---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.
20549

FORM 20-F

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

OR

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

For the fiscal year ended December 31, 2006

OR

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

OR

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

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)

16678 77thAvenue Surrey,
British Columbia Canada V3S 8G1(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

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- ii -

Number of outstanding shares of the Companys only class of
capital or common stock as at December 31, 2006 was 76,025,117 Common Shares
Without Par Value.

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 Act of 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 Act of 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 [X] NO [ ]

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

Large accelerated filer [ ] Accelerated filer [ ]
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]

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TABLE OF CONTENTS

|                                                                                                       |                                                                                    | Page
|------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ----
|                                                                                                       |                                                                                    |     
|Glossary                                                                                               |                                                                                    | 1   
|                                                                                                       |                                                                                    |     
|Cautionary
      Note to U.S. Investors concerning estimates of Measured and Indicated
      Resources | 4                                                                                 
|Cautionary
      Note to U.S. Investors concerning estimates of Inferred Resources                     | 4                                                                                 
|Forward-Looking
      Statements                                                                       | 4                                                                                 
|                                                                                                       |                                                                                    |     
|PART
      I                                                                                           |                                                                                    | 5   
|                                                                                                       |                                                                                    |     
|Item
      1.                                                                                          | Identity
      of Directors, Senior Management and Advisers                        | 5   
|Item
      2.                                                                                          | Offer
      Statistics and Expected Timetable                                      | 5   
|Item
      3.                                                                                          | Key
      Information                                                              | 5   
|Item
      4.                                                                                          | Information
      on the Company                                                   | 10  
|Item
      4A.                                                                                         | Unresolved
      Staff Comments                                                    | 30  
|Item
      5.                                                                                          | Operating
      And Financial Review And Prospects                                 | 30  
|Item
      6.                                                                                          | Directors,
      Senior Management and Employees                                   | 37  
|Item
      7.                                                                                          | Major
      Shareholders and Related Party Transactions                            | 42  
|Item
      8.                                                                                          | Financial
      Information                                                        | 43  
|Item
      9.                                                                                          | The
      Offer and Listing                                                        | 44  
|Item
      10.                                                                                         | Additional
      Information                                                       | 45  
|Item
      11.                                                                                         | Quantitative
      and Qualitative Disclosures About Market Risk                   | 57  
|Item
      12.                                                                                         | Description
      of Securities Other Than Equity Securities                       | 57  
|                                                                                                       |                                                                                    |     
|PART
      II                                                                                          |                                                                                    | 58  
|                                                                                                       |                                                                                    |     
|Item
      13.                                                                                         | Defaults,
      Dividend Arrearages and Delinquencies                              | 58  
|Item
      14.                                                                                         | Material
      Modifications to the Rights of Security Holders and Use of Proceeds | 58  
|Item
      15.                                                                                         | Controls
      and Procedures                                                      | 58  
|Item
      16.                                                                                         | [Reserved]                                                                         | 58  
|Item
      16A.                                                                                        | Audit
      Committee Financial Expert                                             | 58  
|Item
      16B.                                                                                        | Code
      of Ethics                                                               | 59  
|Item
      16C.                                                                                        | Principal
      Accountant Fees and Services                                       | 59  
|Item
      16D.                                                                                        | Exemptions
      from the Listing Standards for Audit Committees                   | 59  
|Item
      16E.                                                                                        | Purchases
      of Equity SecuritIES by the Issuer and Affiliated Purchasers       | 59  
|                                                                                                       |                                                                                    |     
|PART
      III                                                                                         |                                                                                    | 60  
|                                                                                                       |                                                                                    |     
|Item
      17.                                                                                         | Financial
      Statements                                                         | 60  
|Item
      18.                                                                                         | Financial
      Statements                                                         | 60  
|Item
      19.                                                                                         | Exhibits                                                                           | 61  

---

Glossary

|Term                    | Definition                                                                                                        
|----------------------- | ------------------------------------------------------------------------------------------------------------------
|                        |                                                                                                                   
|Acquisition             | The Companys acquisition
        of CRL in October 2002                                                          
|                        |                                                                                                                   
|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                               
|                        |                                                                                                                   
|CRA                     | Canada Revenue Agency                                                                                             
|                        |                                                                                                                   
|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 Companys mineral project,
        situated in the Gandhamardan Hill, Duragali, State of Orissa, India        
|                        |                                                                                                                   
|                        |                                                                                                                   
|GSI                     | Geological Survey of India                                                                                        
|                        |                                                                                                                   
|ICA                     | Investment Canada Act                                                                                             
|                        |                                                                                                                   
|Investor                | A person who acquires one or
        more Common Shares of the Company                                            
|                        |                                                                                                                   
|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 Project
|                        |                                                                                                                   
|MECL                    | Mineral Exploration Corp. Ltd.                                                                                    
|                        |                                                                                                                   
|NQSO Options            | Non-qualified stock options                                                                                       
|                        |                                                                                                                   
|ODM                     | Orissa Directorate of Mines                                                                                       

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- 2 -

|Term                | Definition                                                                                                                                                                                                                                     
|------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                    |                                                                                                                                                                                                                                                
|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                                                                                                                                                                                                             
|                    |                                                                                                                                                                                                                                                
|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 Summary
      Report Gandhamardan Bauxite Deposit Sambalpur and Bolangir Districts,
      State of Orissa, India, dated April 8, 2003 and amended January 19, 2007,
      and February 9, 2007
|                    |                                                                                                                                                                                                                                                
|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                                                                                                                                                                 
|                    |                                                                                                                                                                                                                                                
|U.S. Securities Act | United States Securities Act of 1933, as amended                                                                                                                                                                                               

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

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- 3 -

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.
  (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.

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- 4 -

CAUTIONARY NOTE TO U.S. INVESTORSCONCERNING
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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- 5 -

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 and
should be read in conjunction with the audited financial statements of the
Company for the last five fiscal years ended December 31, 2006, as well as the
sections of this Annual Report entitled Information on the Company and
Operating and Financial Review and Prospectus. The financial statements are
presented in United States dollars and have been prepared in accordance with CDN
GAAP. Note 16 to the financial statements provides a summary of the material
differences between Canadian GAAP and U.S. GAAP as they relate to the Companys
financial statements included herein.

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 may not be
comparable to the amounts presented for 2003, 2004, 2005 and 2006. 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 December 31, 2005 annual
financial statements included in this Annual Report to comply with comments from
the SEC.

|                                       |   |            |   |   |            |   |   | 2004       |   |   |            |   |   |            |  
|-------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | -
|(US$)                                  |   | 2006       |   |   | 2005       |   |   | Restated   |   |   | 2003       |   |   | 2002       |  
|Balance Sheet Data                     |   |            |   |   |            |   |   |            |   |   |            |   |   |            |  
|Total assets (CDN GAAP)                | $ | 230,254    |   | $ | 602,464    |   | $ | 733,976    |   | $ | ,632,818   |   | $ | 1,664,408  |  
|Total assets (US GAAP)                 |   | 230,254    |   |   | 602,464    |   |   | 733,976    |   |   | 1,632,818  |   |   | 1,664,408  |  
|Total liabilities                      |   | 1,039,037  |   |   | 336,898    |   |   | 488,617    |   |   | 1,727,812  |   |   | 1,663,097  |  
|Share capital                          |   | 4,958,884  |   |   | 4,958,884  |   |   | 4,130,154  |   |   | 2,738,402  |   |   | 2,598,000  |  
|Retained earnings (deficit) (CDN GAAP) |   | (7,196,173 | ) |   | (6,121,824 | ) |   | (4,972,337 | ) |   | (2,910,886 | ) |   | (2,596,689 | )
|Retained earnings (deficit) (US GAAP)  |   | (7,196,173 | ) |   | (6,121,824 | ) |   | (4,972,337 | ) |   | (2,910,886 | ) |   | (2,596,689 | )

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- 6 -

|                            |  |            |   |  |         |  |  | 2004     |  |  |           |   |  |            |  
|--------------------------- |  | ---------- | - |  | ------- |  |  | -------- |  |  | --------- | - |  | ---------- | -
|(US$)                       |  | 2006       |   |  | 2005    |  |  | Restated |  |  | 2003      |   |  | 2002       |  
|Period End Balances (as at) |  |            |   |  |         |  |  |          |  |  |           |   |  |            |  
|Working capital (deficit)   |  | (1,009,959 | ) |  | 64,390  |  |  | 44,183   |  |  | 1,664,886 |   |  | (1,598,581 | )
|Resource properties         |  | -0-        |   |  | -0-     |  |  | -0-      |  |  | 1,145,163 |   |  | 1,145,163  |  
|Shareholders equity        |  | (808,783   | ) |  | 265,566 |  |  | 245,359  |  |  | (94,994   | ) |  | 1,311      |  

|                                         |   |            |   |   |            |   |   | 2004       |   |   |             |   |   |            |  
|---------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ----------- | - | - | ---------- | -
|(US$)                                    |   | 2006       |   |   | 2005       |   |   | Restated   |   |   | 2003        |   |   | 2002       |  
|                                         |   |            |   |   |            |   |   |            |   |   |             |   |   |            |  
|Statement of Operations Data             |   |            |   |   |            |   |   |            |   |   |             |   |   |            |  
|Revenue                                  | $ | -          |   | $ | -          |   | $ | -          |   | $ |            |   | $ | 24,899     |  
|Production costs                         |   | -          |   |   | -          |   |   | -          |   |   |            |   |   | 22,398     |  
|Write-down of resource properties        |   | -          |   |   |            |   |   |            |   |   |            |   |   | 1,895,987  |  
|General and administrative expenses      |   | 476,028    |   |   | 914,749    |   |   | 1,239,605  |   |   | 195,286     |   |   | 232,587    |  
|Consulting fees and commissions          |   | 425,124    |   |   | 63,000     |   |   | 245,882    |   |   | 72,000      |   |   |            |  
|Professional fees                        |   | 173,769    |   |   | 171,738    |   |   | 207,376    |   |   | 34,980      |   |   |            |  
|Interest expense                         |   | -          |   |   | -          |   |   | 13,040     |   |   | 11,931      |   |   |            |  
|Write down of loan receivable            |   | -          |   |   | -          |   |   | 355,548    |   |   | -           |   |   |            |  
|Oil income                               |   | 5,793      |   |   | -          |   |   | -          |   |   | -           |   |   | -          |  
|Interest income                          |   | 1,366      |   |   | -          |   |   | -          |   |   | -           |   |   | -          |  
|Oil expense                              |   | 6,587      |   |   | -          |   |   | -          |   |   | -           |   |   | -          |  
|Income (loss) (CDN GAAP)                 |   | (1,074,349 | ) |   | (1,149,487 | ) |   | (2,061,451 | ) |   | (314,197    | ) |   | (2,126,073 | )
|Loss per common share (CDN GAAP)
      2 |   | (0.01      | ) |   | (0.02      | ) |   | (0.03      | ) |   | (0.01       | ) |   | (0.05      | )
|Loss per common share (US GAAP)2         |   | (0.01      | ) |   | (0.02      | ) |   | (0.03      | ) |   | (0.01       | ) |   | (0.05      | )
|Number of outstanding shares             |   | 76,025,117 |   |   | 76,025,117 |   |   | 73,795,260 |   |   | 66,762,2141 |   |   | 64,988,194 |  

|Notes:
|------
|(1)   
|(2)   

|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 flows of the Company. You
could lose all or part of your investment due to any of these risks.

The Company has no history of earnings and is subject to
the risks inherent in a start-up company.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.

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- 7 -

The Company will require additional funding to continue
operations. Historically, the Company has funded its operations
through the sale of equity capital and will require additional funding to
continue operations.The Company has had and will continue to have
capital requirements in excess of its currently available resources and may not
be 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.

The loss of any directors or officers would adversely
affect the Company. The loss of any directors or officers would
adversely affect the results of the Company. The Company is wholly dependent at
present upon the personal efforts and abilities of its officers and directors,
who exercise control over the day-today affairs of the Company. The loss of any
director or officer could have an adverse effect on the Company.

The issuance of additional shares would dilute the
interests of existing shareholders. The Company is authorized to
issue an unlimited number of common shares. On December 31, 2006, the Company
had 76,025,117 common shares issued and outstanding and a commitment to issue
333,000 shares as described in Note 9 of the audited annual financial statements
included herein. The Board of Directors has the power to issue additional shares
and may in the future issue shares to acquire products, equipment or properties,
or for other corporate purposes. Any additional issuance by the Company from its
authorized but unissued share capital would have the effect of diluting the
interest of existing shareholders.

Our officers and directors may be indemnified against
certain securities liabilities.The laws of the Province of
British Columbia provide that the Company can 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 Company has the power to indemnify such person
against the liability insured. 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. The Company has been advised that in the opinion of the SEC,
indemnification is against public policy as expressed in the U.S. Securities
Act, 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 be subject to U.S. legal proceedings as
a result of which 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 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

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- 8 -

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.

Exploration and development of natural resources involves
many risks. Even with a combination of experience, knowledge and careful
examination, operating hazards and risks 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. 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.

Commodity prices fluctuate and are affected by factors
beyond the Companys control. 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.

We operate in a highly competitive industry. The
resource industry is intensely competitive in all of its phases with numerous
companies seeking to explore and develop resource properties. The Company
competes with many companies larger than it and possessing greater financial
resources and technical facilities. Competition could adversely affect CRLs
ability to develop the Gandhamardan Project.

We may enter into options and joint venture agreements
which would reduce our interests in these projects. 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.

The Company cannot guarantee title to its 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 be affected by unregistered interests and claims
to title, which could adversely affect the Companys ability to develop its
properties.

We have 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.

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We lack experience in fish protection and hydroelectric
projects.The Company has not constructed, installed or sold any
Systems, the Pisces Process (other than its tested prototypes) or BRIMAC 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 BRIMAC and the Company has not received any significant expression of
interest for the systems.

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

The Company relies on Indian government agencies for the
development of the Gandhamardan Project. 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.

We may face inflationary and other economic
pressures. The Company is not currently generating any revenue. However,
future revenues, if any, 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 expenditures, 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 the
economy of the United States in particular.

We are subject to government policies in India.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

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- 10 -

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.

We may be required to protect our patents which could be
costly. 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 16678 77th Avenue, Surrey, BC V3S 8G1, telephone
number (604) 574-9551.

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 described 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

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- 11 -

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. The Company has no near future plans to develop
this site.

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
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 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.

Over the past three years, the Company has focussed on
establishing a strong working relationship with OMC, the other 50% owner of
COMPL. The Company and OMC have discussed the principal terms of the exploration
and possible development of the Gandhamardan Project, although no written
agreement has yet been signed. Management has held discussions with potential
partners to provide financial and technical resources to assist in the
exploration and potential development of the Gandhamardan Project. These efforts
have taken substantially all of the time of the Company's management over the
past three years.

During 2004, COMPL was voluntarily dissolved to make way for a
new entity that will facilitate future joint venture agreements with 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.

In March 2007, CRL entered into an agreement in principle (the
Essar Agreement), with Essar Aluminum Orissa Limited (Essar),
an Indian resource development corporation, to develop the Gandhamardan Project
and set up an Alumina/Aluminum complex subject to feasibility study and
applicable approvals. The Essar Agreement is subject to the negotiation and
execution of a definitive agreement among Essar and CRL and, additionally,
subject to the approval of the OMC and the approval of the revised agreement
between CRL and OMC to develop the Gandhamardan Deposit by the State of Orissa,
India.

The Company is currently seeking a manager, joint venture
partner or purchaser for its hydroelectric power assets, including 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

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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 BRIMAC 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
BRIMAC 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
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, India 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. 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.

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In May 2007 the Companys CRL entered into the Essar Agreement
with Essar Aluminum Orissa Limited, an Indian resource development corporation,
to develop the Gandhamardan Project and set up an Alumina/Aluminum complex
subject to feasibility study and applicable approvals. The Essar Agreement is
subject to the negotiation and execution of a definitive agreement among Essar
and CRL and, additionally, subject to the approval of the OMC and the approval
of the revised agreement between CRL and OMC to develop the Gandhamardan Project
by the State of Orissa, India.

Summary Report on 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 Bauxite Deposit Sambalpur and Bolangir Districts, State of
Orissa, India, dated April 8, 2003 as amended January 19, 2007, and February 9,
2007 (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.

Historical Resource Estimates

The Report sets out resource estimates calculated prior to
the Canadian Institute of Mining and Metallurgy (CIM) Best Practices Guidelines
for Estimation of Mineral Resources and Mineral Reserves and National Instrument
43-101 (NI 43-101) and were not performed to CIM Standards. The Company has
obtained the original data but a qualified person has not done the work
necessary to verify the classification of the resource and the Company is not
treating it as a NI 43-101 defined resource. It is a historic estimate that
should not be relied upon. Moreover, there is no guarantee that further work
will result in the delineation of the current mineral resources.

Significant risks are associated with the development of the
Gandhamardan Project and the Companys effort to date can only be considered
preliminary in nature. Many factors affect the development of the project
including the proximity of the project to rail, roads, water, cost of energy and
environmental concerns associated with the development of the project. Based on
the preliminary nature of the Companys efforts, there can be no assurance that
the project will be feasible or economically viable.

Introduction And Terms Of Reference

The Report was written at the request of Mr. Bruce Whipple of
Continental Resources (USA) Ltd., a subsidiary of Balaton Power Inc. It was
written on April 8, 2003, and revised on January 15, 2007 and further revised on
February 9, 2007.

The Gandhamardan Bauxite deposit was the focus of an extensive
exploration-evaluation programme conducted in stages over a number of years by
ODM and MECL. A need was recognized to examine and assimilate the technical
results of all this work, to draw whatever conclusions might emerge, and to make
recommendations regarding any further work that might be warranted. The Report
addresses that need.

The prime sources of data utilized in preparing the Report are
technical reports written by geologists and engineers employed on the project by
ODM and MECL. Information was also obtained from other technical reports, and
from discussions held with officials of OMC, MECL, GSI, National Aluminium
Company of India, and SNC-Lavalin Inc. As well, the author drew upon
observations made during 5 visits to the area, including 3 to the property.
These 3 visits lasted a total of 59 days.

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The author has relied heavily on technical reports written
by ODM and MECL personnel. These persons are competent, qualified professionals.
Nevertheless, occasional minor discrepancies were found in their reports, such
as conflicting numbers, typographical errors, and illegible words. Most of the
discrepancies involve drill hole sites and pit sites, and they could not be
resolved. One of the more bothersome was in the ODM resource calculations. One
calculation appears to include Block 10, the other does not, although it is not
clear that this is the case. At any rate, Block 10 is one of the smallest
blocks, and accounts for only about 3% of the total calculated tonnage. Its
inclusion or omission does not change the weighted average grade calculations.
The other discrepancies appear to have similar minimal effects on the size,
shape, and grade of the bauxite zone, due to the thorough extent of work
performed, and to the straight-forward nature of the deposit.

Property Description And Location

The Gandhamardan bauxite deposit occurs at the top of
Gandhamardan hill. This hill, which has a plateau top, is linear, aligned in a
NE-SW direction. The hill straddles the boundary between Balangir District to
the SE, and Sambalpur District to the NW, in the west central part of the State
of Orissa, in eastern India.

Figure I shows the general location of Orissa in India.



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- 15 -

Figure II shows the location of Gandhamardan in Orissa.



Figure II Location Of Gandhamardan In Orissa

Gandhamardan is bounded by Latitudes 20 50 and 20 55 North,
and Longitudes 82 45 and 82 54 East. It plots on Survey of India topographic
sheet NTS 65L/13.

Gandhamardan hill extends in the NE-SW 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 kms2. The bauxite zone covers
an area of 735 hectares. Because of its large size and lineal alignment, the
deposit has been divided into 10 1-km wide blocks, numbered 1 to 10.

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- 16 -

Figure III shows the extent of the deposit and the 10 blocks.



Figure III  Gandhamardan Bauxite Deposit Showing Block
Divisions

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- 17 -

OMC currently holds a Mining Lease on Block 7, which contains
about 20% of the deposit, or approximately 40 million tonnes. The Lease covers
an area of 285 hectares, as shown in Figure IV.



Figure IV  Granted And Applied Mining Leases

OMC has applied for a Mining Lease covering the rest of the
deposit. A perimeter land survey must be performed before this second Lease is
granted.

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- 18 -

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.

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. Indian
government regulations permit mining in a designated Forest Reserve provided
that another area of equal or greater areal extent is secured and substituted in
its stead, and the designation transferred to it. A permit must be granted by
the Dept. of Forests to effect such a transfer. The Directorate of Mines has
identified 3 potential substitute sites, and has made application to the Dept.
of Forests for the necessary permit. Granting of the permit is pending.

Accessibility, Climate, Local Resources, Infrastructure
And Physiography

The property is easily accessed by 4-wheel drive vehicle along
a poorly-maintained road up the NW 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 the 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 a paved road to
the State Capital, Bhubaneswar, about 300 kms. to the E, and to port cities
along the Bay of Bengal, equidistant to the SE.

At the time that the exploration work was performed, the hill
top could also be accessed up the SE side. This road currently has 3 wash-outs.
After repairs, this road would be navigable by 4-wheel drive vehicles. The SE
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 Orissa bauxite deposits by linking them to the
port of Vishakhapnam on the Bay of Bengal.

The climate in the Gandhamardan area is sub-tropical, with
summer temperatures averaging 33°C, and winter temperatures averaging 18°C.
Annual rainfall averages 150 cms., most of it 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 impoverished drought
conditions.

Should a mining operation be established, no tailings or wastes
would be created, since the bauxite is direct-shipping. The cover of soil and
laterite would be moved and stockpiled, then replaced after removal of the
bauxite.

History

The potential for bauxite at Gandhamardan was first recognized
by the GSI in the 1940s, and they recommended that the area be thoroughly
prospected.

In 1948, ODM sank several pits which intersected only laterite.

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- 19 -

In 1959, ODM identified bauxite at Gandhamardan, and they
immediately undertook a programme of exploration and evaluation. GSI and 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% Al2O3 to a depth of 17 meters. This figure does
not conform to current NI 43-101 standards, and is classified as a historical
estimate.

Subsequent phases of drilling were conducted between1961-65. In
the late 1960s, Aluminium Corp. of India undertook detailed exploration with
MECL, after which MECL reported a resource of 26 million tones of metallurgical
grade bauxite, using a cut-off of +46% Al2O3. This figure does not conform to
current NI 43-101 standards, and is classified as a historical estimate.

The deposit attracted no further attention until 1975, when the
economic potential of the large, low-silica bauxite deposits in Orissa became
recognized. Balco expressed interest in Gandhamardan as a source of feed for
their aluminium plant at Korba, situated 350 kms. by rail to the N, 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
linecutting, topographic surveying, geological mapping, pitting, drilling,
sampling, mineralogical studies, and metallurgical tests.

Balco commissioned a feasibility study on a portion of the
deposit in 1980, and upon its conclusion, prepared to bring the deposit into
production. Local villagers opposed the project, and Balco finally gave it up.

The property remained idle until 1997, when Continental
Resources Ltd. and OMC agreed to jointly develop it. Continental commissioned
SNC-Lavalin to undertake a feasibility study on the deposit, however numerous
delays ensued, and the study was never completed. The author 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. The samples were collected in the
authors presence, and he personally transported them to a Canadian commercial
laboratory. Analyses were performed for 12 radicals, including Al2O3, SiO2,
Fe2O3, TiO2, and LOI, by x-ray fluorescence, fused-disc method. Appendix I of
this Report is the Certificate of Analyses for these samples. In 2002, OMC
transferred the Agreement from Continental Resources Ltd. to Continental
Resources (USA) Ltd. There is no connection between the 2 companies.

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 NE-SW direction, gently curving
eastward at their northern end. Khondalites are rocks formed by high-grade
metamorphism of argillaceous, arenaceous, and calcareous sediments. 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 E-W. Trends in the
other 2 blocks are

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NE-SW, and NW-SE, 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 NW 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.

Figure V shows the general geology of the State of Orissa.

The local geology at Gandhamardan and the geology of the
property are the same. Both consists 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 NE-SW 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 SE at 45 to 70°.



Figure V  General Geology Of Orissa

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.

Deposit Type

The bauxite occurs as a large residual deposit, formed by in
situ, subaerial weathering of aluminium-rich rocks (khondalites) under tropical
conditions. The deposit blankets the plateau top of a high ridge known as
Gandhamardan hill. The bauxite mineralization is continuous and homogeneous, and
is analogous to a horizontally-bedded stratigraphic unit.

Figure VI is a schematic longitudinal section through
Gandhamardan hill depicting the bauxite layer.

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- 21 -



Figure VI  Schematic Longitudinal Section Through
Gandhamardan

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 silca and iron content. It reaches a thickness of up to
several centimeters.

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 laterited is hard, reflecting a relatively higher silica content
than the lower portion. Iron content also 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.

Mineralization

The bauxite is composed mainly of the minerals gibbsite and
hematite, which together comprise about 95%. The remaining 5% is a mixture of
several oxide minerals in minor and trace amounts.

Table I shows the mineralogical composition of bauxite.

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Table I  Mineralogical Composition Of The Bauxite

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.

Exploration / Previous Work

Linecutting- Using theodolite and steel tape, ODM established a
grid with base line oriented at Azimuth 50°, parallel to the longitudinal axis
of Gandhamardan hill. Cross lines were run at right angles to the base line,
spaced at 100-meter intervals. Stations were established on all lines at
25-meter intervals, and marked by stone monuments. A total of 85 kms. of lines
were established. Accuracy of the grid was maintained by triangulation.

Topographic Survey  Survey of India performed a topographic
survey using a standard bubble level. All stations were read. An area of 5.8
kms2. was covered.

Geological Mapping  ODM geologists mapped Gandhamardan plateau
using the grid for their traverses. Scarp faces were also examined, at the ends
of cross lines, wherever accessible.

Pitting  According to ODM reports, 26 pits were sunk into the
bauxite zone, however data exists for only 24. It appears that 26 may have been
planned, but only 24 actually dug. The pits are spaced at 400-meter intervals,
and their sites were selected to coincide with previously-drilled holes. They
were dug by hand in such a way that half the drill hole was retained in one wall
of the pit. Each pit is 2.5 m2 in cross section. Depth ranged from 17.9 to 41.2
meters, and averaged 31 meters. A total of 744 meters of pits were excavated,
producing 4,650 m3 of material, equal to more than 2,300 tonnes. Pit data
indicate that the soil-laterite overburden ranges between 0.8 to 4.5 meters in
thickness and averages 2.7 meters.

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- 23 -

Drilling

Drilling  Both ODM and MECL undertook extensive drill
programmes. ODM concentrated on the SW portion of the deposit, on Blocks 1 to 8,
and MECL on Blocks 7 to 10 at the NE end. Drilling was performed dry. NX size
casing bits of tungsten carbide were used at the start of a hole, to penetrate
the hard laterite capping. Bit size was reduced to BX in the softer bauxite
zone. Short sections of thin-walled casing shoes were used, and drill runs were
restricted to less than 1 meter in length. This technique allowed the drill
cuttings to be collected in the casing, thus eliminating the need for a core
barrel. The entire deposit was drilled at a hole spacing of 200 meters. Spacing
was reduced to 100 meters in Blocks 5 to 8, where the plateau is widest, and
therefore the bulk concentration the greatest. Selected portions of Blocks 6, 7
and 8 were detail-drilled at 50-, 25-, and 15-meter spacing. Two small areas,
termed Clusters I and II, were detailed-drilled at a 5-meter spacing. Cluster I
sits in Block 7, at Station N2 on Line E19, and covers an area of 0.24 hectare.
Cluster II is in Block 8, at Station SO.5 on Line E24 and covers 0.16 hectare.
Together ODM and MECL drilled a total of 462 holes, for a cumulative length of
15.1 kms. Except for 36 holes drilled at 450, all the holes were drilled
vertically into the flat-lying bauxite zone. The cuttings from each hole were
collected, geologically mapped, sampled and analysed. Figure VIII shows the
locations of the dill holes, the pits, and the scarp sampling sites.

Sampling Procedures And Analyses

Samples of the bauxite zone were taken from selected scarp
sites, from each pit, and from each drill hole. All samples were collected under
direct supervision of ODM or MECL geologists.

Scarp samples of 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. They are given in MECLs Exploration
Report, Volume I, 1980, as 47.03% Al2O3, 2.97% SiO2, 22.00% Fe2O3, 2.09% TiO2,
and 22.27% LOI, across an average thickness of +7.6 meters.

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 materials 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. MECLs same report shows them as 46.31% Al2O3,
4.37% SiO2, 20.34% Fe2O3, 1.78% TiO2, and 23.71% LOI.

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 geological 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.

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- 24 -

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 own lab 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 anaylsed as well for V, Zn, S, P2O5, K2O, Na2O, CaO, adherent
moisture, and organic carbon.

Analyses for all these radicals were determined by chemical
method, employing the EDTA technique (ethylene-diamene-tetra-acetic acid), 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.

Sample Preparation, Analyses And Security

Samples collected personally by the author were transported to
a Canadian commercial laboratory for analyses. Determinations were performed of
the major oxides by the x-ray fluorescence  fused disc method, currently
recognized as a standard analytical technique. The results obtained for these
samples are in general agreement with the results reported by ODM and MECL, and
are shown in Appendix I.

Data Verification

In examining the technical reports authored by ODM and MECL, it
became apparent to the author 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 bauxite deposit, and its suitability
for the production of alumina by the Bayer Process.

Discussion with OMC technical staff verified the integrity of
the data.

Three site visits 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 the
author, and transported to a Canadian commercial laboratory for analyses.

Mineralogical Studies and Metallurgical Tests

Mineralogical Studies  MECL conducted a number of studies of
the bauxite to determine its mineral constituents, and to identify any
deleterious chemical constituents that might be present. A total of 182 studies
were undertaken, including petrological studies, heavy mineral determinations,
acid-alkali treatments, derivatography, and x-ray diffraction. The studies
indicate that gibbsite and hematite are the main minerals present. According to
Indian Bauxite Standards, metallurgical grade bauxite must contain at least
44.0% A1203. As well, the maximum and/or minimum contents of certain deleterious
constituents are listed. A comparison of these Standards with the chemical
composition of Gandhamardan bauxite is shown in Table II.

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- 25 -



Table II  Indian Standards Compared to Gandhamardan Bauxite

Metallurgical Tests  Five autoclave testes were performed by
MECL Separate tests were undertaken on bauxite from the upper part of the zone,
where the Si02 content is higher, and on bauxite from the lower part of the some
where the A1203 content is higher. Results indicate that the Bayer Process would
extract 93.5% of the A1203 from the upper part of the zone, and 97 to 99% from
the lower part.

Balco, in cooperation with MECL, collected 12 composite drill
hole samples, and submitted them to Aluterv-FKI, an integrated aluminium
producer in Budapest, Hungary. MECLs Exploration Report, Volume I, 1980, states
.industrial tests were undertaken, however it does not describe the nature
of these tests. The MECL report does provide the results of additional autoclave
tests and chemical analyses performed by Aluterv, and it states The Hungarian
tests indicate that for the Korba plant the Gandhamardan bauxite can be
processed advantageously, and also that the deposit has a potential for low
temperature technology The conclusions in the report state The immediate
objective of establishing reserves of suitable categories for developing a mine
to feed the Korba plant has been achieved MECL also states in this report that
the Gandhamardan bauxite is suitable for use in Bayers process is general

Feasibility Study  In 1980 Balco commissioned Metallurgical
and Engineering Consultants (India) Ltd. to conduct a feasibility study. Their
report is titled Feasibility Report for Development of Gandhamardan Bauxite
Deposit and is dated Feb., 1981. In this report, they state a mining
operation could be establishedwith annual production of 500,000 tpy on dry
basis.. Capital costs were estimated to be about 50 crore Rupees (approx.
US$10.5 million), including equipment, service buildings, townsite, class I
access road, ore tram line to base of hill, loading complex, and a 25-km spur
rail line. This report also states Operating cost for mine, crushing plant,
ropeway and wagon loading complex(estimated)as 35.28 Rupees per tonne
(approx. US$0.75/tonne) .

The Balco feasibility study is not current. It was based
upon historical estimates that are too speculative to have economic
considerations applied to them, and therefore it does not conform to current NI
43-101 standards. It cannot be relied upon. The economic viability of this
project has not yet been determined. Any future development of this project will
be contingent to the completion of a positive feasibility or other study
demonstrating its technical and economic viability.

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Historical Resource Calculations

There are no current mineral resources or mineral reserves
on the property. The author has not done sufficient work to reclassify the
historical estimates as current mineral resources or mineral reserves, and the
public should not rely on the historical estimates.

The resource estimates referred to in this Report were
performed by competent geologists employed by Indian federal and/or state
government agencies. As such they are considered by the author to be accurate
and reliable. However, these resource estimates were not performed in accordance
with NI 43-101 standards, and therefore are classified 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 cutoff grades of +40 % Al2O3 and -5%
SiO2 used in the calculations were specified by Balco, and were determined in
anticipation of the bauxite being processed at their plant in Korba. Korba
produces alumina by the Bayer Process.

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  average factor and area of influence method, cross section
method, and 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.

The average factor and area of influence method is based on the
assumptions 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
weighing 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 distance 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 assumptions that unit
values gradually change from one point to another. Isograde maps and isochore
maps are prepared, in this case 1% Al2O3 and 5 meters, respectively. The area
encompassed between the respective isoclines and the two corresponding midpoints
of assay value and thickness is used to estimate the resource.

Four categories of resources were established, based on the
Russian system, and termed A, B, C1, and C2. The Russian system of mineral
resource  mineral reserve classification does not conform to that established
by the CIM. MECLs 1980 Exploration Report, Volume I states that the Russian A
Category

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- 27 -

reserves are considered to be 90% accurate, and therefore are
suitable for mine planning. Under the CIMs Standards on Definition for
Mineral Resources and Mineral Reserves, the Russian A Category would qualify as
a measured mineral resource, however the calculation was not performed to NI
43-101 Standards, therefore they are a historic estimate, not as a resource, and
there is no guarantee that it will be converted to a corresponding CIM
category.

MECLs Report describes the Russian 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. Under the CIM standards, the Russian B
Category would be termed an indicated mineral resource, however the calculation
was not performed to NI 43-101 Standards, therefore they are a historic
estimate, not as a resource, and there is no guarantee that it will be converted
to a corresponding CIM category.

Russian C1 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 C1 resources is considered to be 50%. Russian 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. Under the CIM
Standards, both the CI and C2 Categories, being 50% or less in accuracy, would
be classified as an inferred mineral resource, however the calculations were not
performed to NI 43-101 Standards, therefore they are historic estimates, not
resources, and there is no guarantee that they will be converted to
corresponding CIM categories.

B.K.Monhanty, in ODMs Resources Evaluation Report, 1981,
states the total calculated tonnage as 207.37 million tonnes 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 Table III. His calculated total tonnage is
213.43 million tonnes, with a weighted average grade of 46.50% Al2O3 and 2.49%
SiO2. The 3 other radicals were not calculated.

The data acquisition and calculations were performed prior
to NI 43-101 and not according to NI 43-101 Standards, therefore they are
historic estimates, not resources and there is no guarantee that they will be
converted to corresponding CIM categories.

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.

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- 28 -



Table III  ODM Block-Wise Historical Estimate

MECL calculated resources independently, and categorized them
according to the Russian system. MECLs 1980 Exploration Report, Volume I gives
their total calculated resources as .201.3 million tonnes averaging 46.40%
Al2O3, 2.44% SiO2., and estimates the Fe2O3, TiO2, and LOI contents to be
2341%, 2.47%, and 24.59%, respectively. MECLs resources estimates by category
are shown in TABLE IV. The data acquisition and calculations were performed
prior to NI 43-101 and not according to NI 43-101 Standards, therefore they are
historic estimates, not resources.

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

The 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.



Table IV  MECL Historical Estimate By Category

The 3 resources calculations are in fairly close agreement. The
total tonnage figures differ by a maximum of only 6%, and the calculated
weighted average grades by1.4% for Al2O3, 9.0% for SiO2, 0.8% for Fe2O3, 1.2%
for TiO2, and 6.7% for LOI.

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- 29 -

MECLs historical estimates were calculated in 1980-81, and
they followed the Russian system of classification. The Russian system of
resource-reserve classification does not comply with the standards established
by the CIM and incorporated in NI 43-101, therefore the Russian categories are
only roughly equivalent to the CIM categories, and there is no guarantee that
the Russian categories will be converted to corresponding CIM categories.

Hydroelectric Assets

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

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.

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|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s subsidiary CRL 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.
The terms of the lease is three (3) years with annual rental payments of $4,800
the first and second years and $5,400 the third year. The lease expired in
January 2007 and has been renewed for another year.

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, 2006
included elsewhere in this document, the section entitled Information on the
Company in Item 4 of 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 16 of the annual financial statements 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 December 31, 2005, 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 Company was in
the business of constructing, installing and selling low impact
run-of-the-river hydroelectric power production systems which incorporated a
patent pending fish

---

- 31 -

protective water inlet device. 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, 2006, the Company continued
to work on the Gandhamardan Project through its wholly owned subsidiary CRL. The
Companys plan of operations for the next twelve months is to focus on the
Gandhamardan Project and the Company expects to spend approximately $455,000 in
that regard, including $75,000 for legal fees, $120,000 for the Bhubaneswar
office and overhead and $200,000 for consultants and $60,000 for travel and
logding. 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 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 and/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. As of the
date of this report, the Company has the necessary funds to carry the corporate
operations expenditures for the next twelve months due to the completion of a
non-broker private placement of units of common stock to accredited investors
and debt settlements that occurred in March 2007.

|A. | Operating Results
|-- | -----------------

The Company is a development stage resource company. No
revenues were reported in 2004, 2005, or 2006 from its operations. No revenues
are anticipated in 2007 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 the Gandhamardan Project 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 2006, 2005 and
2004. During the 2004 fiscal year the Company wrote off $1,145,163 of investment
in the joint-venture company, COMPL, which was voluntarily dissolved. 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 2006. 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

---

- 32 -

rich state that has had negotiations with several entities
including CRL for the development of resources including bauxite.

During 2006, the Companys main expenses were general and
administrative in the amount of $476,028 compared to $914,749 in 2005 and
$1,239,605 for 2004. The expenditures in 2004 were 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.

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. 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 for the Company increased from 2005 ($63,000)
to 2006 ($425,124). This increase was the result of increased activity in 2006
requiring the use of consultants in relation to the Gandhamardan Project. In
2006 the consulting fees reflect the amount of activity incurred on the project
in India plus fees incurred for shareholder relations and administrative
activities for the Company. Also included in the consulting fees are accounting
and auditing fees of $95,000 for 2006, which is significantly higher due to
restating the audited financial statements for the 2004 fiscal year.
Professional fees including legal and accounting remained about the same when
comparing 2005 ($171,738) to 2006 ($173,769). Professional fees in 2004
($207,376) were higher as this was the second year of operations following the
acquisition of CRL in 2003 requiring additional legal costs.

In 2004 the Company wrote-down a $481,724 note receivable to
$126,176 from Perial Ltd., which was collateralized by 25% of the profits of an
oil/gas well in Kansas that became a marginal producer. During 2005 the Company
converted this note receivable through a settlement agreement where the Company
received a 6.25% working interest in a producing oil well for the $126,176. For
further information see Notes 4 and 5 in the annual audited financial
statements.

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 and/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. As of the
date of this report, the Company has the necessary funds to carry the corporate
operations expenditures for the next twelve months due to the completion of a
non-broker private placement of units of common stock to accredited investors
and debt settlements that occurred in March 2007, subsequent to the end of the
2006 fiscal year. For further information see Note 15 of the

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- 33 -

financial statements and also in sections Liquidity and
Capital Resources and also in Financial Requirements of this report.

Future funding sources for the Company could come from the
exercise of options and warrants outstanding from 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 initially raising approximately $2 million in
working capital for the bauxite project in India for pre-feasibility work.
However, no assurance can be given that it will be able to raise such funds.

The Company intends to hire employees and consultants 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, 2006 the Companys cash position was $1,748,
however, discussions were in progress to raise working capital to meet to
maintain normal operations for the next year exclusive of exploration and
development expenses relating to the Gandhamardan Project. The Company had
assets of $230,254 on December 31, 2006 of which only $29,078 were current
assets compared to $401,288 in assets on December 31, 2005 of which $332,240 was
cash. The company had a negative working capital of $1,009,959 on December 31,
2006 compared to working capital of $64,390 on December 31, 2005. The decrease
in working capital is directly related to the reduction in cash on hand and the
amount of accounts payable incurred in 2006 in relation to work being conducted
on the Gandhamardan Project and the Company did not complete any funding
arrangements in 2006.

The Company relies on the issuance of share capital to raise
capital. There can be no assurance that the Company will continue to be
successful in raising additional capital to meet future obligations of the
Company.

The liabilities of the Company on December 31, 2006 were
$1,039,037 of which $797,816 was paid subsequent to the end of the year through
a combination of debt settlement agreements and cash payments. The debt
settlement was the results of the Company completing a non-brokered private
placement subsequent to December 31, 2006 (March 22, 2007) to accredited
investors of $841,000 totaling 4,205,000 units. Each unit consists of one common
share and one-unit purchase warrant, at a price of US$0.20 per unit. Each unit
purchase warrant is exercisable to purchase a further unit (Warrant Unit) on
or before March 21, 2009, at US$0.25 per Warrant Unit. Each Warrant Unit is
exercisable to purchase a further common share on or before March 21, 2010, at a
price of US$0.30 per share. A finders fee was paid on this placement in the
amount of US$66,100. The Company also at the same time completed the settlement
of US$578,124 in outstanding debt through the issuance of 2,890,520 units on the
same terms as the units issued in the private placement. A further debt of
US$92,900 has been settled through the issuance of 333,000 common share purchase
warrants. Each of these warrants is exercisable to purchase a further common
share on or before December 16, 2007, at a price of US$0.40.

As at December 31, 2006, the Company had an accumulated deficit
of $7,196,173 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 totaling $1,074,349 in 2006. This
loss was from expenditures incurred for operations of the Company and more
significantly came from meeting the costs of its subsidiary, CRL, on the
Gandhamardan Project in India. At yearend, December 31, 2006, the Company had a
working capital deficit of $1,009,959.

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- 34 -

During 2004 and 2005 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 totaling $75,110. The RoyCap debt was incurred in February
2002 from loans that were to be paid by the Company through the issuance of
common shares that failed because of a decrease in the price of the Companys
common stock.

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 annual audited 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 received $400,000 during the 2005 fiscal year from warrants
exercised to purchase 1,000,000 common shares.

During the 2006 fiscal year the Company did not raise any
capital through private placement of its common shares or had any warrant or
options exercised. Subsequent to yearend the Company completed a private
placement and debt settlements to raise additional funds for the Companys
operations. For further information see Note 15 of the audited financial
statements.

In March 2007, the Company received gross proceeds of
US$841,000 for a non-brokered private placements totaling 4,205,000 units of
Balaton as follows: A placement of 4,205,000 units, each unit consisting of one
common share and one-unit purchase warrant, at a price of US$0.20 per unit. Each
unit purchase warrant is exercisable to purchase a further unit (Warrant Unit)
on or before March 21, 2009, at US$0.25 per Warrant Unit. Each Warrant Unit
consists of one common share and one share purchase warrant. Each share purchase
warrant is exercisable to purchase a further common share on or before March 21,
2010, at a price of US$0.30 per share.

In March 2007, the Company also completed the settlement of
US$578,124 outstanding debt through the issuance of a 2,890,520 units on the
same terms as the units issued in the private placement. A further debt of
US$92,900 has been settled through the issuance of 333,000 common shares and
333,000 share purchase warrants. Each of these warrants is exercisable to
purchase a further common share on or before December 16, 2007, at a price of
US$0.40.

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.

---

- 35 -

The Company resolved a lawsuit on September 1, 2005, with
Ronald Brown, a former president of the Company with cash payments totalling
$100,000 and 0.5% of any proceeds the Company or its subsidiary receives from
the sale of its project in India with a limit not to exceed $5,000,000.
Management of the Company does not view this contingent liability as a major
detriment to the Companys overall performance as the $100,000 cash payment has
been paid.

On March 29, 2004 a separate legal action was brought against
the Company by a person associated with Balaton Power Corporation S.A. claiming
to have acquired stock in the Company. Management does not believe this legal
matter has any merit and considers the contingent liability of this matter to be
virtually nil.

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.

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- 36 -

|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.

|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 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.

|F. | Tabular Disclosure of Contractual
      Obligations
|-- | ---------------------------------------------------

|                        |  | Payments due by period | 
|----------------------- |  | ---------------------- | 
|Contractual Obligations |  | Total                  | 
|                        |  |                        | 
|Related Party Loans(1)  |  | 170,475                | 
|Related Party Accounts  |  | 59,168                 | 
|Payable                 |  |                        | 

(1)This loan is from a shareholder of the Company
and subsequent to fiscal year end this loan has been fully repaid.

|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.

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- 37 -

|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.

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.

|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. Total compensation of
$70,000 was paid to directors and/or officers during the Companys financial
year ended December 31, 2006.

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.

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- 38 -

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 300,000 shares at $0.40 expiring on August
22, 2008.

Summary Compensation Table

During the Companys financial year ended December 31, 2006,
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 $70,000 . 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 President and Chief Executive Officer
      2006
      Nil
      20,000
      14,000
      Nil
      Nil
      Nil
      NilRobert Wyllie Chief Financial Officer
      2006
      Nil
      20,000
      Nil
      Nil
      Nil
      Nil
      NilNicole Bouthillier Director
      2006
      Nil
      10,000
      Nil
      Nil
      Nil
      Nil
      NilDavid Wynn Director
      2006
      Nil
      10,000
      Nil
      Nil
      Nil
      Nil
      NilKaren Evans(1)Secretary
      2006
      Nil
      10,000
      Nil
      Nil
      Nil
      Nil
      Nil


|(1) | As at the date of this annual report, Karen Evans no
      longer serves as Secretary of the Company but she did receive $10,000 as
      compensation for her term served in fiscal 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

No stock options were exercised during 2006. 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

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- 39 -

Bouthillier joined the Companys Board of Directors on November
24, 2005 subsequent to the death of Mr. Burdett, who was a director and officer
since February 1, 2003. The Companys officers are appointed 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 Michael Rosa, Robert Wyllie 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.

|D. | Employees
|-- | ---------

The Company has no employees other than its officers and
directors. The Company has two directors/officers involved in management and
administration of the Company, Mr. Michael Rosa and Mr. Robert Wyllie.

|E. | Share Ownership
|-- | ---------------

Common Shares

Security Holdings of Directors and Officers

Name of Insider
    Shares owned or beneficially
      controlled
    Percentage of 83,453,737 outstanding
      common sharesMichael Rosa
      138,000
        (1)
    *Robert Wyllie
      150,000
        (2)
    *David C. Wynn
      220,000
        (3)
    *Nicole Bouthillier
      50,000
        (4)
    *TOTAL:
      558,000


|*   | Less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In addition, Mr. Rosa holds 400,000 options to purchase
      Shares at an exercise price of US$0.40. Of those options 300,000 options
      will expire on June 25, 2009 and 100,000 options will expire on August 22,
      2008. He also holds 100,000 Warrant Units to purchase one Share and one
      unit purchase warrant at an exercise price of US$0.25 each, expiring on
      March 21, 2009. Each unit purchase warrant is exercisable into one Share
      and one Share purchase warrant exercisable on or before March 21, 2010 at
      a price of $0.30 each.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | In addition, Mr. Wyllie holds 400,000 options to purchase
      Shares at an exercise price of US$0.40. 300,000 options will expire on
      June 25, 2009 and 100,000 options will expire on August 22, 2008. He also
      holds 100,000 Warrant Units to purchase one common share and one unit
      purchase warrant at an exercise price of US$0.25 each, expiring on March
      21, 2009. Each unit purchase warrant is exercisable into one Share and one
      Share purchase warrant exercisable on or before March 21, 2010 at a price
      of $0.30 each.        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | In addition, Mr. Wynn holds 400,000 options to purchase
      Shares at an exercise price of US$0.40. Of those options 300,000 options
      will expire on June 25, 2009 and 100,000 options will expire on August 22,
      2008. He also holds 50,000 Warrant Units to purchase one Share and one
      unit purchase warrant at an exercise price of US$0.25 each, expiring on
      March 21, 2009. Each unit purchase warrant is exercisable into one Share
      and one Share purchase warrant exercisable on or before March 21, 2010 at
      a price of $0.30 each. 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | In addition, Ms. Bouthillier also holds 50,000 Warrants
      Units to purchase one Share and one unit purchase warrant at an exercise
      price of US$0.25 each, expiring on March 21, 2009. Each unit purchase
      warrant is exercisable into one Share and one Share purchase warrant
      exercisable on or before March 21, 2010 at a price of $0.30 each.                                                                                                                                                                                                          

---

- 40 -

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, 2007:

Under the 2004 Share Option PlanName of Officer/Director
      Amount of Securities
      Exercise Price
      Expiration Date For
      Options
      Percentage of Total Options
      IssuedMichael Rosa
    300,000
    US$0.40
    June
      25, 2009
    21.4David C. Wynn
    300,000
    US$0.40
    June
      25, 2009
    21.4Robert Wyllie
    300,000
    US$0.40
    June
      25, 2009
    21.4Michael Rosa
    100,000
    US$0.40
    August 22, 2008
    7.14David C. Wynn
    100,000
    US$0.40
    August 22, 2008
    7.14Robert Wyllie
    100,000
    US$0.40
    August 22, 2008
    7.14Total(1)
    1,200,000
    -
    -
    85.6


(1)A total of 1,400,000 options have been issued,
with 200,000 options being issued to consultants of the Company that are neither
officers nor directors.

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.

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 following summary of the material terms of the Plan is
not complete and is qualified in its entirety by reference to the Plan, a copy
of which [has been filed with the SEC.]

The Committee

The Plan provides for the granting by the Committee of Options
to directors, officers, employees and consultants of the Company. 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

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- 41 -

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. 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.

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.

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.

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- 42 -

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. At the time of this report, the 3,000,000 common shares allocated for the
Stock Option Plan represented 3.59% 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 1,400,000 common shares have
been granted under the Plan and are outstanding as of June 29, 2007.

|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS
|------- | -------------------------------------------------------

|A. | Major Shareholders
|-- | ------------------

Perial Ltd. holds 25,000,000 common shares or 29.96% of all
issued and outstanding shares as at June 29, 2007. 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, 2007, the total number of common shares
held by US residents is 22,614,666 or 27.1% held by 109 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 ClassPerial Ltd. 191 Eglinton Avenue East Suite 302
      Toronto, Ontario Canada M4P 1K1
      25,000,000
      Shareholder
      29.96


|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.

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:

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.

---

- 43 -

A shareholder of the Company advanced $89,351 to the Company
during the year 2006. As of the year-end, the balance still remained unpaid,
however, this debt was paid subsequent to year end.

A shareholder of the Company was owed $81,124 on December 31,
2006 for advances made during 2004 and 2005, which was paid subsequent to year
end through a debt settlement where the Company issued 405,620 units. Each unit
consisting of one common share and one-unit purchase warrant. This settlement
was a part of the settlement agreements entered into on March 22, 2007 as
disclosed in Note 15 of the audited financial statements.

As of December 31, 2006, the Company owed a shareholder $52,273
for expenses incurred on behalf of the Company. Subsequent to the end of the
fiscal year this amount was paid in full in cash.

The Officers and Directors received compensation totaling
$70,000 in 2006.

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

Other than as disclosed herein, 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. 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

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- 44 -

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:

| |               |   | 2006 |  |   | 2005 |  |   | 2004 |  |   | 2003 |  |   | 2002 | 
| | ------------- | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- | 
| | High (U.S. $) | $ | 0.50 |  | $ | 0.80 |  | $ | 1.00 |  | $ | 0.17 |  | $ | 0.95 | 
| | Low (U.S. $)  | $ | 0.20 |  | $ | 0.35 |  | $ | 0.16 |  | $ | 0.06 |  | $ | 0.02 | 

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

| |               |   |      |  |   |      |  |   | 2006 |  |   |      |  |   |      |  |   |      |  |   | 2005 |  |   |      | 
| | ------------- | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ---- | 
| |               |   | Q1   |  |   | Q2   |  |   | Q3   |  |   | Q4   |  |   | Q1   |  |   | Q2   |  |   | Q3   |  |   | Q4   | 
| | High (U.S. $) | $ | 0.47 |  | $ | 0.41 |  | $ | 0.48 |  | $ | 0.50 |  | $ | 0.80 |  | $ | 0.63 |  | $ | 0.58 |  | $ | 0.47 | 
| | Low (U.S. $)  | $ | 0.27 |  | $ | 0.20 |  | $ | 0.20 |  | $ | 0.23 |  | $ | 0.48 |  | $ | 0.40 |  | $ | 0.36 |  | $ | 0.35 | 

---

- 45 -

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

| |               |   | May 07 |  |   | Apr 07 |  |   | Mar 07 |  |   | Feb 07 |  |   | Jan 07 |  |   | Dec 06 | 
| | ------------- | - | ------ |  | - | ------ |  | - | ------ |  | - | ------ |  | - | ------ |  | - | ------ | 
| | High (U.S. $) | $ | 0.50   |  | $ | 0.34   |  | $ | 0.40   |  | $ | 0.37   |  | $ | 0.34   |  | $ | 0.36   | 
| | Low (U.S. $)  | $ | 0.25   |  | $ | 0.28   |  | $ | 0.25   |  | $ | 0.28   |  | $ | 0.29   |  | $ | 0.26   | 

|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.

|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

---

- 46 -

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 the date of this annual report, 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.

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

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- 47 -

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.

Loan Agreement dated March 22, 2005

On March 22, 2005, the Company received from City Source Net
Corp. $US92,900 as a loan for working capital. The loan was for two years
bearing 6.5% interest all due on March 21, 2007. The loan has been repaid in
full through the issuance of 333,000 common shares and 333,000 share purchase
warrants. Each of these warrants is exercisable to purchase a further common
share on or before December 16, 2007, at a price of US$0.40. City Source Net
Corp. is a shareholder of the Company but is not considered to be a related
party to the Company.

|D. | Exchange Controls
|-- | -----------------

The Company is a corporation incorporated under the laws of the
Province of British Columbia, Canada. Canada has no system of exchange controls.
There are no exchange restrictions on borrowings from foreign countries or on
the remittance of dividends, interest, royalties and similar payments,
management fees, loan repayments, settlement of trade debts, or the repatriation
of capital. The Investment Canada Act (the ICA) enacted on June
20, 1985, as amended by the Canada-United States Free Trade Agreement
Implementation Act (Canada), requires the notification and, in certain cases,
advance review and approval by the Government of Canada of the acquisition by a
non-Canadian of control of a Canadian business, all as defined in the ICA.
For the purposes of the ICA, control can be acquired through the acquisition
of all or substantially all of the assets used in carrying on the Canadian
business, or the direct or indirect acquisition of interests in an entity that
carries on a Canadian business or which controls the entity, which carries on
the Canadian business. Under the ICA, control of a corporation is deemed to be
acquired through the acquisition of a majority of the voting shares of a
corporation, and is presumed to be acquired where one third or more, but less
than a majority, of the voting shares of a corporation are acquired, unless it
can be established that the corporation is not controlled in fact by the
acquirer through the ownership of voting shares. Other rules apply with respect
to the acquisition of non-corporate entities.

To the best of the registrants knowledge, there are no
governmental laws, decrees or regulations in Canada relating to restriction on
the import/export of capital, or which affect the remittance of interest,
dividends, or other payments to non-resident holders of the Companys common
stock. Any such remittance to United States residents, however, is subject to a
15% withholding tax pursuant to Articles X, Xl, and XII of the reciprocal
Canada-United States Income Tax Convention. Except for the ICA, there are no
limitations under the laws of Canada, the Province of British Columbia, or in
the Charter or any other constituent documents of the registrant on the rights
of foreigners to hold and/or vote the shares of the registrant. The provisions
of the ICA provide legislative guidelines for screening and evaluating new
foreign investment in Canada. The purpose of the legislation is to:

| | (a) | encourage investment in Canada that contributes to
      economic growth and employment; and                        
| | --- | --------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                     
| | (b) | provide for the review of significant investments in
      Canada by non-Canadians to ensure such benefit to
Canada.

All investments that meet the following criteria are subject to
a review:

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- 48 -

| | (a) | direct acquisition of control of an existing
      Canadian business with assets of five million dollars or more by a non-WTO
      investor;                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                              
| | (b) | indirect acquisition of an existing Canadian
      business with assets of fifty million dollars or more by a non-WTO
      investor;                                                                                                                        
| |     |                                                                                                                                                                                                                                                              
| | (c) | indirect acquisition of control of an existing
      Canadian business with assets of five million dollars or more where the
      assets of the Canadian business being acquired exceed 50% of the total
      assets involved in the worldwide transaction;
| |     |                                                                                                                                                                                                                                                              
| | (d) | direct acquisition of control of an existing
      Canadian business with assets of $281 million dollars or more by a WTO
      investor; and                                                                                                                
| |     |                                                                                                                                                                                                                                                              
| | (e) | investments in prescribed areas related to
      cultural heritage or national identity where the discretionary authority
      to review is exercised                                                                                                       

|E. | Taxation
|-- | --------

Material Canadian Federal Income Tax Consequences for United
States Residents

The following discussion summarizes the principal Canadian
federal income tax considerations generally applicable to a person (an
Investor) who acquires one or more Common Shares of the Company, and
who at all material times and for the purposes of the Income Tax Act (Canada)
(the Canadian Act) deals at arms length with the Corporation, holds
all Common Shares solely as capital property, is a nonresident of Canada, and
does not, and is not deemed to, use or hold any Common Shares in or in the
course of carrying on business in Canada. It is assumed that the Common Shares
will at all material time be listed on a stock exchange that is prescribed for
the purposes of the Canadian Act.

This summary is based on the current provisions of the Canadian
Act, including the regulations thereunder, and the Canada-United States Income
Tax Convention (1980) (the Treaty) as amended. This summary takes into
account all specific proposals to amend the Canadian Act and the regulations
thereunder publicly announced by the government of Canada to the date hereof and
the Corporations understanding of the current published administrative and
assessing practices of the Canada Revenue Agency (CRA). It is assumed
that all such amendments will be enacted substantially as currently proposed,
and that there will be no other material change to any such law or practice,
although no assurances can be given in these respects. This summary does not
take into account any provincial, territorial or foreign income tax law or
treaty other than the Treaty.

This summary is not, and is not to be construed as, tax
advice to any particular Investor. Each prospective and current Investor is
urged to obtain independent advice as to the Canadian income tax consequences of
an investment in Common Shares applicable to the Investors particular
circumstances.

An Investor generally will not be subject to tax pursuant to
the Canadian Act on any capital gain realized by the Investor on a disposition
of a Common Share unless the Common Share is taxable Canadian property, and is
not treaty-protected property, of the Investor for purposes of the Canadian
Act. A Common Share that is disposed of by an Investor will generally not
constitute taxable Canadian property of the Investor provided that neither the
Investor, nor one or more persons with whom the Investor did not deal at arms
length, alone or together at any time in the 60 months immediately preceding the
disposition owned 25% or more of the issued shares of any class of the capital
stock of the Corporation. In addition, the Common Share will be a
treaty-protected property of the Investor if, under the terms of an applicable

---

- 49 -

bilateral tax treaty, any gain realized by the Investor on
disposition of the share is exempt from Canadian income tax under Part I of the
Canadian Act.

An Investor whose Common Shares constitute taxable Canadian
property and are not treaty-protected property, and who disposes of one or more
Common Shares in a taxation year, will realize a capital gain (capital loss)
equal to the amount by which the proceeds of disposition therefor exceed (are
exceeded by) the adjusted cost base thereof to the Investor and the Investors
reasonable costs of disposition. The Investor will be required to include one
half of any such capital gain (taxable capital gain) in the Investors taxable
income earned in Canada for the taxation year and to pay Canadian income tax
accordingly. The Investor will be entitled to deduct one half of any such
capital loss (allowable capital loss) against taxable capital gains included in
the Investors taxable income earned in Canada in the taxation year and, to the
extent not so deductible, against taxable capital gains included in the
Investors taxable income earned in Canada in any of the three preceding
taxation years or in any subsequent taxation year.

Each Investor will be required to pay Canadian withholding tax
on the amount of any dividend, including any stock dividend, paid or credited or
deemed to be paid or credited by the Corporation to the Investor on a Common
Share. The rate of withholding tax is 25% of the gross amount of the dividend,
or such lesser rate as may be available under an applicable income tax treaty.
In accordance with the Treaty, the rate of withholding tax applicable to a
dividend paid on a Common Share to an eligible Investor who is a resident of the
United States for the purposes of the Treaty and who takes appropriate steps, is
5% if the Investor is a company that owns at least 10% of the voting stock of
the Corporation, and 15% in any other case, of the gross amount of the dividend.
The Corporation will be required to withhold any such tax from the dividend, and
remit the tax directly to CRA for the account of the Investor.

Investors are advised to consult their tax advisors with
respect to the tax implications of acquiring, holding or disposing of Common
Shares and the application of any applicable income tax treaty.

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.

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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.

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

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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. 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.

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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.

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

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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. 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

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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.

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

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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. 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

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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. 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

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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.

|H. | Documents on Display
|-- | --------------------

Exhibits attached to this Form 20-F are also available for
viewing at the offices of the Company, 16678 77th Avenue, Surrey, BC
V3S 8G1 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.

---

- 58 -

|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
|-------- | -----------------------

As required by Rule 13a-15 under the Securities Exchange Act of
1934 (the Exchange Act), we carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2006, being the date of our most recently completed year. This
evaluation was carried out under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures areeffective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the rules and forms of the Securities and Exchange
Commission.

Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and our
Principal Accounting Officer, to allow timely decisions regarding required
disclosure. A control system, however, can provide only reasonable, not
absolute, assurance that the objectives of the control system will be met.

During the fiscal year ended December 31, 2006, there were no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to affect, our internal control over
financial reporting.

|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.

---

- 59 -

|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$ 95,000 and US$60,000 for the fiscal years ended 2006 and 2005, respectively.
These fees relate 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
|-- | ------------------

$29,177.04 - Audit-Related Fees include services that are
traditionally performed by the auditor. These audit-related services include
employee benefit audits, due diligence assistance, accounting consultations on
proposed transactions, internal control reviews and audit or attest services not
required by legislation or regulation.

|C. | Tax Fees
|-- | --------

Nil

|D. | All Other Fees
|-- | --------------

Nil

|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.

---

- 60 -

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, 2006 and 2005, including
the following:

|1. | Independent Auditors Report of Killman, Murrell &
      Company, P.C. dated April 25, 2007.                 
|-- | -------------------------------------------------------------------------------------------------------------
|   |                                                                                                              
|2. | Consolidated Balance Sheets as at December 31, 2006 and
      December 31, 2005.                             
|   |                                                                                                              
|3. | Consolidated Statements of Operations and Deficit for the
      years ended December 31, 2006, 2005 and 2004.
|   |                                                                                                              
|4. | Consolidated Statements of Cash Flows for the years ended
      December 31, 2006 and 2005.                  
|   |                                                                                                              
|5. | Notes to the Consolidated Financial
  Statements.                                                            

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

Not applicable.

---

|BALATON POWER INC.               
|---------------------------------
|                                 
|Consolidated Financial Statements
|                                 
|(United States Dollars)          
|                                 
|December 31, 2006 and 2005       

Page 1

---

|BALATON POWER INC.        
|--------------------------
|                          
|INDEX                     
|                          
|December 31, 2006 and 2005

|                                                                       | PAGE  
|---------------------------------------------------------------------- | ------
|                                                                       |       
|INDEPENDENT AUDITORS
      REPORT  DECEMBER 31, 2006                 | 3     
|                                                                       |       
|FINANCIAL STATEMENTS                                                   |       
|Consolidated Balance Sheets - Statement I                              | 4     
|Consolidated Statements of Operations
      and Deficit - Statement II | 5     
|Consolidated Statements of Cash Flows 
      Statement III            | 6     
|                                                                       |       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                             | 7 - 18

Page 2

---

INDEPENDENT AUDITORS REPORT

To the Shareholders of 
  BALATON POWER INC.

We have audited the consolidated balance sheet of BALATON
  POWER INC. as at December 31, 2006 and the consolidated statements of loss
  and deficit and cash flows for the year 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
  the audit to obtain reasonable assurance about whether the financial statements
  are free of material misstatement. The company is not required to have, nor
  were we engaged to perform, an audit of its internal control over financial
  reporting. Our audit included consideration of internal control over financial
  reporting as a basis for designing audit procedures that are appropriate in
  the circumstances, but not for the purpose of expressing an opinion on the effectiveness
  of the companys internal control over financial reporting. Accordingly,
  we express no such opinion. An audit also includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements,
  assessing the accounting principles used and significant estimates made by management,
  as well as evaluating the overall financial statement presentation. We believe
  that our audits provide a reasonable basis for our opinion

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company, as
  at December 31, 2006, and the results of its operations and cash flows for the
  year then ended, in accordance with Canadian generally accepted accounting principles.

The financial statements as at December 31, 2005 and 2004 and
  for each of the years then ended were audited by other auditors who expressed
  an opinion without reservation on those statements in their report dated June
  23, 2006.

Killman, Murrell & Company, P.C.Odessa, Texas, United States 
  April 25, 2007

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 described in Note 1 to the financial statements. Our report to the directors
  dated April 25, 2007, is expressed in accordance with Canadian reporting standards,
  which do not permit a reference to such events and conditions in the auditors
  report when these are adequately disclosed in the financial statements.

Killman, Murrell & Company, P.C.Odessa, Texas, United States 
  April 25, 2007

Page 3

---

|BALATON POWER INC.                               |   |            |   |   | Statement I |  
|------------------------------------------------ | - | ---------- | - | - | ----------- | -
|Consolidated Balance Sheets                      |   |            |   |   |             |  
|As at December 31, 2006 and 2005                 |   |            |   |   |             |  
|(United States Dollars)                          |   |            |   |   |             |  
|                                                 |   |            |   |   |             |  
|                                                 |   | 2006       |   |   | 2005        |  
|                                                 |   |            |   |   |             |  
|ASSETS                                           |   |            |   |   |             |  
|CURRENT                                          |   |            |   |   |             |  
|Cash                                             | $ | 1,748      |   | $ | 332,240     |  
|Loans receivable
      (Note 3)                  |   | -          |   |   | 34,556      |  
|Prepaid
      expenses                           |   | 27,330     |   |   | 34,492      |  
|                                                 |   |            |   |   |             |  
|                                                 |   | 29,078     |   |   | 401,288     |  
|Note receivable (Note 4)                         |   | -          |   |   | -           |  
|Investments (Note 5)                             |   | 201,176    |   |   | 201,176     |  
|                                                 |   |            |   |   |             |  
|                                                 | $ | 230,254    |   | $ | 602,464     |  
|                                                 |   |            |   |   |             |  
|LIABILITIES                                      |   |            |   |   |             |  
|CURRENT                                          |   |            |   |   |             |  
|Accounts
      payable and accrued liabilities   | $ | 809,394    |   | $ | 255,774     |  
|Accounts payable
      (Note 13) - Related Party |   | 59,168     |   |   | -           |  
|Convertible
      debt (Note 7)                  |   | -          |   |   | -           |  
|Loan payable (Note 8) - Related Party            |   | 170,475    |   |   | 81,124      |  
|                                                 |   |            |   |   |             |  
|                                                 |   | 1,039,037  |   |   | 336,898     |  
|                                                 |   |            |   |   |             |  
|SHAREHOLDERS (DEFICIENCY) EQUITY                |   |            |   |   |             |  
|COMMITMENT TO ISSUE SHARES                       |   | 16,149     |   |   | 16,149      |  
|SHARE CAPITAL(Note 9)                            |   | 4,958,884  |   |   | 4,958,884   |  
|CONTRIBUTED SURPLUS                              |   | 1,412,357  |   |   | 1,412,357   |  
|DEFICIT
      Statement II                      |   | (7,196,173 | ) |   | ( 6,121,824 | )
|                                                 |   |            |   |   |             |  
|                                                 |   | (808,783   | ) |   | 265,566     |  
|                                                 |   |            |   |   |             |  
|                                                 | $ | 230,254    |   | $ | 602,464     |  

APPROVED ON BEHALF OF THE BOARD

/s/ Robert Wyllie, Director

/s/ Michael Rosa, Director

The accompanying notes are an integral part of these consolidated
  financial statements.

Page 4

---

|BALATON POWER INC.                                   |   |            |   |   |            |   |   | Statement II |  
|---------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ------------ | -
|Consolidated Statements of Operations and Deficit    |   |            |   |   |            |   |   |              |  
|For the Years Ended December 31, 2006, 2005 and 2004 |   |            |   |   |            |   |   |              |  
|(United States Dollars)                              |   |            |   |   |            |   |   |              |  
|                                                     |   |            |   |   |            |   |   |              |  
|                                                     |   | 2006       |   |   | 2005       |   |   | 2004         |  
|                                                     |   |            |   |   |            |   |   |              |  
|                                                     |   |            |   |   |            |   |   |              |  
|REVENUE                                              | $ | -          |   | $ | -          |   | $ | -            |  
|                                                     |   |            |   |   |            |   |   |              |  
|EXPENSES                                             |   |            |   |   |            |   |   |              |  
|Administration and general                           |   | 476,028    |   |   | 914,749    |   |   | 1,239,605    |  
|Consulting fees and commissions                      |   | 425,124    |   |   | 63,000     |   |   | 245,882      |  
|Professional fees                                    |   | 173,769    |   |   | 171,738    |   |   | 207,376      |  
|Interest                                             |   | -          |   |   | -          |   |   | 13,040       |  
|Write
      down of loan receivable                  |   | -          |   |   | -          |   |   | 355,548      |  
|                                                     |   |            |   |   |            |   |   |              |  
|                                                     |   | 1,074,921  |   |   | 1,149,487  |   |   | 2,061,451    |  
|                                                     |   |            |   |   |            |   |   |              |  
|OTHER INCOME (EXPENSE)                               |   |            |   |   |            |   |   |              |  
|Oil Income                                           |   | 5,793      |   |   | -          |   |   | -            |  
|Oil Expense                                          |   | (6,587     | ) |   | -          |   |   | -            |  
|Interest Income (Expense)                            |   | 1,366      |   |   | -          |   |   | -            |  
|                                                     |   |            |   |   | -          |   |   | -            |  
|                                                     |   | (572       | ) |   | -          |   |   | -            |  
|                                                     |   |            |   |   |            |   |   |              |  
|NET LOSS FOR THE YEAR                                |   | 1,074,349  |   |   | 1,149,487  |   |   | 2,061,451    |  
|                                                     |   |            |   |   |            |   |   |              |  
|DEFICIT, BEGINNING OF YEAR                           |   | 6,121,824  |   |   | 4,972,337  |   |   | 2,910,886    |  
|                                                     |   |            |   |   |            |   |   |              |  
|                                                     |   |            |   |   |            |   |   |              |  
|DEFICIT, END OF
      YEAR                           | $ | 7,196,173  |   | $ | 6,121,824  |   | $ | 4,972,337    |  
|                                                     |   |            |   |   |            |   |   |              |  
|LOSS PER COMMON SHARE                                |   |            |   |   |            |   |   |              |  
|Basic                                                |   | ($ 0.01    | ) |   | ($ 0.02    | ) |   | ($ 0.03      | )
|Diluted                                              |   | ($ 0.01    | ) |   | ($ 0.02    | ) |   | ($ 0.03      | )
|                                                     |   |            |   |   |            |   |   |              |  
|AVERAGE NUMBER OF COMMON SHARES                      |   |            |   |   |            |   |   |              |  
|OUTSTANDING                                          |   | 76,025,117 |   |   | 75,125,178 |   |   | 69,679,959   |  
|                                                     |   |            |   |   |            |   |   |              |  
|AVERAGE NUMBER OF DILUTED SHARES                     |   |            |   |   |            |   |   |              |  
|OUTSTANDING                                          |   | 78,788,831 |   |   | 85,107,418 |   |   | 77,845,996   |  

The accompanying notes are an integral part of these consolidated
  financial statements.

Page 5

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|BALATON POWER INC.                                   |   |             |   |   |             |   |   | Statement III |  
|---------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ------------- | -
|Consolidated Statements of Cash Flows                |   |             |   |   |             |   |   |               |  
|For the Years Ended December 31, 2006, 2005 and 2004 |   |             |   |   |             |   |   |               |  
|(United States Dollars)                              |   |             |   |   |             |   |   |               |  
|                                                     |   |             |   |   |             |   |   |               |  
|                                                     |   | 2006        |   |   | 2005        |   |   | 2004          |  
|                                                     |   |             |   |   |             |   |   |               |  
|CASH PROVIDED BY (USED IN)                           |   |             |   |   |             |   |   |               |  
|OPERATING ACTIVITIES                                 |   |             |   |   |             |   |   |               |  
|Net loss for the year                                |   | ($1,074,349 | ) |   | ($1,149,487 | ) |   | ($2,061,451   | )
|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       |  
|Write down of loan
      receivable                  |   | -           |   |   | -           |   |   | 355,548       |  
|Settlement
      of convertible debt                 |   | -           |   |   | ( 179,779   | ) |   | -             |  
|Fair value of stock options granted                  |   | -           |   |   | 166,968     |   |   | 602,964       |  
|                                                     |   |             |   |   |             |   |   |               |  
|                                                     |   | (1,074,349  | ) |   | ( 892,472   | ) |   | ( 633,693     | )
|Changes in non-cash working
      capital components |   |             |   |   |             |   |   |               |  
|Prepaid expenses                                     |   | 7,162       |   |   | ( 4,592     | ) |   | ( 28,659      | )
|Accounts payable
      and accrued liabilities       |   | 612,788     |   |   | 28,060      |   |   | 24,762        |  
|                                                     |   |             |   |   |             |   |   |               |  
|Cash provided by (used in) operating activities      |   | (454,399    | ) |   | ( 869,004   | ) |   | ( 637,590     | )
|                                                     |   |             |   |   |             |   |   |               |  
|INVESTING ACTIVITIES                                 |   |             |   |   |             |   |   |               |  
|Investment
      in shares of private company        |   | -           |   |   | -           |   |   | ( 75,000      | )
|                                                     |   |             |   |   |             |   |   |               |  
|FINANCING ACTIVITIES                                 |   |             |   |   |             |   |   |               |  
|Loan receivable                                      |   | 34,556      |   |   | 29,412      |   |   | ( 63,968      | )
|Loan payable                                         |   | 89,351      |   |   | -           |   |   | 51,124        |  
|Issue of share capital,
      warrants and share     |   |             |   |   |             |   |   |               |  
|Subscriptions                                        |   | -           |   |   | 732,900     |   |   | 1,159,676     |  
|                                                     |   |             |   |   |             |   |   |               |  
|                                                     |   | 123,907     |   |   | 762,312     |   |   | 1,146,832     |  
|                                                     |   |             |   |   |             |   |   |               |  
|NET INCREASE (DECREASE) IN CASH                      |   | (330,492    | ) |   | ( 106,692   | ) |   | 434,242       |  
|                                                     |   |             |   |   |             |   |   |               |  
|CASH, BEGINNING
      OF YEAR                        |   | 332,240     |   |   | 438,932     |   |   | 4,690         |  
|                                                     |   |             |   |   |             |   |   |               |  
|CASH, END OF YEAR                                    | $ | 1,748       |   | $ | 332,240     |   | $ | 438,932       |  
|SUPPLEMENTAL DISCLOSURE OF                           |   |             |   |   |             |   |   |               |  
|CASH FLOW INFORMATION                                |   |             |   |   |             |   |   |               |  
|Cash
      paid during the year for:                 |   |             |   |   |             |   |   |               |  
|Interest expense                                     | $ | -           |   | $ | -           |   | $ | -             |  
|Income taxes paid                                    | $ | -           |   | $ | -           |   | $ | -             |  

The accompanying notes are an integral part of these consolidated
  financial statements.

Page 6

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|1. | DESCRIPTION OF BUSINESS, BASIS
      OF PRESENTATION AND GOING CONCERN
|-- | ----------------------------------------------------------------------

Basis of Presentation

The Company, Balaton Power Inc. (BPI)
  was incorporated under the British Columbia Business Corporations Act
  on June 25, 1986. Prior to the acquisition/merger with Continental Resources
  (USA) Ltd. (CRL) in October 2002 (the Acquisition),
  the Company was in the construction, installation and sale of 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 primary business to exploring and developing the Gandhamardan Bauxite Deposit.
  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 write-downs 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 7

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|1. | DESCRIPTION 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 2006, utilized $454,399 of cash in operations. At December
  31, 2006, the Company reported a deficit of $7,196,173 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 2007. 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 8

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 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 9

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 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 an 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                               |   | 2006    |  |   | 2005    | 
| | --------------------------------------------- | - | ------- |  | - | ------- | 
| | Interest in oil well                          | $ | 126,176 |  | $ | 126,176 | 
| | Common shares in Cumberland Continental Corp. |   | 75,000  |  |   | 75,000  | 
| |                                               | $ | 201,176 |  | $ | 201,176 | 

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.

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. There were no operations in either 2006 or 2005. The Company evaluates
  the carrying value of this asset each year to determine if facts and circumstances
  indicate that the cost of this asset may be impaired. No impairment has been
  made to the carrying value of this asset.

Page 10

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|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 2005, the Company settled this debt for a payment
        of $100,000 and the issuance of 100,000 restricted common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Page 11

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|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         |  | 1,600,000  |  |   | 86,321    | 
| | 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          |  | 73,795,260 |  |   | 4,114,005 | 
| | Private placements for cash         |  | 750,000    |  |   | 175,053   | 
| | Exercise of warrants                |  | 1,000,000  |  |   | 400,000   | 
| | Issued on settlement of debt        |  | 479,857    |  |   | 269,826   | 
| |                                     |  |            |  |   |           | 
| | Balance, December 31, 2005 and 2006 |  | 76,025,117 |  | $ | 4,958,884 | 
| |                                     |  |            |  |   |           | 
| | Commitment to issue shares*         |  | 333,000    |  | $ | 16,149    | 

*The Company sold 333,000 Units (common
  shares and warrants) for net proceeds of $92,900 ($99,900 less a $7,000 fee),
  which was received by the Company during 2005. The value of the warrants allocated
  to Contributed Surplus was $76,751. These shares for this private placement
  have not been issued as of December 31, 2006.

| | 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 and 2006    | $ | 1,412,357 | 

Page 12

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

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

| | Warrants                   |  |            |   | 
| | -------------------------- |  | ---------- | - | 
| |                            |  |            |   | 
| | Balance, December 31, 2004 |  | 4,128,137  |   | 
| | Exercised                  |  | (1,000,000 | ) | 
| | Issued in 2005             |  | 963,714    |   | 
| |                            |  |            |   | 
| | Balance, December 31, 2005 |  | 4,091,851  |   | 
| | Expired                    |  | (3,128,137 | ) | 
| |                            |  |            |   | 
| |                            |  |            |   | 
| | Balance, December 31, 2006 |  | 963,714    |   | 

At December 31, 2006, the following warrants
  were outstanding:

| | Amount  | Price | Expiry           
| | ------- | ----- | -----------------
| | 125,000 | 0.66  | February 21, 2007
| | 838,714 | 0.44  | September 9, 2007
| |         |       |                  
| | 963,714 |       |                  

At December 31, 2006, the following stock
  options were outstanding:

| | 400,000   | 0.50 | January 31, 2007
| | --------- | ---- | ----------------
| | 900,000   | 0.40 | June 25, 2009   
| | 200,000   | 0.50 | October 6, 2009 
| | 300,000   | 0.40 | August 22, 2008 
| |           |      |                 
| | 1,800,000 |      |                 

|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.

Page 13

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|10. | STOCK-BASED COMPENSATION(continued)
|--- | -----------------------------------

A summary of the status of the Companys
  employee stock option plan as of December 31, 2006 and 2005 and changes during
  the years then ended are as follows:

| |                                  |  |            |   |   | 2006     |  |  |           |  |   | 2005     | 
| | -------------------------------- |  | ---------- | - | - | -------- |  |  | --------- |  | - | -------- | 
| |                                  |  |            |   |   | Weighted |  |  |           |  |   | Weighted | 
| |                                  |  |            |   |   | Average  |  |  |           |  |   | Average  | 
| |                                  |  | Number of  |   |   | Exercise |  |  | Number of |  |   | Exercise | 
| |                                  |  | Options    |   |   | Price    |  |  | Options   |  |   | Price    | 
| | Outstanding, beginning of year   |  | 4,800,000  |   | $ | 0.46     |  |  | 4,400,000 |  | $ | 0.47     | 
| | Expired                          |  | (3,000,000 | ) | $ | 0.50     |  |  | -         |  |   | -        | 
| | Granted                          |  | -          |   |   | -        |  |  | 400,000   |  |   | 0.41     | 
| |                                  |  |            |   |   |          |  |  |           |  |   |          | 
| | Outstanding, end of year         |  | 1,800,000  |   | $ | 0.43     |  |  | 4,800,000 |  | $ | 0.46     | 
| |                                  |  |            |   |   |          |  |  |           |  |   |          | 
| | Options exercisable, end of year |  | 1,800,000  |   | $ | 0.43     |  |  | 4,800,000 |  | $ | 0.46     | 

Stock options issued in 2005 are
  valued using the Black Scholes option pricing model with the following assumptions:
  risk free interest rate of 3.50%, expected life of 3 years, expected volatility
  of 313% 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.

A reconciliation comparing income taxes
  calculated at the statutory rates to the amount provided in the accompanying
  financial statements is as follows:

| |                                                        |   | 2006        |   |   | 2005        |  
| | ------------------------------------------------------ | - | ----------- | - | - | ----------- | -
| | Combined federal and provincial income tax
      rates |   | 34%         |   |   | 34%         |  
| |                                                        |   |             |   |   |             |  
| | Loss before income taxes                               |   | ($1,074,349 | ) |   | ($1,149,487 | )
| |                                                        |   |             |   |   |             |  
| | Expected income tax (recovery)                         |   | ( 365,000   | ) |   | ( 390,000   | )
| | Non-deductible expenses                                |   | -           |   |   | 56,000      |  
| | Valuation allowance                                    |   | 365,000     |   |   | 334,000     |  
| |                                                        |   |             |   |   |             |  
| | Actual income taxes                                    | $ | -           |   | $ | -           |  

Page 14

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|11. | INCOME TAXES(continued)
|--- | -----------------------

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

| | Future income tax assets                    |   |           |  |   |           | 
| | ------------------------------------------- | - | --------- |  | - | --------- | 
| | Net operating losses carried forward        | $ | 3,822,000 |  | $ | 1,824,000 | 
| | Valuation allowance for future income taxes |   | 3,822,000 |  |   | 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    |  | 
| | ----------------------------------------- | - | --------- |  | 
| |                                           |   |           |  | 
| | 2019                                      | $ | 317,000   |  | 
| | 2020                                      |   | 394,000   |  | 
| | 2024                                      |   | 1,102,000 |  | 
| | 2025                                      |   | 1,085,000 |  | 
| | 2026                                      |   | 1,053,000 |  | 
| |                                           |   |           |  | 
| |                                           | $ | 3,951,000 |  | 

|12. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
|--- | -----------------------------------------

| | a) | Fair value disclosure                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                      
| |    | Fair values are made as of a specific point in time
        using available information about the financial instrument. These estimates
        are subjective in nature and often cannot be determined with precision.                                              
| |    |                                                                                                                                                                                                                                                                      
| |    | The Company has determined that the carrying value of
        its financial assets and liabilities approximates their fair value.                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                      
| | b) | Foreign exchange risk                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                      
| |    | The Company incurs expenditures in United States dollars
        and Indian rupees as such is subject to risk due to fluctuations in exchange
        rates. The Company does not use derivative instruments to reduce its exposure
        to foreign exchange risk.

Page 15

---

|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|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:                
|    |                                                                                                                                                                                                                                                                                            
|    | The Company had an outstanding payable to
        its officers and directors for their compensation for the year totaling
        $70,000.                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                            
|    | A shareholder of the Company advanced
        $89,351 (2005- $81,124) to the Company during the year. The loan bears
        interest at 6.5% per annum. Interest and principal are payable at maturity
        on December 31, 2007. As of the year-end, the balance still remains unpaid.
|    |                                                                                                                                                                                                                                                                                            
|    | During 2005, 254,857 common shares were issued
        in exchange for fees and services in the amount of $78,231.                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                            
|    | During 2005, 125,000 common shares were issued
        to a shareholder to settle outstanding third party debt totalling $80,396.                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                            
|    | During 2005, a related company was advanced
        funds in the amount of $13,070; which is included in loans receivable.
        The balance as of December 31, 2006 was $6,894.                                                                                                         
|    |                                                                                                                                                                                                                                                                                            
|    | As of December 31, 2006, the Company owed
        a shareholder $52,273 for expenses incurred on behalf of the Company.                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                            
|    | During 2006 a shareholder of the Company held
        in his personal bank account Company funds in the amount of $Nil; (2005
        - $21,486) which has been reflected as a loan receivable.                                                                                            
|    |                                                                                                                                                                                                                                                                                            
|14. | CONTINGENT LIABILITY                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                            
|    | a)                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                            
|    | **b)**                                                                                                                                                                                                                                                                                     

Page 16

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|15. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | During March of 2007 the Company closed a private placement
        of 4,205,000 units at a price of US $0.20 per unit for gross proceeds
        of $841,000. Each unit consists of 1 common share and 1 unit purchase
        warrant exercisable to March 21, 2009 at US $0.25 per unit warrant. Each
        unit warrant is exercisable into one common share and one common share
        purchase warrant exercisable on or before March 21, 2010 at a price of
        $0.30 per warrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company also settled US$578,124 in outstanding debts
        through the issuance of 2,890,520 units on the same terms as the units
        issued in the private placement. A further debt of US$92,900 has been
        settled through the issuance of 333,000 common shares and 333,000 share
        purchase warrants. Each of these warrants is exercisable to purchase a
        further common share on or before December 16, 2007, at a price of US$0.40.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|16. | 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, 2006 and 2005 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, 2006 and 2005 if U.S. GAAP were
        employed. Similarly, there would be no adjustments needed to arrive at
        shareholders equity as at December 31, 2006 and 2005 if U.S. GAAP
        were employed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | 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, 2006 and 2005, 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.

Page 17

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|BALATON POWER INC.                            
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|December 31, 2006 and 2005                    
|(United States Dollars)                       

|16. | COMMENTS FOR U.S. READERS(continued)                                                                                                                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                            
|    | 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.
|    |                                                                                                                                                                                                            
|17. | STATEMENT OF SHAREHOLDERS DEFICIENCY                                                                                                                                                                      

|                                   |  | Share Capital |  |   | Contributed |  |   | Commitment |  |   | Share           |  |   |              |   |  |              |  
|---------------------------------- |  | ------------- |  | - | ----------- |  | - | ---------- |  | - | --------------- |  | - | ------------ | - |  | ------------ | -
|                                   |  | Shares        |  |   | Amount      |  |   | Surplus    |  |   | To issue shares |  |   | Subscription |   |  | Deficit      |  
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Balance, December 31, 2003         |  | 66,762,214    |  | $ | 2,738,402   |  | $ | -          |  | $ | -               |  | $ | 77,490       |   |  | ( $2,910,886 | )
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Cancellation of share subscription |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | ( 77,490     | ) |  | -            |  
|Private placements                 |  | 1,600,000     |  |   | 86,321      |  |   | 420,430    |  |   | -               |  |   | -            |   |  | -            |  
|Exercise of warrants               |  | 2,953,333     |  |   | 807,167     |  |   | -          |  |   | -               |  |   | -            |   |  | -            |  
|Settlement of debt                 |  | 595,755       |  |   | 5,123       |  |   | 110,668    |  |   | -               |  |   | -            |   |  | -            |  
|Issued for services                |  | 1,883,958     |  |   | 476,992     |  |   | -          |  |   | -               |  |   | -            |   |  | -            |  
|Share subscription receivable      |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | ( 92,900     | ) |  | -            |  
|Commitment to Issue Shares         |  | -             |  |   | -           |  |   | -          |  |   | 16,149          |  |   | -            |   |  | -            |  
|Debt assumed by a shareholder      |  |               |  |   |             |  |   | 46,379     |  |   | -               |  |   |              |   |  |              |  
|Fair value of stock options        |  | -             |  |   | -           |  |   | 602,965    |  |   | -               |  |   | -            |   |  | -            |  
|Net loss                           |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | -            |   |  | ( 2,061,451  | )
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Balance, December 31, 2004         |  | 73,795,260    |  |   | 4,114,005   |  |   | 1,180,442  |  |   | 16,149          |  |   | ( 92,900     | ) |  | ( 4,972,337  | )
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Private placements                 |  | 750,000       |  |   | 175,053     |  |   | 64,947     |  |   | -               |  |   | -            |   |  | -            |  
|Exercise of warrants               |  | 1,000,000     |  |   | 400,000     |  |   | -          |  |   | -               |  |   | -            |   |  | -            |  
|Settlement of debt                 |  | 479,857       |  |   | 269,826     |  |   | -          |  |   | -               |  |   | -            |   |  | -            |  
|Issued for services                |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | -            |   |  | -            |  
|Fair value of stock options        |  | -             |  |   | -           |  |   | 166,968    |  |   | -               |  |   | -            |   |  | -            |  
|Share subscription receivable*     |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | 92,900       |   |  | -            |  
|Net loss                           |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | -            |   |  | ( 1,149,487  | )
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Balance, December 31, 2005         |  | 76,025,117    |  |   | 4,958,884   |  |   | 1,412,357  |  |   | 16,149          |  |   | -            |   |  | ( 6,121,824  | )
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Net Loss                           |  | -             |  |   | -           |  |   | -          |  |   | -               |  |   | -            |   |  | 1,074,349    |  
|                                   |  |               |  |   |             |  |   |            |  |   |                 |  |   |              |   |  |              |  
|Balance December 31, 2006          |  | 76,025,117    |  | $ | 4,958,884   |  | $ | 1,412,357  |  | $ | 16,149          |  | $ | - _          |   |  | ( $7,196,173 | )

Page 18

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- 61 -

|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 2002(2)12.2
    Certification of Chief Financial
          Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)13.1
    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 2002(2)13.2
    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(2)


|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Filed as an exhibit to this Annual Report on Form 20-F
      for the fiscal year ended December 31, 2006.                                                                                                           

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- 62 -

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.      | 
|----------------------- | 
|                        | 
|                        | 
|/s/ Robert
      Wyllie | 
|ROBERT WYLLIE           | 
|Chief Financial Officer | 
|                        | 
|                        | 
|                        | 
|DATED: July 16, 2007    | 

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