietary technology and related
        confidential data throughout Canada and the United States for a period
        of 20 years. The license has an ongoing option to be renewed for a further
        20 years at the expiration of each 20 year period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In 2003, the agreement was amended to reduce the royalty
        payments in the license agreement from 5% to 2% and eliminate all other
        obligations of the Company under the license agreement. The Company issued
        500,000 common shares as consideration for this amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|7. | CONVERTIBLE DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | On February 11, 2002, the Company entered into a loan
        agreement arranged by S.J. Roth Capital Placement Inc. Under the terms
        of the agreement, the Lender was to make four consecutive loans to the
        Company, each loan in the amount of $125,000 ("the loans"). Each loan
        was to be evidenced by a Promissory Note, accruing interest at approximately
        7.3% per annum and all were to mature on December 31, 2002. Each loan
        had conversion privileges whereby the Lender could convert each of the
        loans or any portion thereof outstanding, including interest, into "Units".
        Each Unit was to consist of one common share of the Company and one Share
        Purchase Warrant entitling the Lender to purchase from the Company one
        additional common share at an exercise price of $0.50 at any time prior
        to the expiry date of December 31, 2004.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company received only $163,436 under the terms of
        these loans and incurred a penalty of $16,343.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | During the year, the Company settled this debt for a
        payment of $100,000 and the issuance of 100,000 restricted common shares.
        At year-end, $50,000 of this settlement was still owing and is included
        in accounts payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Page 10

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|8. | LOAN PAYABLE  RELATED PARTY                                                                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                     
|   | The loan payable is unsecured and due to a shareholder
        of the Company and a company controlled by this shareholder and bears
        interest at 6.5% per annum. The loan was extended to December 31, 2007.
|   |                                                                                                                                                                                                                     
|9. | SHARE CAPITAL                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                     
|   | Authorized: 700,000,000 common shares without par value                                                                                                                                                             

| | Issued and fully paid:                 |   | Shares     |  |   | Amount    | 
| | -------------------------------------- | - | ---------- |  | - | --------- | 
| |                                        |   |            |  |   |           | 
| | Balance, December 31, 2002             |   | 64,988,194 |  | $ | 2,598,000 | 
| | Issued for fees and services           |   | 1,174,020  |  |   | 117,402   | 
| | Private placements for cash            |   | 600,000    |  |   | 23,000    | 
| | Balance, December 31, 2003             |   | 66,762,214 |  |   | 2,738,402 | 
| | Private placements for cash            |   | 1,933,000  |  |   | 102,470   | 
| | Exercise of warrants                   |   | 2,953,333  |  |   | 807,167   | 
| | Issued for fees and services           |   | 1,883,958  |  |   | 476,992   | 
| | Issued on settlement of debt           |   | 595,755    |  |   | 5,123     | 
| | Balance, December 31, 2004             |   | 74,128,260 |  |   | 4,130,154 | 
| | Private placements for cash            |   | 750,000    |  |   | 189,990   | 
| | Exercise of warrants                   |   | 1,000,000  |  |   | 400,000   | 
| | Issued on settlement of debt           |   | 479,857    |  |   | 254,889   | 
| |                                        |   |            |  |   |           | 
| | Balance, December 31, 2005             |   | 76,358,117 |  | $ | 4,975,033 | 
| |                                        |   |            |  |   |           | 
| | Contributed Surplus                    |   |            |  |   |           | 
| | Balance, December 31, 2003             | $ | -          |  |   |           | 
| | Company debt assumed by a shareholder  |   | 46,379     |  |   |           | 
| | Fair value of purchase warrants issued |   | 531,099    |  |   |           | 
| | Fair value of stock options granted    |   | 602,964    |  |   |           | 
| |                                        |   |            |  |   |           | 
| | Balance, December 31, 2004             |   | 1,180,442  |  |   |           | 
| | Fair value of purchase warrants issued |   | 64,947     |  |   |           | 
| | Fair value of stock options granted    |   | 166,968    |  |   |           | 
| | Balance, December 31, 2005             | $ | 1,412,357  |  |   |           | 

Page 11

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|9. | SHARE CAPITAL(continued)
      Warrants
|-- | ---------------------------------------

| | Balance, December 31, 2003 |  | 7,499,481  |   |  |  | 
| | -------------------------- |  | ---------- | - |  |  | 
| | Exercised                  |  | (2,953,333 | ) |  |  | 
| | Expired                    |  | (4,546,148 | ) |  |  | 
| | Issued in 2004             |  | 4,128,137  |   |  |  | 
| |                            |  |            |   |  |  | 
| | Balance, December 31, 2004 |  | 4,128,137  |   |  |  | 
| | Exercised                  |  | (1,000,000 | ) |  |  | 
| | Issued in 2005             |  | 963,714    |   |  |  | 
| |                            |  |            |   |  |  | 
| | Balance, December 31, 2005 |  | 4,091,851  |   |  |  | 

At December 31, 2005, the following warrants
  were outstanding:

| | Amount    | Price | Expiry           
| | --------- | ----- | -----------------
| |           |       |                  
| | 472,154   | $0.40 | June 13, 2006    
| | 1,602,900 | 0.40  | July 13, 2006    
| | 600,000   | 0.40  | August 25, 2006  
| | 120,083   | 0.40  | August 31, 2006  
| | 333,000   | 0.40  | December 16, 2006
| | 125,000   | 0.66  | February 21, 2007
| | 838,714   | 0.44  | September 9, 2007
| | 4,091,851 |       |                  

At December 31, 2005, the following stock
  options were outstanding:

| | 2,500,000 | $0.50 | May 15, 2006    
| | --------- | ----- | ----------------
| | 400,000   | 0.50  | January 31, 2007
| | 1,300,000 | 0.40  | June 25, 2009   
| | 200,000   | 0.50  | October 6, 2009 
| | 400,000   | 0.40  | August 22, 2008 
| | 4,800,000 |       |                 

Page 12

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|10. | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                   
|    | Under the stock option plan, the Company may grant options
        to its officers, directors and consultants. Options granted under the
        plan have a maximum term of 5 years, with vesting terms and conditions
        determined by the board of directors when granted.
|    |                                                                                                                                                                                                                                                                                   
|    | A summary of the status of the Companys employee
        stock option plan as of December 31, 2005 and 2004 and changes during
        the years then ended are as follows:                                                                                                      

| |                                  |  |           |  |   | 2005     |  |  |           |  |   | 2004     | 
| | -------------------------------- |  | --------- |  | - | -------- |  |  | --------- |  | - | -------- | 
| |                                  |  |           |  |   | Weighted |  |  |           |  |   | Weighted | 
| |                                  |  |           |  |   | Average  |  |  |           |  |   | Average  | 
| |                                  |  | Number of |  |   | Exercise |  |  | Number of |  |   | Exercise | 
| |                                  |  | Options   |  |   | Price    |  |  | Options   |  |   | Price    | 
| |                                  |  |           |  |   |          |  |  |           |  |   |          | 
| | Outstanding, beginning of year   |  | 4,400,000 |  | $ | 0.47     |  |  | 2,900,000 |  | $ | 0.50     | 
| | Granted                          |  | 400,000   |  |   | .40      |  |  | 1,500,000 |  |   | 0.41     | 
| |                                  |  |           |  |   |          |  |  |           |  |   |          | 
| | Outstanding, end of year         |  | 4,800,000 |  | $ | 0.46     |  |  | 4,400,000 |  | $ | 0.47     | 
| |                                  |  |           |  |   |          |  |  |           |  |   |          | 
| | Options exercisable, end of year |  | 4,800,000 |  | $ | 0.46     |  |  | 4,400,000 |  | $ | 0.47     | 

|    | Stock options issued are valued using the Black Scholes
        option pricing model with the following assumptions: risk free interest
        rate of 2.75% to 3.00%, expected life of between 2 years and 4 years,
        expected volatility of 310% and no dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|11. | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In assessing the realizability of future tax assets,
        management considers whether it is more likely than not that some portion
        or all of the future income tax assets will not be realized. The ultimate
        realization of future income tax assets is dependant upon the generation
        of future taxable income during the periods in which those temporary differences
        become deductible. Management considers the scheduled reversal of future
        tax liabilities, projected future taxable income and tax planning strategies
        in making this assessment. Management has provided for a valuation allowance
        on all of its losses as there is no assurance that future tax benefits
        will be realized.

Page 13

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|11. | INCOME TAXES(continued)                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                         
|    | A reconciliation comparing income taxes calculated at
        the statutory rates to the amount provided in the accompanying financial
        statements is as follows:

| |                                                        |   | **2005**    |   |   | **2004**    |  
| | ------------------------------------------------------ | - | ----------- | - | - | ----------- | -
| |                                                        |   |             |   |   |             |  
| | Combined federal and provincial income tax
      rates |   | 34%         |   |   | 34%         |  
| |                                                        |   |             |   |   |             |  
| | Loss before income taxes                               |   | ($1,149,487 | ) |   | ($2,061,451 | )
| |                                                        |   |             |   |   |             |  
| | Expected income tax (recovery)                         |   | ( 390,000   | ) |   | ( 700,000   | )
| | Non-deductible expenses                                |   | 56,000      |   |   | 205,000     |  
| | Valuation allowance                                    |   | 334,000     |   |   | 495,000     |  
| |                                                        |   |             |   |   |             |  
| | Actual income taxes                                    | $ | -           |   | $ | -           |  

The significant components of the Companys
  future income taxes are as follows:

Future income tax assets

| | Net operating losses carried forward        | $ | 2,623,000 |  | $ | 1,824,000 | 
| | ------------------------------------------- | - | --------- |  | - | --------- | 
| | Valuation allowance for future income taxes |   | 2,623,000 |  |   | 1,824,000 | 
| |                                             |   |           |  |   |           | 
| |                                             | $ | -         |  | $ | -         | 

The Company has accumulated potential
  tax benefits coming from losses carried forward. The related tax benefits will
  be recorded when realized. They expire as follows:

| | The non-capital losses expire as follows: |   | Losses    | 
| | ----------------------------------------- | - | --------- | 
| |                                           |   |           | 
| | 2009                                      | $ | 333,000   | 
| | 2010                                      |   | 440,000   | 
| | 2014                                      |   | 867,000   | 
| | 2015                                      |   | 983,000   | 
| |                                           |   |           | 
| |                                           | $ | 2,623,000 | 

Page 14

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|12. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                      
|    | a)                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|    | b)                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                      
|13. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                      
|    | Related party transactions are in the normal
        course of operations and are measured at the exchange amount, which is
        the amount of consideration established and agreed to by the related parties.
        Related party transactions include the following:          
|    |                                                                                                                                                                                                                                                                                      
|    | A shareholder of the Company advanced $Nil
        (2004 - $51,124) to the Company during the year. The loan bears interest
        at 6.5% per annum. Interest and principal are payable at maturity on June
        30, 2005. As of the year-end, the balance still remains unpaid.
|    |                                                                                                                                                                                                                                                                                      
|    | During the year 254,857 common shares were
        issued in exchange for fees and services in the amount of $78,231.                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                      
|    | During the year, 125,000 common shares were
        issued to a shareholder to settle outstanding third party debt totalling
        $80,396.                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                      
|    | During the year, a related company was advanced
        funds in the amount of $13,070; (2004 - $Nil) which is included in loans
        receivable.                                                                                                                                 

Page 15

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|13. | RELATED PARTY TRANSACTIONS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | During the year a shareholder of the Company
        held in his personal bank account Company funds in the amount of $21,486;
        (2004 - $63,968) which has been reflected as a loan receivable.                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|14. | CONTINGENT LIABILITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|15. | COMMENTS FOR U.S. READERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Differences in the Generally Accepted Accounting
        Principles (GAAP) between those utilized in Canada and those
        utilized in the United States create differences in the treatment of certain
        transactions and the disclosures contained in the financial statements.
        Accordingly, disclosure of those differences and reconciliation with United
        States accounting practices is appropriate for United States readers of
        the financial statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The consolidated financial statements of the
        Company for the years ended December 31, 2005 and 2004 have been prepared
        in accordance with generally accepted accounting principles as applied
        in Canada (Canadian GAAP). In the following respects, generally
        accepted accounting principles as applied in the United States (U.S.
        GAAP) differ from those applied in Canada.                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | There would be no adjustments needed to arrive
        at net loss for the years ended December 31, 2005 and 2004 if U.S. GAAP
        were employed. Similarly, there would be no adjustments needed to arrive
        at shareholders equity as at December 31, 2005 and 2004 if U.S.
        GAAP were employed.                                                                                                                                                                              

Page 16

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|15. | COMMENTS FOR U.S. READERS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Accounting for future (deferred) income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The significant differences between U.S. GAAP and Canadian
        GAAP in the accounting for future income taxes relate to the treatment
        of proposed changes in income tax rates and terminology. Under Canadian
        GAAP, future income tax assets and liabilities are measured using substantively
        enacted tax rates and laws expected to apply when the differences between
        the accounting basis and tax basis of assets and liabilities reverse.
        Under U.S. GAAP, future income tax assets and liabilities are called deferred
        income tax assets and liabilities and are measured using only currently
        enacted tax rates and laws. As at December 31, 2005 and 2004, the difference
        in rate determination did not result in any adjustment from Canadian to
        U.S. GAAP since any deferred tax assets were not considered more likely
        than not to be realized and, accordingly, a full valuation allowance was
        recorded on such assets.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Contributed surplus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | There is a difference between U.S. GAAP and Canadian
        GAAP for contributed surplus with respect to terminology. Under U.S. GAAP,
        contributed surplus is called additional paid in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|16. | RESTATEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Subsequent to the issuance of the consolidated financial
        statements for the year ended December 31, 2004 that were filed with the
        U.S. Securities and Exchange Commission on June 30, 2005, the Company
        made the following adjustments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | a) | Exchange of $481,724 note receivable for a 6.25% interest
        in oil well.                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Write down of note receivable of $355,548.                                                                                                                                    
| | c) | Issue of 333,000 units for a share subsCRLption receivable
        of $92,900. Each unit consists of one common share and one warrant with
        an exercise price of $0.40.
| | d) | Decrease in fair value on settlement of trade payable
        of $22,500.                                                                                                     
| | e) | Increase in fair value on settlement of trade payable
        of $11,025.                                                                                                     
| | f) | Cancellation of 362,100 common shares for $90,525 issued
        for services.                                                                                                
| | g) | Allocation of $64,646 for fair value of warrants attached
        to issue of 333,000 units from share capital to contributed surplus.                                        
| | h) | Increase in volatility assumption for Black Scholes
        option price model from 40% to a range of 177% to 359%.                                                           
| | i) | Settlement of debt with personally held common shares
        of a shareholder totaling $46,378.                                                                              

Page 17

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|16. | RESTATEMENT(continued)                                   
|--- | ---------------------------------------------------------
|    |                                                          
|    | A summary of the effect of the restatement is as follows:

| |                                |   | Year Ended December 31, 2004 |  
| | ------------------------------ | - | ---------------------------- | -
| |                                |   | As Stated                    |  
| | Consolidated Balance Sheet     |   |                              |  
| |                                |   |                              |  
| | Note receivable                | $ | 481,724                      |  
| | Share subsCRLption receivable  |   | -                            |  
| | Share capital                  |   | 4,022,851                    |  
| | Contribution surplus           |   | 681,911                      |  
| | Deficit                        |   | ( 4,103,856                  | )
| |                                |   |                              |  
| | Statement of Operations        |   |                              |  
| | Administration and general     | $ | 715,196                      |  
| | Consulting fees and commission |   | 268,382                      |  
| | Professional fees              |   | 196,352                      |  
| | Write down of note receivable  |   | -                            |  
| | Net loss                       |   | ( 1,192,970                  | )
| |                                |   |                              |  
| | Loss per common share          |   | ($ 0.02                      | )

| |                                          |  | Year Ended December 31, 2004 |  
| | ---------------------------------------- |  | ---------------------------- | -
| |                                          |  | As Stated                    |  
| | Statement of Cash Flow                   |  |                              |  
| | Net loss                                 |  | ($1,192,970                  | )
| | Adjustments for items not affecting cash |  |                              |  
| | Shares issued for services               |  | 330,210                      |  
| | Fair value of stock options issued       |  | 169,080                      |  
| | Changes in non-cash working capital      |  |                              |  
| | components                               |  |                              |  
| | Accounts payable and accrued             |  |                              |  
| | liabilities                              |  | ( 145,156                    | )
| | Cash flows for operating activities      |  | ( 867,495                    | )
| |                                          |  |                              |  
| | Issue of share capital                   |  | 1,343,201                    |  
| | Debt assumed by shareholder              |  | 46,380                       |  
| | Cash from financing activities           |  | 1,376,737                    |  

Page 18

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2005                             
|(United States Dollars)                       

|17. | STATEMENT OF SHAREHOLDERS EQUITY
|--- | ---------------------------------

Share Capital
      
      
      Contributed
      
      
      **Share**Shares
      
      
      Amount
      
      
      Surplus
      
      
      SubsCRLption
      
      
      Deficit
      
      
      **Total**Balance, December 31, 2002
      
      64,988,194
      
      $
      2,598,000
      
      $
      -
      
      $
      -
      
      $
      (2,596,689
      )
      $
      1,311Issued for cash
      
      600,000
      
      
      23,000
      
      
      -
      
      
      -
      
      
      -
      
      
      23,000Issued for services
      
      1,174,020
      
      
      117,402
      
      
      -
      
      
      -
      
      
      -
      
      
      117,402Share subsCRLption
      
      -
      
      
      -
      
      
      -
      
      
      77,490
      
      
      -
      
      
      77,490Net loss
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      ( 314,197
      )
      
      ( 314,197
      )Balance, December 31, 2003
      
      66,762,214
      
      
      2,738,402
      
      
      -
      
      
      77,490
      
      
      ( 2,910,886
      )
      
      ( 94,994
      )Cancellation of share
      
      -
      
      
      -
      
      
      -
      
      
      ( 77,490
      )
      
      -
      
      
      ( 77,490
      )subsCRLptionPrivate placements
      
      1,933,000
      
      
      102,470
      
      
      420,430
      
      
      -
      
      
      -
      
      
      522,900Exercise of warrants
      
      2,953,333
      
      
      807,167
      
      
      -
      
      
      -
      
      
      -
      
      
      807,167Settlement of debt
      
      595,755
      
      
      5,123
      
      
      110,668
      
      
      -
      
      
      -
      
      
      115,791Issued for services
      
      1,883,958
      
      
      476,992
      
      
      -
      
      
      -
      
      
      -
      
      
      476,992Share subsCRLption receivable
      
      -
      
      
      -
      
      
      -
      
      
      ( 92,900
      )
      
      -
      
      
      ( 92,900
      )Debt assumed by a shareholder
      
      -
      
      
      -
      
      
      46,379
      
      
      -
      
      
      -
      
      
      46,379Fair value of stock options
      
      -
      
      
      -
      
      
      602,965
      
      
      -
      
      
      -
      
      
      602,965Net loss
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      ( 2,061,451
      )
      
      ( 2,061,451
      )Balance, December 31, 2004
      
      74,128,260
      
      
      4,130,154
      
      
      1,180,442
      
      
      ( 92,900
      )
      
      ( 4,972,337
      )
      
      245,359Private placements
      
      750,000
      
      
      175,053
      
      
      64,947
      
      
      -
      
      
      -
      
      
      240,000Exercise of warrants
      
      1,000,000
      
      
      400,000
      
      
      -
      
      
      -
      
      
      -
      
      
      400,000Settlement of debt
      
      479,857
      
      
      269,826
      
      
      -
      
      
      -
      
      
      -
      
      
      269,826Issued for services
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Fair value of stock options
      
      -
      
      
      -
      
      
      166,968
      
      
      -
      
      
      -
      
      
      166,968Share subsCRLption receivable
      
      -
      
      
      -
      
      
      -
      
      
      92,900
      
      
      -
      
      
      92,900Net loss
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (1,149,487
      )
      
      ( 1,149,487
      )Balance, December 31, 2005
      
      76,358,117
      
      $
      4,975,033
      
      $
      1,412,357
      
      $
      -
      
      $
      (6,121,824
      )
      $
      265,566


|18. | COMPARATIVE FIGURES                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                
|    | Certain of the 2003 figures, which were prepared by
        another firm of chartered accountants have been reclassified to conform
        to the current years presentation.

Page 19

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- 53 -

SIGNATURES

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

BALATON POWER INC.



|Per: /s/ Robert Wyllie  | 
|----------------------- | 
|                        | 
|                        | 
|                        | 
|ROBERT WYLLIE           | 
|Chief Financial Officer | 



DATED: August 11, 2006

---