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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

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

For the fiscal year ended **June 30,
2006**

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

For the transition period from ___________to ___________.

Commission file number **0-30927**

GARUDA CAPITAL CORP.(Exact
name of registrant as specified in its charter)

|NEVADA                                        | 980209053                           
|--------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.)
|of Organization)                              |                                     
|                                              |                                     
|502-1978 Vine Street, Vancouver, BC           | V6K 4S1                             
|(Address of principal executive offices)      | (ZIP Code)                          

604.737.0203(Registrants telephone
number, including area code)

|Securities registered pursuant to Section |                                
|----------------------------------------- | -------------------------------
|12(b) of the Act                          |                                
|None                                      | None                           
|(Title of Class)                          | (Name of each exchange on which
|                                          | registered)                    
|                                          |                                
|Securities registered pursuant to Section | Common Shares                  
|12(g) of the Act:                         | (Title of Class)               
|                                          |                                

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

Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form-10KSB or any amendment to Form 10-KSB. [   ]

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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [   ]
No [X]

Issuers revenues for its most recent fiscal year:
$768,863

Aggregate market value of the voting stock of the registrant
held by non-affiliates of the |registrant at September 19, 2006 (computed by
reference to average of the bid and asked price on the NASD OTC Bulletin
Board of the common shares on such date): $2,777,572

Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by a court. Yes
[   ] **No [X]**

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Number of common shares outstanding at November 10, 2006:
63,255,207

ii

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TABLE OF CONTENTS

|Part I   |         |                                                                                                                      
|-------- | ------- | ---------------------------------------------------------------------------------------------------------------------
|         |         |                                                                                                                      
|         | Item 1  | Description of Business                                                                                              
|         | Item 2  | Description of Property                                                                                              
|         | Item 3  | Legal Proceedings                                                                                                    
|         | Item 4  | Submission of Matters to a Vote of Security Holders                                                                  
|         |         |                                                                                                                      
|         |         |                                                                                                                      
|Part II  |         |                                                                                                                      
|         |         |                                                                                                                      
|         | Item 5  | Market for Common Equity and Related Stockholder Matters                                                             
|         | Item 6  | Managements Discussion and Analysis or Plan of Operation                                                            
|         | Item 7  | Financial Statements                                                                                                 
|         | Item 8  | Changes In and Disagreements with Accountants on Accounting
      and Financial Disclosure                           
|         | Item 8A | Controls and Procedures                                                                                              
|         | Item 8B | Other Information                                                                                                    
|         |         |                                                                                                                      
|         |         |                                                                                                                      
|PART III |         |                                                                                                                      
|         |         |                                                                                                                      
|         | Item 9  | Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of the Exchange Act
|         | Item 10 | Executive Compensation                                                                                               
|         | Item 11 | Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters                 
|         | Item 12 | Certain Relationships and Related Transactions                                                                       
|         | Item 13 | Exhibits                                                                                                             
|         | Item 14 | Principal Accountant Fees and Services                                                                               

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PART I

Item 1. Description of Business.

Cautionary Statement

Certain statements contained in this Annual Report on Form
10-KSB, including, without limitation, statements containing the words
believes, anticipates, estimates, expects, and words of similar import,
constitute forward-looking statements. Readers should not place undue reliance
on these forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including risks described in this Report, including the Risk Factors section
beginning on page 14, and the other documents we file with the United States
Securities and Exchange Commission (SEC).

Currency

All currency references in this Report are in US dollars unless
otherwise noted.

Introduction

We are Garuda Capital Corp. (Garuda, the Company we,
our, us), and are based in Vancouver, British Columbia, Canada. We have
seven wholly-owned subsidiaries, Hagensborg Foods Ltd. (Hagensborg),
Hagensborg Seafoods Ltd., Natural Program Inc. (Natural Program), Natural
Program Ltd., Garuda Gold Corporation, Garuda Minerals Inc. and Garuda
Exploration Inc., which changed its name from Garuda Ventures Canada Inc. to
Garuda Exploration Inc. on September 20, 2006 (Garuda Exploration). We have
recently acquired mining interests through Garuda Exploration. Garuda Gold and
Garuda Minerals are currently inactive.

Hagensborg is in the business of manufacturing and marketing
gourmet foods. Through Hagensborg we manufacture and market both branded and
private label chocolates as well as seafood pâtés and we serve wholesale and
retail customers both in Canada and the US. All products are directly shipped
from our warehouse in Vancouver, British Columbia, Canada.

Natural Program is in the business of developing and marketing
herbal remedies. Through Natural Program we operate a Chinese herbal pharmacy to
dispense high quality Chinese herbs to practitioners and market a wholesale line
of herbal remedies under the Natural Program name.

Natural Programs main assets are its proprietary formulations
which are developed in-house. See the section titled Natural Program Inc. on
page 7 for a complete description of Natural Programs history and business.

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HAGENSBORG FOODS LTD.

Through our subsidiary Hagensborg, we are in the business of
manufacturing and marketing gourmet chocolates and other gourmet foods.
Hagensborg has created a new fairyland marketing and promotional concept, and
has re-packaged its entire product line using this new fairyland theme. All of
Hagensborgs sales personnel have adopted the title of Chocolate Princess. We
market the gourmet chocolate products to high-end departmental and specialty
stores throughout North America. The gourmet food products are also targeted to
specialty stores and to mass market retailers. Hagensborg produces two main
product categories, namely confectionary and seafood pâtés. These products are
sold under the Hagensborg brand name as well as private labels for various
customers. Confectionary products currently constitute 85% of Hagensborgs total
revenue while seafood pâtés generate approximately 15% of revenues.

Products of Hagensborg - Chocolate Division

We manufacture and market both branded and private label
chocolates. The two main Hagensborg chocolate brands are the Truffle Pig Bar
and the Kiss Me truffle frogs. Our main private label customers for
confectionary products are Safeway, Future Fundraising and Nikka Traders.

Kiss Me is a European chocolate truffle in the shape of a frog
with a velvety truffle centre. The product is marketed in two different size
gift boxes (a 1.16oz box and a 3.5oz box). The target market for Kiss Me
truffles consists of upscale gift box chocolate consumers, both male and female,
between 25 and 65 years of age, with medium to higher household incomes. We
launched this product in July of 2005.

The Truffle Pig bars are manufactured in six flavors: Orange,
Mint, Mocha, Peanut Butter, Milk Chocolate and Raspberry Chocolate. They are
marketed as all natural, non-hydrogenated single bars. The target market of this
product is the indulgent chocolate consumer. Men, between the ages of 25 and 44,
in the mid to higher income bracket, are the largest consumers of the bars.

In the short term, Hagensborg will be introducing two new
chocolate products. One such new product is the Polar Bar. The Polar Bar is
currently on the market as a private label product called the Peaks bar. In
the long term, Hagensborg plans on developing the Robin Hood bar. The Robin Hood
bar will be specifically designed to be sold through charities for the benefit
of social causes.

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Products of Hagensborg  Seafood Division

Hagensborg seafood pâtés are marketed in six flavors: smoked
salmon, salmon, shrimp, rainbow trout with dill, crab and lobster. The products
are packed in 3-oz tins and are sold either individually or inside a decorative
retail box. Hagensborg owns the proprietary recipes, which are produced on a
contract basis by St. Jeans cannery in Nanaimo, B.C. Hagensborg will continue to
increase product skews through outsourcing product lines from other producers as
well as developing new products in-house. Hagensborg plans on introducing new
skews on a regular basis, approximately every 6 months. Hagensborg is planning
on expanding its line of high quality pâtés by introducing various canned fish
products. This expansion will allow Hagensborg to appeal to the growing market
of health conscious consumers.

Market

Gourmet foods consumption is affected by many factors
including: climate, purchasers disposable income, economic development,
distribution and marketing. Since chocolates have a limited shelf life, and our
plant is located in Vancouver, British Columbia, we are limited in the areas
that we can market our product. Because of this, and the fact that developed
nations generally have higher levels of gourmet food consumption in comparison
to developing or emerging nations, we have limited where we market our products
to North America.

A number of socio-economic forces have contributed to the
continuing growth of the confectionary market. Such factors include: a demand
for good tasting food, a growing preference for attractive foods, a continuing
demand for more variety and a need for self-indulgence. As a result, both the
Canadian and U.S confectionary market has experienced steady growth.

Competition

Hagensborg can be considered a niche marketer of specialty food
products. Our competition consists of Canadian and US based manufacturers and
marketers of gourmet confectionary products and canned seafood pâtés.
Competition is based upon brand recognition, taste and cost. Many of our
competitors are enjoying a greater portion of market share as they have greater
resources and brand recognition.

Marketing Trends

Increasingly health conscious shoppers look for high
quality, health-friendly products

This trend is largely a response to the general increase in
health consciousness of both the aging baby-boomers and their descendants.
Hagensborgs no-sugar added, all natural chocolates and all natural seafood
pâtés are marketed to this growing segment.

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Small packages encourage impulse offerings

Specialty foods marketers are making their products easier to
purchase by selling them individually wrapped, or in small packages suitable for
placement at the register. To this end, we have developed three piece Kiss Me
truffle packages and the Truffle Pig bars.

Marketing

Trade Shows

Trade shows are a key forum for meetings with brokers, retail
buyers and distributors. Hagensborg is represented at two Fancy Food Shows per
year (January in San Francisco, July in New York), and Gift shows in Seattle and
Vancouver. In addition, Hagensborg attends distributor shows such as the
Consolidated Foods shows for their customers held two times per year.

Magazine Editorials and Television Broadcasts

Hagensborg will continue to pursue both print and television
media exposure. Hagensborg has been published in magazines such as Chocolatier
magazine (June 2006), In Style and is currently in contact with Martha Stewart
Living, Elle and Country Living magazines. In addition to magazine editorials,
Hagensborg has been published by The San Francisco Chronicle and The Vancouver
Sun. Hagensborg has been presented on CBC Television in January 2006.

Sales Manager Contacts

Hagensborgs Sales Managers have been developing contacts with
distributors, brokers and major retailers (Safeway, Overwaitea, Neiman Marcus
and Whole Foods in particular), working with them to place products in their
permanent displays, provide promotional support and ensure supply. To widen
distribution of Hagensborgs products through the larger retailers means gaining
head office approval then working with each regional division to gain placement
in stores.

Product Information

Hagensborgs Marketing has developed selling presentations for
each product/brand, including market information and key selling points. As well
as using it for customer meetings, Sales Managers provide this information to
brokers who work on Hagensborgs behalf to ensure they have a strong selling
story. This is part of the sales effort to ensure Hagensborgs brokers and
distributors are educated about Hagensborgs products and can work effectively
with potential customers. Retailers are inundated with new products and
merchandise to choose from. Providing competitive arguments in a category
context makes it easier for them to choose Hagensborgs products.

Website

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The Hagensborg website address appears on packaging and printed
materials. The site gives details of all products, retail locations to purchase,
company and contact information for customers, retailers and distributors. This
is a useful tool for advertising, promotion, educating and in the future, the
possibility of ordering for all types of customers. The site is monitored and
updated regularly with focus on search engine optimization.

Market Penetration

In 2006 we began our efforts to distribute our products to a
higher end consumer by marketing our products to upscale retailers at North
America gourmet food products trade shows. As a result of our attendance at
these trade shows, we generated several leads and we are currently in
negotiations with several chain retail stores to distribute our product. If
these negotiations are successful, we expect to achieve sales increases by
Spring 2007.

Hagensborg consistently strives for excellence in our product
packaging. Our packaging has been redesigned which has resulted in our pâté
packaging being recognized through an industry award. In order to develop the
best packaging possible, Hagensborg works closely with the English design firm
of Turner Duckworth, the same firm that designs for Virgin, Palm Pilot, Coca
Cola and Amazon.com. Turner Duckworth is the winner of thirteen Clio Awards.
Hagensborg offers more attractive packaging concepts such as its Kiss Me truffle
frogs and Truffle pig chocolate bars. In addition, Hagensborg offers different
varieties of chocolates by working with both Callebaut and Schokinag Chocolate
suppliers.

Hagensborgs main competitive distinction over other seafood
producers is the fact that Hagensborgs pâtés are all natural, with no added
fillers. A key characteristic of Hagensborg is that we use high-quality, all
natural ingredients.

We sell products directly to consumers and to a variety of
distributor/resellers. Distributor/resellers purchase the product at a 25%
discount and resell the products to their consumer base.

Market Expansion

Broadening our distribution base, including finding new markets
for existing products, is another strategy we plan to apply in order to expand
our business. Although it involves more risk than sole market penetration,
developing new markets has a greater potential for revenue generation.

We are currently developing a variety of concepts to attract
new markets for our existing products. We are also pursuing a variety of private
label opportunities to add to our bottom line by manufacturing for large,
national retail chains.

One of the most significant distribution developments in 2006
has been the addition of the Bayside Food Group to our list of distributors. The
Bayside Food Group is directly responsible for our largest new account for 2006
 Whole Foods Grocery chain. Whole Foods Grocery chain has over 186 retail
locations.

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Reliance on Major Customer

During the year ended June 30, 2006, Garuda recognized revenue
from three unrelated entities, Safeway, Future Fundraising and Nikka Traders,
which together comprised approximately 47% of total revenues. These revenues
were for private label chocolate products which we manufactured in our factory,
under the brands of our customers (Eg. Safeway Select). Revenue recognized from
these three entities was 47% in 2006, compared to 36% in 2005.

Research

During the last year, we redesigned the packaging for our
gourmet chocolate products so that they would appeal to a different type of
purchaser, namely chocolate connoisseurs who we thought would pay a premium
price for high quality chocolates. We obtained information on who was spending
money on purchasing high quality chocolates by researching where high end
chocolate products were being sold. We sent marketing personnel to those stores
that were carrying high end chocolates and we conducted market surveys within
those stores regarding the type of people who shopped there, what kind of
chocolates they were likely to purchase, at what price and in what quantity. We
conducted this research in New York, San Francisco, Vancouver, and Toronto. Our
research revealed that persons between the ages of 25  65, with medium to high
incomes, were most likely to become purchasers of our chocolates. During the
past year, we also obtained and reviewed market research reports which described
regional areas of chocolate sales and types and prices of chocolates sold.

Product/Market Development

The development of new products for new markets is the most
cost-intensive, high-risk method for growth within the specialty food industry.
However, the risk can be minimized by acquiring existing businesses with
products complementary to our Hagensborg line of products. The advantage of
acquiring existing companies with established products is the development cost
savings and reduced time to market. Product development will focus on the
introduction of the Polar Bar and co-packing panned chocolates.

Other Projects

In addition to the product/market-related strategies discussed
above we are currently evaluating the automation of production facilities and
new manufacturing equipment to decrease the cost of production and thereby offer
more competitive pricing.

Stated Business Objectives

Market existing products

Our strategic focus for the next 12 months will be developing
and marketing our existing proprietary brands and private label business in
Canada and the US.

Expand distribution to increase volumes

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In order to take advantage of economies of scale, we are
seeking to expand our national distribution in Canada and the US over the course
of the next 12 months. This will be achieved by selecting a pick and pack
logistics company in the US to service our smaller customers and brokers that
specialize in servicing the department stores, specialty stores, gift basket
suppliers and health food chains. We plan to develop sales channels for the club
and private label business and by hiring key sales personnel.

Our first priority will be the expansion of distribution. To
sustain growth over the long term, we intend to generate a continuing flow of
distinctively different, new products through in-house product development and
by way of acquisitions. We plan to market these new products on a North America
wide basis.

With the continued success of Hagensborg and increasing market
demand, we plan to continue expanding sales throughout North America, with a
medium term plan to expand into the European and Japanese markets. New client
accounts secured so far in 2006 include Shoppers Drug Mart (925 locations),
Whole Foods (186 locations) and Wild Oats (110 locations, which includes
Vancouvers popular Capers Markets).

NATURAL PROGRAM INC.

We have a wholly-owned subsidiary, Natural Program, Inc., which
was incorporated as a Nevada company on July 7, 2000 (Natural Program).
Natural Program also has a wholly owned subsidiary, Natural Program Ltd.,
through which it carries on business in British Columbia. Natural Program is in
the business of developing and distributing herbal remedies. Through Natural
Program, we operate a Chinese herbal pharmacy to dispense Chinese herbs to
practitioners and we market a wholesale line of herbal remedies under the
Natural Program name. Natural Program makes prescription formulas for
practitioners of traditional Chinese medicine. Our clients are registered
practitioners predominantly in British Columbia. Prescriptions are made up on
the premises and patients then pick up these formulas from the West Broadway
location in Vancouver. The products are all manufactured to Good Manufacturing
Practices standards and are free of additives and heavy metals.

Products and Services

Our product line includes the Rescue Line and Travel Line. Our
herbal line is imported from Taiwan. The Rescue Line currently consists of five
products: Memory, Sleep, Headache, Stress and Energy Rescue. The first product
of our new Travel Line is Thrombosin. The remedies are marketed as improving the
quality of day-to-day life and offering solutions for common health problems. No
independent studies have been performed to evaluate the effectiveness of the
formulations.

Stress Rescue

Designed to offer immediate relief of stress, trauma and shock,
our Stress Rescue formula is marketed for use in times of emergency, as a
restorative tonic, or as a preventative measure. We believe Stress Rescue helps
the body adapt to increased demands and is particularly useful in preventing
anxiety attacks, relieving fatigue and easing tension and pain.

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Energy Rescue

Energy Rescue is a caffeine-free, herbal formulation used to
increase endurance, improve athletic performance, restore sexual vitality and
invigorate the body and mind. Energy Rescue can also be used to alleviate the
effects of jet lag, nervous exhaustion, Chronic Fatigue Syndrome and is designed
to help restore the body in cases of depression and physical weakness.

Sleep Rescue

Sleep Rescue is designed to promote a deep, relaxing and
revitalizing sleep. We believe Sleep Rescue reduces evening restlessness,
restores the nervous system and relieves anxiety, tension and sleeplessness
without habit forming or addictive properties.

Headache Rescue

Headache Rescue is intended to alleviate headaches and
migraines caused by various factors through its anti-inflammatory and pain
relieving properties. We believe Headache Rescue helps to relax muscular
tension, promotes rapid recovery, and can be used as a preventative measure.

Memory Rescue

Formulated to enhance memory and concentration, Memory Rescue
is marketed as an enhancement to cognitive function and mental abilities. It
also claims to counteract mental dullness and depression.

Thrombosin

Thrombosin is an herbal formula which we believe helps prevent
the formation of blood clots as a result of lack of circulation. The formation
of blood clots, or deep-vein thrombosis (DVT), has been dubbed economy class
syndrome because it results from long hours of minimal movement suffered
especially, but not exclusively, by air travel passengers on long-haul flights.
Taken several days before and after flying, Thrombosin is intended to help the
prevention of blood clots.

Herbal Laboratories

In addition to the wholesale product lines described above,
Natural Program has a division which operates as a Chinese herbal pharmacy
called Natural Program Herbal Laboratories. Natural Program Herbal Laboratories
dispenses Chinese herbal extracts including traditional Chinese herbal formulas,
custom herbal formulas and single herbal extracts in granulated form.
Practitioners of traditional Chinese medicine prescribe herbal formulas just
like traditional physicians prescribe medications. Patients of Chinese medical
practitioners drop off their prescriptions at the Natural Program laboratory
where the formulations are mixed by professional herbalists. As an incentive for
practitioners to refer their patients to Natural Program, they receive a
commission related to the value of the herbs sold.

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We carry over 400 single Chinese herbal extracts and more than
350 of the most commonly used formulas. Both are packed in 50g and 100g bottles
and may be special ordered in larger quantities.

Distribution

Natural Programs products are currently distributed through
direct sales to natural health food stores and pharmacies on a test market basis
in Vancouver, British Columbia. We hope to expand our distribution to the rest
of Canada, the US and ultimately Europe and hope to include general grocery and
mass food chains. To accomplish this, Natural Program is identifying specialized
distributors for each of its geographical markets. To date we do not have any
agreements with any distributors located outside of British Columbia, Canada.

In order to support retail sales, we provide product
information and educational seminars to sales personnel in order to enable them
to effectively sell our products. We also provide point of purchase displays and
informational brochures for end-consumers. In the future, we intend to advertise
in trade publications and attend industry trade shows.

Competition

The herbal products market is currently dominated by
traditional, grass-roots products sold as raw herbs which require preparation
such as drying or boiling. The market is underserved by professional products
which are safe, easy to use and effective. This is mainly due to the complex
regulatory environment and the start-up capital requirements for developing and
dispensing herbal remedies.

As a manufacturer and wholesaler of herbal remedies, Natural
Program competes with manufacturers of natural medicine products. Other
competition includes allopathic pharmaceutical drug companies and natural
therapists who supply professional lines of natural health products.

Most competitors can be categorized into the following three
groups:

- Small to medium sized Chinese herbal dispensaries that fill custom formula
  prescriptions through direct sales and over the Internet.
- Medium sized manufacturers of Western herbal remedies, minerals, vitamins,
  etc.
- Large pharmaceutical drug companies who offer natural remedies in addition
  to traditional drugs.

Our focus is to capture the segments of the markets which do
not buy from large corporations but prefer smaller, specialized providers. We
are also targeting people in today's health-conscious marketplace that prefer to
prevent and treat illness with natural remedies as part of a holistic approach
to health and well-being, instead of taking chemically prepared medications with
unwanted side effects.

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Governmental Regulations

The Food and Drug Administration in the US currently requires
that manufacturers, processors and packagers of food, drugs, medical equipment
and blood follow Good Manufacturing Practices (GMP). GMP is a regulatory
process that was implemented for consumer protection. It ensures that all
aspects of the business are monitored, allowing consumers to feel confident that
the products they receive are safe, pure and effective. Some of the aspects
involved in the GMP regulatory process are sanitation, cleanliness, personnel
qualifications and recordkeeping. These procedures are followed on a daily
basis. GMP protects consumers against weak or super potent products,
contamination, inconsistency in appearance, improper packaging and mislabeling.
Dietary supplements are not yet required, by law, to follow GMP practices.
However, GMP regulations should soon apply to dietary supplements. Natural
Program already abides by these requirements and can therefore ensure customers
of the high quality and purity of the products it delivers.

As of January 1, 2004 the Natural Health Products Directorate
has become the regulating body for natural health products (NHP) in Canada.
Previous regulations were defined by the Food and Drug Regulations. The new
regulations will affect manufacturers, distributors, importers, labelers and
packagers of NHP. The new regulations require that all NHP have a product
license in order to be sold pre-packaged and in open selection areas. Locations
which are involved in the production, distribution, importation and sale of NHP
will be required to hold a site license and comply with using GMP. Companies
which import goods from foreign sites must also provide evidence showing that
the imported products meet GMP standards. GMP must be created, implemented and
regulated by a qualified Quality Assurance officer.

The transition period for site license compliance applies only
to companies which have an establishment license (which Natural Program has
already obtained) and have been conducting business before January 1, 2004.
Sites with a valid establishment license must be compliant with site license and
GMP requirements by January 1, 2006. Sites without a valid Establishment License
must have been compliant by January 1, 2004.

All NHP that are pre-packed, and not sold by prescription will
require a product license and in turn a NHP number. The purpose of this license
is to provide standards of evidence for the quality of the NHP purchased. The
Natural Health Products Directorate has provided clearly defined criteria to
evaluate each product type. Each product sold by a company must go through the
application process. There are different submission types for products. These
include Compendial and Non-Compendial. The Compendial submission refers to an
application for which a monograph is available. There will be a compilation of
over 100 monographs of common NHP for reference.

Non-Compendial describes an application in which a full review
is required. Some of the general requirements for an application include: a
completed product license application form, proposed label text, quality summary
report and evidence of safety and efficiency. Once all product information has
been gathered and sent to the Natural Health Products Directorate, the product
will be reviewed. If quality, purity and safety can be demonstrated, a product
license will be submitted.

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Health Canada has instituted a transitional period to help all
parties affected by the new regulations to work towards a full understanding of
the requirements for compliance. The transition periods apply to NHP with and
without drug identification numbers (DIN). A NHP with a DIN will have until
December 31, 2009 to obtain a NHP number. A NHP without a DIN will have until
December 31, 2007. Any new NHP introduced to the market after January 1, 2004
must have a NHP number and therefore a product license.

Natural Program will require a site license, will need to be
GMP compliant and will require product licenses for its Rescue Line. However,
Natural Program also qualifies for the transition period which means that the
product license will not be required until December 31, 2007. A site license and
GMP compliance are required by January 2006.

Sources of Raw Materials

Our main Natural Program assets are our proprietary
formulations for our liquid herbal remedies which have been developed in-house.
Both our herbal extracts and raw materials for our liquid herbal remedies come
from international sources. We outsource the manufacturing of our products to
specialized providers who comply with GMP standards.

Mining Interests

Garuda has two wholly owned subsidiaries incorporated for the
purpose of pursuing opportunities in the mining business. These are Garuda Gold
Corporation (Garuda Gold), a company incorporated in British Columbia on June
3, 2002 and Garuda Minerals Inc. (Garuda Minerals), a Nevada company
incorporated on May 6, 2005. Also, Garuda Exploration is now involved in mining
activities.

On May 18, 2005, Garuda Minerals entered into a binding letter
of intent with Newhaven Resources Ltd. (Newhaven) and Aquarian Gold
Corporation (Aquarian) and obtained an option to acquire a 65% interest in an
exploration license in the form of an Environmental Permit for Mineral
Exploration on an area of approximately 200 km2located near the town
of Ho, in the Volta region of Ghana (the Ho Property).

On May 18, 2005, Garuda Gold entered into an agreement with
Newhaven and Aquarian whereby Garuda Gold obtained an option to acquire a 65%
interest in the contract mining of an open pit property with an exposed vein
system in a property in Prestia, Ghana (the Prestia Property).

Garuda Minerals and Garuda Gold had elected not to exercise
their options on the Prestia Property and the Ho Property. Both letters of
intent with Newhaven expired on May 18, 2006. We no longer have any rights in
the Ho Property or the Prestia Property.

On June 26, 2006, Garudas subsidiary, Garuda Exploration,
under its former name, Garuda Ventures Canada Inc., entered into an agreement
with Xemplar Energy Corp. (Xemplar), to acquire a 70% interest in a Corhill
uranium-gold-platinum prospective property located in the Northwest Territories.
The Corhill property is comprised of 18 mineral claims and covers 30,628 acres.
The agreement provides for Garuda Exploration to make a cash payment of
approximately $45,000, issue 2,000,000 restricted common shares of Garuda and
incur expenditures of approximately

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$1,350,000 over 3 years. The property is subject to a 2% net
smelter return royalty. We currently do not have available funds to pay the
$45,000 required to exercise our rights pursuant to this agreement. We are
trying to raise capital to fund our mining operations, including the payments to
exercise our option on the Corhill property. If we are unsuccessful in raising
additional capital, we will lose our option and our business may fail.

The Corhill Property (the Property) consists of 18 contiguous
mineral claims in the north of the east-end of Great Bear Lake, 430 km northwest
of Yellowknife, Northwest Territories, 80 km north of Port Radium. More
information on the Corhill property is contained in our section entitled
Description of Property, beginning on page 19 of this report.

Government Regulations

Our current and future exploration and development activities,
as well as our future mining and processing operations, are subject to various
federal, state and local laws and regulations in the countries in which we
conduct our activities. These laws and regulations govern the protection of the
environment, prospecting, development, production, taxes, labor standards,
occupational health, mine safety, toxic substances and other matters. We expect
to be able to comply with those laws and do not believe that compliance will
have a material adverse effect on our competitive position. We have obtained,
and intend to obtain all licenses and permits required by all applicable
regulatory agencies in connection with our exploration activities and any mining
operations we carry out. We intend to maintain standards of environmental
compliance consistent with regulatory requirements. We have obtained, and will
obtain at the appropriate time, environmental permits, licenses or approvals
required for our operations.

Employees

Our employees are engaged as follows:

Administration/ Accounting
    Sales/ Marketing
    Production/ Operations
    TotalGaruda Capital Corp.
    1
    -
    -
    1Hagensborg Foods Ltd.
    3
    3
    14
    20Natural Program Inc.
    2
    2
    2
    6Mining Interests
    0
    0
    0
    0


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Critical Accounting Policies

Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the US.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to customer
programs and incentives, bad debts, inventories, investments, intangible assets,
income taxes, warranty obligations, impairment or disposal of long-lived assets,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

We consider the following accounting policies to be both those
most important to the portrayal of our financial condition and that require the
most subjective judgment:

- Revenue recognition
- Impairment or disposal of long-lived assets
- Inventory valuation and related reserves
- Accounting for marketable securities
- Stock-based compensation

Revenue recognition

We ship our products by common carrier and also sell products
through brokers, distributors and directly to specialty stores. We receive our
product sales price in the form of cash, credit card or on approved terms. Sales
revenue and related discounts or volume incentives are recorded when the
products are in the hands of the common carrier. Our reserve on accounts
receivable takes into consideration future potential credits, if any, from the
sale of products to customers. We recognize revenue from sales when there is
persuasive evidence that an arrangement exists, products have been rendered, the
sellers price to the buyer is determinable, and collectibility is reasonably
assured.

Accounting for marketable securities

Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 115, our investments in marketable securities are considered as
available for sale.

Available for sale securities consist of debt and equity
securities not classified as trading securities or as securities to be held to
maturity. Unrealized holding gains and losses, net of tax, on securities
available for sale are reported as a net amount in a separate component of other
comprehensive income. When the investment is sold, the realized gain or loss is
reported as other income or expense on the income statement. Gains and losses on
the sale of securities available for sale are determined using the specific
identification method and are included in earnings.

13

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Impairment or disposal of long-lived assets

Long-lived assets are reviewed in accordance with SFAS No. 144.
Impairment or disposal of long-lived assets losses are recognized in the period
the impairment or disposal occurs. Long-lived assets are reduced to their
estimated fair value. Wereview long-lived assets, including amortizable
intangible assets, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. We perform undiscounted operating cash flow analyses to determine
if impairment exists. For purposes of recognition and measurement of impairment
for assets held for use, we group assets and liabilities at the lowest level for
which cash flows are separately identifiable. If impairment is determined to
exist, any related impairment loss is calculated based on fair value. Impairment
losses on assets to be disposed of, if any, are based on the estimated proceeds
to be received, less costs of disposal.

Inventory valuation and related reserves

Inventories are valued at the lower or average cost of net
realizable value. We use a standard cost system for purposes of determining cost
where standards are adjusted as necessary to ensure they approximate actual
costs. We write down or reserve for estimated obsolete or excess inventory based
upon assumptions about future demand and market conditions. We compare current
inventory levels on a product basis to our current sales forecast in order to
assess our inventory reserve balance. The sales forecasts are based on economic
conditions and trends (both current and projected), anticipated customer demand
and acceptance of our products, current products, expected future products and
various other assumptions. If actual market conditions are less favorable than
those projected by management, additional write-downs may be required.

Stock based compensation

Garuda accounts for stock issued for compensation in accordance
with Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees. Under this standard, compensation cost is the difference between
the fair market of the underlying stock and the exercise price of the option on
the grant date. In accordance with SFAS No. 123, Accounting for Stock Based
Compensation, we disclose the pro forma effects on net income and earnings
per share as if compensation had been measured using the fair value method.

RISK FACTORS

Set forth below and elsewhere in this report are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report.

Garuda Risk Factors

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Because our financial statements disclose a going concern
uncertainty, there is substantial uncertainty we will continue operations in
which case you could lose your investment.

Our financial statements disclose a going concern uncertainty.
This means that there is substantial doubt that we can continue as an ongoing
business for the next 12 months. The financial statements do not include any
adjustments that might result from the uncertainty about our ability to continue
our business. As such we may have to cease operations and you could lose your
entire investment.

We will need additional capital and this may result in
dilution of existing shareholders.

In order to carry out our business plans it is likely that we
will need additional capital. It is also likely that we will raise additional
capital by issuing additional equity securities. As a result, current
shareholders are likely to experience dilution. If adequate funds are not
available, or are not available on acceptable terms, we may not be able to carry
out our business plans. This would result in our continuing to be unprofitable
and could cause us to go out of business.

The price and trading volume of our common stock has been
highly volatile and could adversely affect an investors ability to sell the
shares and the available price for the shares when sold.

The price and trading volume of our common stock has been
highly volatile. The price range since September 2002 has been from $0.06 per
share to $0.71 per share. In addition, the daily trading volume has varied from
no shares to 1,200,000 shares. Investors need to consider this volatility, which
could result in lower prices being available to the investor if the investor
desires to sell their shares at a given time.

Our common stock may be classified as a penny stock
which could adversely affect an investors ability to sell their shares.

We believe that our common stock would be characterized as
penny stock under U.S. Securities and Exchange Commission regulations. As
such, broker-dealers dealing in our common stock will be subject to the
disclosure rules for transactions involving penny stocks, which require the
broker-dealer to determine if purchasing our common stock is suitable for a
particular investor. The broker-dealer must also obtain the written consent of
purchasers to purchase our common stock. The broker-dealer must also disclose
the best bid and offer prices available for our stock and the price at which the
broker-dealer last purchased or sold our common stock. These additional burdens
imposed upon broker-dealers may discourage them from effecting transactions in
our common stock, which could make it difficult for an investor to sell their
shares.

15

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We are dependent on our key personnel and may not be able
to easily replace such personnel.

Our success depends, to a significant extent, upon the efforts
and abilities of a small number of key management personnel. The loss of the
services of one or more of these individuals could adversely affect our
businesses. The particular areas of expertise we are dependent upon include
overall business planning and finance, the manufacture and marketing of gourmet
chocolates and foods and Chinese herbal medicine. Our success is also dependent
upon our ability to attract and retain qualified employees and personnel.
Competition for such personnel is intense and we may not be able to attract and
retain the personnel necessary for the development and operations of our
businesses. Our competition for qualified personnel may be hindered by our lack
of capital or fringe benefits which larger, more established competitors can
provide. We have no key man life insurance with respect to any of our key
management personnel.

We use Canadian currency and fluctuations in exchange
rates could adversely affect our sales and operations.

Much of our sales and supplies of raw materials are denominated
in foreign currencies, usually the Canadian dollar. Fluctuations in exchange
rates, i.e., between US and Canadian dollar as well as other currencies could
result in circumstances where our supplies and our products suddenly become more
expensive to us, or to consumers. This would adversely affect our costs, our
sales and our result of operations. Due to the recent fluctuations between
Canadian and US prices, our revenues from US customers have been affected
proportionately. While our cost of goods purchased in Canadian dollars and our
revenues from US sales have remained static, once the US funds are converted
into Canadian dollars, revenues have decreased due to the decreased value of the
US dollar.

The number of shares issuable upon exercise of
outstanding common stock purchase warrants and options may adversely affect the
market price for our shares.

As of October 6, 2006 we have outstanding warrants and options
to acquire up to 20,317,522 shares of common stock at prices between $0.10 per
share and $0.20 per share, including 3,200,000 shares registered on Form S-8.
Exercise of common stock purchase warrants and options could have an adverse
effect on the market for the shares due to the dilution that the exercise will
cause.

We do not anticipate paying dividends to shareholders in
the foreseeable future.

We have not paid dividends on our common shares and do not
intend to in the foreseeable future. Instead, we intend to invest any earnings
in the further development of our business. Accordingly, shareholders should not
expect to receive any dividends on their shares.

Hagensborg Risk Factors

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The business of our subsidiary, Hagensborg, is subject to a
number of risks due to the nature of its business and its present state of
development. Prospective purchasers should consider carefully, among other
factors set forth in this Report, the following:

Our new products will be competing against well
established chocolate and gourmet food companies.

Our chocolate and gourmet food products compete in markets
dominated by extremely large, well financed and internationally recognized
companies. Our ability to compete will depend upon developing brand recognition
and distribution methods. Our competitors already have well established brands
and distribution methods and many times our financial ability. Focused
competition by such giants could substantially limit our potential market and
ability to profit from these products. Such competition may result in reduced
sales, reduced margins or both. We do not currently have sufficient cash to
either develop or market our new products. We plan to raise additional capital
for developing and marketing our new products. However, there is no assurance
that we can acquire additional funding to carry out our plan. Failure to
successfully compete in the global chocolate and gourmet food industry with
well-established companies may result in our inability to continue with our
operations or prevent us from achieving significant revenues.

We may face product liability for the products we
manufacture and sell.

As a business which manufactures and markets products for use
by consumers, we may become liable for any damage caused by our products when
used in the manner intended. Any such claim of liability, whether meritorious or
not, could be time-consuming and result in costly litigation. Although we
maintain general liability insurance, our insurance may not cover potential
claims of the types described above or may not be adequate to indemnify us for
all liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could harm our
business.

We are a niche marketing business and can be greatly
affected by overall economic trends.

Hagensborg may be considered to be a niche marketer of gourmet
foods. Gross sales of gourmet foods are affected by the overall economic
environment which in turn governs consumer spending. As a result, downturns in
the overall economic environment could result in a decrease in demand for such
products and a reduction in both gross sales and margins of Hagensborg.

Our sales can be greatly affected by changes in consumer
tastes and preferences.

Consumer tastes in gourmet foods are inherently volatile.
Hagensborg is dependent upon its ability to gauge the taste of consumers and
provide products that satisfy that demand. Consumer tastes may change rapidly
and Hagensborg may not be able to market foods which consumers wish to purchase,
resulting in a significant reduction in sales and resultant revenues.

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Our ability to succeed is dependent upon our ability to
grow as well as our ability to manage growth.

The growth of Hagensborg is dependent to a significant degree
on its ability to expand the marketing and sales activity to generate additional
sales, and our ability to update and expand our product line. In the past two
years Hagensborg has introduced several new products. The financial performance
of Hagensborg is also dependent upon managements ability to successfully
administer the resulting expanded operations. Hagensborg may not be able to
increase its sales of existing products or develop and sell new products on a
profitable basis.

Natural Program Risk Factors

The business of Natural Program is subject to a number of risks
due to the nature of the business and its present state of development.
Prospective purchasers should consider carefully, among other factors set forth
in this Report, the following:

We may face product liability for the products we
manufacture and sell.

As a business that manufactures and markets products for use by
consumers, we may become liable for any damage caused by our products when used
in the manner intended. Any such claim of liability, whether meritorious or not,
could be time-consuming and result in costly litigation. Although we maintain
general liability insurance, our insurance may not cover potential claims of the
types described above or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.

We may become subject to government regulation of herbal
remedies, which could adversely affect our ability to sell our products.

The regulatory environment governing herbal remedies varies
from country to country and changes at an unpredictable rate. The success of
Natural Program is dependent to a significant degree on its ability to comply
with industry regulations for product labeling, testing, and the like. If
Natural Program is unsuccessful in identifying and complying with changing
industry regulations, there may be a material adverse effect on its results. The
Food and Drug Administration in the US currently requires that manufacturers,
processors and packagers of food, drugs, medical equipment and blood follow GMP.
As of January 1, 2004 the Natural Health Products Directorate became the
regulating body for NHP in Canada. Previous regulations were defined by the Food
and Drug Regulations. The new regulations will affect manufacturers,
distributors, importers, labelers and packagers of NHP.

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Item 2. Description of Property.

Our properties are as follows:

Garuda

Garudas head office is located at 1978 Vine Street, Suite 502,
Vancouver, British Columbia, V6K 4S1, Canada. Our head office is currently
located in the private residence of C. Robin Relph, President of Garuda. No
consideration is being paid to Mr. Relph for the use of space in his private
residence. A commercial office space will be leased in due course as needed.

Hagensborg

Hagensborgs head office is located at 1576 Rand Avenue,
Vancouver, British Columbia, V6P 3G2, and is 20,200 square feet in size. Until
March 31, 2006 the monthly lease amount was approximately $9,035. Commencing
April 1, 2006, the monthly lease amount was approximately $9,398. The lease
expires on March 31, 2007.

Natural Program

Natural Programs head office is located at 2245 West Broadway,
Suite 102, Vancouver, British Columbia, V6K 2E4, and is 765 square feet in size.
The monthly lease is approximately $1,260 and expires on February 28, 2007.

Mining Interests

Corhill Property

The Corhill Property (the Property) located approximately 312
miles NNW of Yellowknife and 90 miles SW of Kugluktuk (Coppermine, straddling
the Northwest Territories / Nunavut Territory border. Our rights in the Property
are subject to a 2% net smelter return (the Net Smelter Return).

The Property consists of 18 contiguous mineral claims centered
around 117o 00 west longitude and 66o 50 north latitude. These are shown,
together with acreage, ownership, and status, are shown on Table 1.

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Table 1:

Mineral Claim
    Tag #
    AcreageRAH 1
    F53535
    206.6RAH 2
    F53536
    206.6WET
    F53534
    206.6COR 1
    F92341
    1033COR 2
    F92342
    2582.5COR 3
    F92343
    1291.25COR 4
    F92344
    1394.55COR 5
    F92345
    2479.2COR 6
    F92346
    2582.5COR 7
    F92355
    2582.5COR 8
    F92348
    2582.5COR 9
    F92356
    1549.5COR 10
    F92350
    2582.5COR 11
    F92351
    1549.5COR 12
    F92352
    1549.5COR 13
    F92353
    2582.5COR 14
    F92354
    1084.65COR 15
    F92328
    2582.5TOTAL
    
    30628.45


Access, Local Resources, Infrastructure and Physiography

The Property is located north of the east-end of Great Bear
Lake, 430 km northwest of Yellowknife, NT, 80 km north of Port Radium. The
Property is located on Corhill Report, July 20, 2005 NTS map sheets 86K14 and
86K15 centered at 117o 00 west longitude and 66o 50north latitude.

Terrain is characterized by low rolling hills with occasional
abrupt topography. Trees are rare with low willow and scrub brush in protected
valleys or low areas. The Property straddles a drainage divide, with the Fault
River flowing westward to Great Bear Lake and the Bigtree River flowing eastward
toward the Coppermine River. Fauna is seasonally abundant with migrating
waterfowl and other birds, caribou and grizzly bears. Access is by float plane
from Yellowknife. Bulk materials have historically been trucked by winter road
up to Port Radium or by barge across Great Bear Lake from Deline. No winter road
hauls are currently active into Port Radium. A number of historic camp sites
from past exploration occur on the Property. The Property includes areas which
we refer to as the Hornby Bay Group, the McTavish Supergroup, and the Echo Bay
Formation.

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History

Exploration for radium, and subsequently uranium and silver
commenced in the Port Radium area of Great Bear Lake in the early 1930s
following the identification of secondary cobalt and nickel mineralization on
the east-side of the lake by the Geological Survey of Canada. Prospectors likely
followed the Fault River eastward from Hornby Bay around this time, although
there is limited recorded history of this work.

In the mid 1950s Canadian Nickel Co. conducted reconnaissance
exploration including the Corhill Property area, identifying small, tabular,
unconformity-related manganese deposits.

Commencing in the 1970s, many companies focused on the Hornby
Bay Group rocks while exploring for uranium deposits. Many occurrences were
identified in the sub-Hornby Bay Group rocks. Notably, Aquitaine discovered the
Pex and Yuk uranium occurrences within sandstone of the Hornby Bay Group rocks
at Dismal Lake. In the mid 1970s, a regional lake water geochemistry program by
Cominco Ltd. identified anomalous areas east of the Fault River which led to the
discovery of the RAH showings in 1976. Pitchblende and coffinite was identified
in veins and fractures and 19 km of the fault system were staked (Herring, B.G.
and Delpierre, M.E.R., 1977). Eight trenches totaling 29 lineal metres were
excavated exposing narrow hematite-stained veins and fractures up to 10 cm wide
within coarse-grained granites of the Great Bear Magmatic Zone. Pitchblende and
coffinite occurred over narrow intervals within these rocks.

In 1987, Aber Resources Ltd. restaked the area and conducted
  a regional prospecting program. Two hundred and fifty seven rock samples were
  selected covering a range of radioactive and non-radioactive outcrops with the
  intent to assess the precious metal potential of the claims. It was found that
  anomalous gold concentrations were associated with fractured McTavish Group
  rocks, quartz veins, or silicified, hematite or sulphide-altered rocks with
  some anomalous radioactivity.

Geology

Regional Geology

The Bear Structural Province is located on the western margin
of the Slave Structural Province, and is subdivided into three principal
terrains. The GBMZ includes the McTavish Supergroup of igneous and related
rocks, and three spatially, compositionally, or geometrically distinct
intrusions. The McTavish Supergroup is subdivided into the Sloan, and Labine
Groups, each of which is subdivided into 3 and 4 formations respectively. These
are further subdivided into members that can be isolated into distinct calderas,
3 to 5 km in diameter.

Intrusions range from subconcordant, subvolcanic sills and
laccoliths, to clearly discordant dykes and stocks. The earliest intrusions are
the Mystery Island Intrusive Suite, denoted G1m and consist of medium-grained
diorite, quartz monzonite, quartz syenite and granodiorite forming
semiconcordant sheets. G-2 intrusions include diorite, monzodiorites and quartz
monzonites whereas the G-3 intrusions include megacrystic granites and
granodiorites, forming larger, more regionally discordant plutons.

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The G1m monzonites are equigranular quartz-poor intrusions that
commonly have induced significant zoned alteration effects within their host
rocks. A bleached, albite-rich domain proximal to the intrusion progresses to a
magnetite actinolite apatite pods, breccias and dissemination through to an
outer zone of pyrite (marcasite) chalcopyrite.

The helikian Hornby Bay siliciclastic rocks unconformably
overly the aphebian McTavish Group igneous rocks with a shallow-dipping
unconformity surface. The rocks immediately underlying the unconformity surface
are deeply weathered and oxidized with prominent hematite development.

The Hornby Bay Group is comprised of 4 units. The lower-most
fluvial sandstone and conglomerate reveals a westward depositional trend. It is
dominated by a pink-weathering, hematite-stained cross-bedded to laminated
quartz-rich sandstone. This unit grades upwards through to a marine succession
including stromatolitic dolostone and minor mudstone layers. This unit in turn
grades upwards into a feldspathic quartz-rich sandstone and red and green
mudstones.

Numerous faults transect the area, most notably north to
northeast striking faults. These are considered to have dominantly pre-Hornby
Bay dextral strike-slip displacement with subsequent post-Hornby Bay dip-slip
movement. Extensive hematite alteration and unique Giant Quartz Veins bodies
of quartz that can be more than 20 metres wide and 20,000 metres in length
appear to be spatially-related to these late faults. The Giant Quartz Veins
contain crustiform to massive quartz, chlorite-hematite quartz breccias, and
significant uranium and copper mineralization. The Rayrock Mine at the south-end
of the Great Bear Magmatic Zone is a past-producer that exploited uranium
mineralization in a Giant Quartz Vein.

Property Geology

The Corhill Property is underlain by intermediate to felsic
rocks of the Echo Bay Formation of the McTavish Supergroup. It is intruded by
granitoid rocks and overlain by Hornby Bay Group sediments.

Early Proterozoic Rocks

The Echo Bay Formation rocks in the area are dominated by a
compositionally homogenous, massive, pink to red-weathering rhyodacite with
minor tuff and chert on the property. It is typically strongly fractured and
forms rubbley outcrops with hematite stained fracture surfaces.

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Late Proterozoic Rocks

The Hornby Bay Group is an unmetamorphosed fluviatile sequence
including quartz pebble and polymictic conglomerates, quartz sandstone, and
locally red arkosic sandstone, volcanic cobble conglomerates and thin basalt
flows. These lie unconformably overtop of the Early Proterozoic and intrusive
rocks with a shallowdipping surface, very close to todays surface. The
unconformity surface is characterized by pervasive hematite minor clay, and
local zones of silicification and manganese deposition. Local depressions, some
interpreted to be grabens are defined by linear development (040o to 060o
strike) of more intense alteration, plus the localization of arkose, and
increased volcanic component in the overlying Hornby Bay Group sediments.

Structure

The Fault River and the RAH Fault strike 040o to 060o and are
the principal structures on the Property. Numerous parallel faults occur,
including the structure associated with the Wet 24 occurrence.

Mineralization

A number of uranium and precious metal showings have been
identified on the property (see History). Two of these showings are of direct
interest, and by extension of the Athabaska-type uranium deposit, or
alternatively, iron oxide copper gold deposit models, additional areas of the
property warrant exploration.

Present Condition of the Property and Current State of
Exploration

The Corhill Property is in the early stage of exploration.

Mapping and sampling were carried out by Xemplar during 2005 on
the Corhill Property. This work included analyses for 257 samples. Rock samples
analyzed included graps, chips, and composite samples from closely spaced crops.
A total of 257 samples were analyzed by Acme Analytical Laboratories in
Vancouver on crushed and pulverized samples, using geochemical techniques and AA
finish. Platinum and palladium were analyzed on the same samples using ICP-MS
techniques.

Based on the results of this geological sampling, we plan to
complete a drilling program on the Corhill Property. Our plan of exploration for
the Corhill Property is as follows:

Description of Phase of Exploration
    Description of Exploration
      Work RequiredFirst Phase of Drilling:
    We have flown a helicopter in lines above the
      Property to measure conductivity and radioactivity, measuring up to 600 ft
      into the ground. We are now mapping and interpreting this geophysical
      information to determine where further ground sampling should occur.Second Phase of Drilling
    Once the evaluation of our
      initial geophysical data is complete, we will complete further sampling to
      see if we can develop a more detailed conclusion as to where the potential
      would lie, and help us identify a potential mineral deposit.


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The anticipated timetable and estimated budget for completion
if each stage of exploration is as follows:

Stage of Exploration
    Anticipated Timetable for
      Completion
    Estimated Cost of
      CompletionFirst Phase of Drilling
    October 31, 2006
    $150,000Second Phase of Drilling
    December 26, 2007
    $205,000


We anticipate that our exploration costs for Phase 1 and Phase
2 will consist of the following expenses:

Phase 1Description
    AmountAirborne Geophysics
    $100,000Travel and fuel
    $35,000Subtotal
    $135,000Contingency (15%)
    $15,000Total
    $150,000


Phase 2Geophysics
    $75,000Prospectors (2 x 30 days)
    $18,000Geologist (30 days)
    $15,000Geochemistry (orientation survey only)
    $10,000Trench (digging trenches) (10 days)
    $5,000Assay (lab tests) (500 samples x $20)
    $10,000Field travel
    $28,000Food and field supplies
    $12,000Travel and Accommodation (geologist)
    $2,000Final Report and Drafting (15 days)
    $10,000Subtotal
    $185,000.00Contingency (15%)
    $20,000Total
    $205,000


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We are required to spend approximately $270,000 by December 26,
2006, in order to maintain our option to acquire a 70% interest in the Corhill
Property (subject to the 2% net smelter royalty). If we carry out our
exploration program and spend $355,000 by December 26, 2006 as we plan, then we
will meet the requirements for our required exploration expenses for the first
six months. After that we will still have to spend, in addition to the $270,000,
approximately $450,000 by June 26, 2007 and $630,000 by June 26, 2008. We need
to raise financing in order to complete Phase 1 and 2 of our exploration program
and subsequent payments to maintain and exercise our option on the Corhill
Property. We plan to raise money by seeking private placements from existing
shareholders and other investors known to us. There is no guarantee that we will
be able to obtain any financing. If we do not obtain adequate capital, we will
not be able to carry out our exploration program and we will lose all of our
rights to acquire the Corhill Property.

Item 3. Legal Proceedings.

On April 12, 2006, Leone International Marketing Inc. (the
"Claimant") filed a claim in the Supreme Court of British Columbia against
Garudas wholly owned subsidiary, Hagensborg Foods Ltd. claiming that
Hagensborgs use of the name Leone to sell its chocolates infringes its
trademark rights, causing damages. The Claimant is seeking:

- An injunction restraining Hagensborg from using the name Leone and the
  stylized lion logo to sell its products and services;
- Damages for trademark infringement;
- An accounting of Hagensborgs profits; and
- Costs and interest.

Hagensborg intends to defend the claim and believes it has a
strong chance of success of defending the claim. No court date has yet been set
and Garuda estimates that its upper estimate for damages pursuant to this claim
is approximately $18,000

There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial shareholders are an
adverse party or have a material interest adverse to us.

Item 4. Submission of Matters to a Vote of Security
Holders.

None

PART II

Item 5. Market for Common Equity and Related Stockholder
Matters.

There is a limited public market for our common shares. Our
common shares are quoted for trading on the NASD OTC Bulletin Board under the
symbol GRUA.

The following table shows the high and low prices of our common
shares on the NASD OTC Bulletin Board. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions:

25

---

Period
    High
    LowJul 1, 2004  Sep 30, 2004
    0.10
    0.02Oct 1, 2004  Dec 31, 2004
    0.10
    0.05Jan 1, 2005  Mar 31, 2005
    0.25
    0.10Apr 1, 2005  Jun 30, 2005
    0.22
    0.09Jul 1, 2005  Sep 30, 2005
    0.14
    0.095Oct 1, 2005  Dec 31, 2005
    0.15
    0.08Jan 1, 2006  Mar 31, 2006
    0.0145
    0.0775Apr 1, 2006  Jun 30, 2006
    0.09
    0.045


As of October 6, 2006, there were 63,255,207 common shares
outstanding, held by approximately 120 shareholders of record.

On June 27, 2005, the shareholders of Garuda approved to
increase the authorized common stock to 100,000,000 shares, $0.001 per par
value, at Garudas Annual General Meeting.

To date, we have not paid any dividends on Garudas common
shares and do not expect to declare or pay any dividends on our common shares in
the foreseeable future. Payment of any dividends will depend upon future
earnings, if any, our financial condition, and other factors as deemed relevant
by our Board of Directors.

Equity Compensation Plans

On April 29, 2005, Garuda filed with the SEC a Form S-8
registering 4,000,000 common shares to be issued to employees and consultants
pursuant to Garudas April 2005 Non-Qualified Stock Compensation Plan approved
by the Board on April 26, 2005. As of June 30, 2005, 3,007,000 shares have been
issued under the plan. During the fiscal year ended June 30, 2006 993,000 shares
are issued under this plan. As of June 30, 2006, 4,000,000 shares have been
issued under the plan.

On May 11, 2005, Garudas Board approved Garudas 2005
Incentive Stock Option Plan, to issue up to 8,000,000 options, and the plan was
approved by the shareholders at the AGM on June 27, 2005. The 2005 Stock Option
Plan was registered in SEC Form S-8 on February 9, 2006. As of June 30, 2006,
3,500,000 options had been issued under the 2005 Stock Option Plan.

On February 9, 2006, Garuda filed with the SEC a Registration
Statement on Form S-8 registering 5,000,000 common shares issuable to employees
and consultants pursuant to Garudas 2006 Non-Qualified Stock Compensation Plan
approved by the Board on January 19, 2006. As of June 30, 2006, 4,990,000 shares
had been issued under the plan.

Equity Compensation Plan Information

26

---

Year Ended June 30, 2006Number of Shares to
      be Issued Upon Exercise of
      Outstanding Options, Warrants and
      Rights
    Weighted- Average
      Exercise Price of Outstanding
      Options, Warrants and Rights
      Number of Shares Remaining Available for Future Issuance Under Equity Compensation PlansEquity compensation plans not approved by
      shareholders
    0
    0
    10,000Equity compensation plans approved by
      shareholders
    0
    0
    4,500,000Total
    0
    0
    4,510,000


Recent Sales of Unregistered Securities

On June 7, 2006, we issued 1,650,000 shares of common stock
with a price of $0.05 per share according to two subscription agreements.

On June 13, 2006, we entered into a subscription agreement to
issue 200,000 shares of common stock at a price of $0.05 per share.

On June 14, 2006, we issued 3,700,000 shares of common stock
with a price of $0.05 per share to four investors.

On June 29, 2006, we received $70,000 for the issuance of
1,000,000 shares of common stock.

We did not employ an underwriter in connection with the
issuance of the securities described above. We believe that the issuance of the
foregoing securities were exempt from registration under Regulation S and
Section 4(2) of the Securities Act.

Item 6. Management's Discussion and Analysis or Plan of
Operation.

Overview

We have seven wholly owned subsidiaries, Hagensborg Foods Ltd.,
Hagensborg Seafoods Ltd., Natural Program Inc., Natural Program Ltd., Garuda
Gold Corporation, Garuda Minerals Inc., and Garuda Exploration Inc. We have
recently acquired mining interests through Garuda Exploration. Garuda Gold and
Garuda Minerals are currently inactive.

27

---

Hagensborg manufactures and distributes chocolate and has been
active during the past year in redeveloping and re-launching its product line.
Hagensborg also sells canned seafood products through its wholly owned
subsidiary, Hagensborg Seafoods Limited. Hagensborg has recently repackaged its
chocolate product line using a fairyland theme and its new marketing and
promotional concept. Hagensborg markets gourmet chocolate products throughout
North America and serves high-end departmental and specialty stores. Due to the
restructuring, Hagensborg is now focused on targeting the confectionary market
with unique, high-quality products that are innovatively packaged.

Natural Program sells herbal remedies through its wholly owned
subsidiary Natural Program Ltd. in Vancouver, British Columbia. Natural Program
makes prescription formulas for practitioners of Traditional Chinese Medicine.
Natural Programs clients are registered practitioners predominantly in British
Columbia. Prescriptions are made up on the premises and patients are able to
pick up these formulas from the West Broadway location in Vancouver. The
products are all manufactured to GMP standards and are free of additives and
heavy metals. Natural Program also supplies herbal products to the Colleges of
Traditional Chinese Medicine.

Forward Looking Statements

This report contains certain forward-looking statements. All
statements other than statements of historical fact are forward-looking
statements for purposes of these provisions, including any projections of
earnings, revenues, or other financial items; any statements of the plans,
strategies, and objectives of management for future operation; any statements
concerning proposed new products, services, or developments; any statements
regarding future economic conditions or performance; statements of belief; and
any statement of assumptions underlying any of the foregoing. Such
forward-looking statements are subject to inherent risks and uncertainties and
actual results could differ materially from those anticipated by the
forward-looking statements.

Results of Operations for the year ended June 30, 2006
compared to June 30, 2005

During the fiscal year ended June 30, 2006, we realized total
revenues of $768,863 with a net loss for the year of $2,052,193. During the
fiscal year ended June 30, 2005, we realized total revenues of $701,637 with a
net loss of $1,967,500. The slight increase in revenues was the result of
increased sales for Hagensborg and the increase in net loss for Fiscal 2006 was
a result of operation expenses that were incurred for Hagensborgs operations,
including increased professional fees, management fees and advertising and
promotion fees.

The following table reflects information for our segments:

28

---

Hagensborg
    **Hagensborg**
    **Natural**
    CorporateFoods Ltd.
    **Seafoods**
    **Program**
    and
    TotalLtd.
    Inc.
    Eliminations$
    $
    $
    $
    $2006Revenues
    586,325
    97,703
    84,813
    22
    768,863Gross profit (loss)
    (218,499)
    45,692
    (9,783)
    22
    (182,567)Depreciation and amortization
    40,844
    
    6,265
    2,497
    49,606Other income(expense)
    44,815
    
    
    (42,505)
    2,310Net loss
    (1,183,847)
    (20,033)
    (49,868)
    (798,445)
    (2,052,193)Segment assets
    567,464
    48,428
    39,233
    10,645
    665,7702005Revenues
    444,915
    193,999
    62,790
    (67)
    701,637Gross profit (loss)
    (144,392)
    61,790
    (23,017)
    (67)
    (105,969)Depreciation and amortization
    49,763
    
    4,145
    1,564
    55,472Other income(expense)
    
    
    
    (85,329)
    (85,329)Net loss
    (812,645)
    (13,598)
    (65,709)
    (1,075,548)
    (1,967,500)Segment assets
    546,250
    57,399
    46,446
    304,492
    954,588


We are subject to seasonal effects on chocolate purchases. A
large part of our sales of chocolate products in the fiscal year ended June 30,
2006 was generated during the Christmas season. The spring season which includes
Valentines Day, Easter and Mothers Day is the second most important chocolate
consumption season after Christmas. We anticipate that during the next fiscal
year, our greatest sales of our chocolates will take place during the Christmas
season and in the spring.

Our cost of sales was $951,430 for the year ended June 30,
2006, compared to $807,606 for the same period in 2005. The higher cost of sales
is a result of additional costs associated with a new product line. Gross loss
for the year ended June 30, 2006 was $182,567, compared to gross loss $105,969
for the same period in 2005. The increase in gross loss was the result of
increased cost of sales, which consists of the purchase price of products sold,
inbound and outbound shipping charges, packaging supplies and costs associated
with revenues, marketplace business and manufacturing equipment depreciation
expense.

Our total expenses were $1,870,307 for Fiscal 2006, compared to
$1,768,290 for Fiscal 2005. Our general and administrative expenses increased
$186,819 from $985,811 in the year ended June 30, 2005 to $1,172,630 for the
same period in 2006. The increase in general and administrative fees in the
fiscal year 2006 is the result of increased professional and management
fees.

We incurred advertising expenses of $527,879 in the year ended
June 30, 2006, compared to $252,789 for the same period in 2005. The increase in
advertising costs in Fiscal 2006 is largely the result of increased costs
incurred in the design, development, and printing of literature and marketing
materials.

We anticipate that we will have increased sales in the coming
year from increased product sales through both Hagensborg and Natural Program.
We also anticipate that we will need to incur greater expenses for marketing
costs, hiring sales personnel, broker fees and trade show attendance fees as we
implement our business growth strategies for both Hagensborg and Natural
Program.

29

---

Liquidity and Capital Resources for the year ended June
30, 2006 compared toJune 30, 2005

We believe that sales from Hagensborg and Natural Program will
not provide sufficient capital resources to sustain our operations and fund
product development throughout the fiscal year ended June 30, 2006. Management
has been able, thus far, to finance the operations through a series of equity
and debt financings. While our independent auditor's report for the years ended
June 30, 2006 and 2005 included an explanatory paragraph describing substantial
doubt as to our ability to continue as a going concern, management plans to
continue to seek other sources of financing on favorable terms; however, there
are no assurances that any such financing can be obtained on favorable terms, if
at all. Management believes we have implemented significant cost reductions and
expects to keep our operating costs to a minimum until cash is available through
financing or operating activities. There is no assurance that we will be
successful in achieving these goals. We continually evaluate opportunities to
sell additional equity or debt securities, or obtain credit facilities from
lenders to strengthen our financial position. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.

We have financed Hagensborgs operations partly through
revenues from operations and bank credit facilities, and partly through the
issuance of equity shares and convertible debentures. Hagensborg has not been
able to reach the break-even point for the last five fiscal years and has had to
rely on Garuda for capital resources. We believe that sales from Hagensborgs
new product lines will add new capital resources over the coming year, but may
not be sufficient to sustain operations and fund new product launches throughout
the fiscal year ending June 30, 2007. Currently we do not have sufficient cash
to accomplish our outlined plan and launch and market our new products.

We have financed Natural Programs operations partly through
revenues and bank credit facilities, and partly through the issuance of equity
shares. Natural Program has not yet been able to reach the break-even point and
has had to rely on Garuda for capital resources. We believe that additional
sales resulting from Natural Programs increased marketing efforts will add new
capital resources, but may not be sufficient to sustain operations and fund new
product launches throughout the fiscal year ending June 30, 2007. Our
competitors already have well established brands and distribution methods and
many times our financial ability. Competitive ability of our new products will
depend upon developing brand recognition and distribution methods. Failure to
successfully compete with well-established companies may result in our inability
to continue with our operations or prevent us from achieving significant
revenues.

During the year ended June 30, 2006, Garuda received net
proceeds of $545,410, compared to $875,000 in 2005, in connection with the
issuance of equity. Management plans to continue to seek other sources of
financing on favorable terms; however, there are no assurances that any such
financing can be obtained on favorable terms, if at all. There are no assurances
that Garuda will be successful in achieving these goals.

During the year ended June 30, 2006, our current assets to
current liabilities ratio decreased to 0.52 from 0.60 for the same period in
2005. Pursuant to Garudas loan agreement, Garudas ratio of current assets to
current liabilities cannot exceed 1.2 to 1.0. At June 30, 2006 and 2005, Garuda
was in violation of this condition. At June 30,

30

---

2006 and 2005, Garuda was also in violation of a second
covenant whereby Garudas ratio of debt to tangible net worth may not exceed 3.0
to 1.0. The bank had waived any action until January 31, 2007 and has not taken
any action to date.

Current assets decreased $270,148, from $690,073 in 2005, to
$419,925 in 2006, primarily as a result of disposition of marketable securities
during the year ended June 30, 2006. At June 30, 2005, Garuda owned securities
classified as available for sale with a market value of $291,315. The unrealized
loss for the securities on hand at June 30, 2006 was $nil, compared to $88,277
in 2005. Garuda disposed of securities and realized a gain of $6,942, compared
to $32,808 in 2005. At June 30, 2006, Garuda did not own any securities
classified as available for sale.

Non-current assets for the year ended June 30, 2006 were
$245,845 net of depreciation.

Total liabilities decreased from $1,172,883 for the year ended
June 30, 2005 to $820,685 for the year ended June 30, 2006. For the year ended
June 30, 2006, this includes $805,857 in current liabilities and $14,828 in
government loan. We have bank loans of $125,000 as at June 30, 2006.

On June 27, 2006, our subsidiary, Garuda Exploration entered
into an agreement with Xemplar Energy Corp. to acquire a 70% interest in the
Corhill uranium-gold-platinum property located in the Northwest Territories. The
Corhill property is comprised of 18 mineral claims and covers 30,628 acres. The
agreement provides for Garuda Exploration to make a cash payment of
approximately $45,000, issue 2,000,000 restricted shares of common stock of
Garuda and incur expenditures of approximately $1,350,000 over 3 years. The
property is subject to a 2% net smelter return royalty.

Plan of Operation

Our independent auditor's report for the years ended June 30,
2006 and 2005 included an explanatory paragraph describing substantial doubt as
to our ability to continue as a going concern. We are seeking $750,000 in
financing to be used to repay all outstanding debt to HSBC and for working
capital. We will require an additional $1,000,000 to finance operations for
Fiscal 2007, including amounts we require to carry out our mining exploration
program. We intend to obtain such financing through sales of Garudas equity
securities. We have no binding commitments or arrangements for additional
financing and there is no assurance that management will be able to obtain any
additional financing on acceptable terms, if at all.

The threat to our ability to continue as a going concern will
be removed only when revenues have reached a level that sustains Garudas
business operations.

Regarding our mining interests, we expect to require
approximately $150,000 to continue our planned operations for the first phase
and an additional $205,000 for the second phase. We plan on spending these
amounts during Fiscal 2007. A breakdown of these expenses can be found under the
Description of Property at page 19.

31

---

Item 7. Financial Statements.

Our consolidated financial statements for the year ended June
30, 2006, together with the Report of Independent Registered Public Accounting
Firm thereon, are included in this report commencing on page F-1.

32

---

Garuda Capital Corp. 
  Consolidated Financial Statements 
  (Expressed in United States dollars)

June 30, 2006

|                                                        | Index
|------------------------------------------------------- | -----
|Report of Independent Registered Public Accounting Firm | F-1  
|Consolidated Balance Sheets                             | F2  
|Consolidated Statements of Operations                   | F3  
|Consolidated Statements of Cash Flows                   | F4  
|Consolidated Statement of Stockholders Deficiency      | F5  
|Notes to the Consolidated Financial Statements          | F7  

---

REPORT OF INDEPENDENT REGISTERED
  PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders ofGaruda Capital Corp.

We have audited the accompanying consolidated balance sheets
  of Garuda Capital Corp. as of June 30, 2006 and 2005 and the related
  consolidated statements of operations, stockholders deficiency and cash
  flows for the years then ended. These financial statements are the responsibility
  of the Companys management. Our responsibility is to express an opinion
  on these financial statements based on our audit.

We conducted our audits in accordance with auditing standards
  of the Public Company Accounting Oversight Board (United States). Those standards
  require that we plan and perform an audit to obtain reasonable assurance about
  whether the financial statements are free of material misstatement. We were
  not engaged to perform an audit of the Companys internal control over
  financial reporting. Our audits 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, and evaluating the overall financial statement presentation.
  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
  fairly, in all material respects, the consolidated financial position of Garuda
  Capital Corp. at June 30, 2005 and 2006, and the consolidated results of its
  operations and its cash flows for the years then ended, in conformity with U.S.
  generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Companys
  recurring net losses and working capital deficiency raise substantial doubt
  about its ability to continue as a going concern. The Company is also in violation
  of its debt covenant, which is further described in Note 8 to the financial
  statements. Managements plans as to these matters are described in Note
  1. These financial statements do not include any adjustments that might result
  from the outcome of this uncertainty.

|Vancouver, Canada,  |                      
|------------------- | ---------------------
|September 28, 2006. | Chartered Accountants

F-1

---

|Garuda Capital Corp.                    
|----------------------------------------
|                                        
|Consolidated Balance Sheets             
|(Expressed in United States dollars)    
|(Going Concern Uncertainty  see Note 1)

|                                                                                       |  | As at      |   |  | As at      |  
|-------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                                                       |  | June 30,   |   |  | June 30,   |  
|                                                                                       |  | 2006       |   |  | 2005       |  
|                                                                                       |  | $          |   |  | $          |  
|                                                                                       |  |            |   |  |            |  
|ASSETS                                                                                 |  |            |   |  |            |  
|Current Assets                                                                         |  |            |   |  |            |  
|Marketable securities
      (Note 3)                                                   |  | -          |   |  | 291,315    |  
|Accounts receivable (Note 15)                                                          |  | 91,490     |   |  | 84,096     |  
|Inventory (Note
      4)                                                               |  | 302,721    |   |  | 288,194    |  
|Prepaid expenses and deposits                                                          |  | 25,714     |   |  | 26,468     |  
|Total Current Assets                                                                   |  | 419,925    |   |  | 690,073    |  
|Machinery and equipment (Note 5)                                                       |  | 245,845    |   |  | 245,940    |  
|Patents and trademarks (Note 6)                                                        |  | -          |   |  | 18,575     |  
|Total Assets                                                                           |  | 665,770    |   |  | 954,588    |  
|                                                                                       |  |            |   |  |            |  
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                               |  |            |   |  |            |  
|Current Liabilities                                                                    |  |            |   |  |            |  
|Bank indebtedness (Notes 8)                                                            |  | 96,258     |   |  | 94,754     |  
|Accounts payable
      and accrued expenses                                            |  | 295,084    |   |  | 344,892    |  
|Bank loan (Notes 8)                                                                    |  | 125,000    |   |  | 185,000    |  
|Income taxes payable
      (Note 7)                                                    |  | 9,541      |   |  | 7,912      |  
|Deferred revenue                                                                       |  | 2,618      |   |  | -          |  
|Notes payable 
      related parties (Note 12)                                        |  | 277,356    |   |  | 524,558    |  
|Capital lease obligation                                                               |  | -          |   |  | 2,375      |  
|Total Current Liabilities                                                              |  | 805,857    |   |  | 1,159,491  |  
|Government loan
      (Note 9)                                                         |  | 14,828     |   |  | 13,392     |  
|Total Liabilities                                                                      |  | 820,685    |   |  | 1,172,883  |  
|Commitments and contingencies (Notes 9, 13 and 16)                                     |  |            |   |  |            |  
|Stockholders Deficiency                                                               |  |            |   |  |            |  
|Preferred stock                                                                        |  |            |   |  |            |  
|Authorized: 10,000,000 shares, $0.01 par value                                         |  |            |   |  |            |  
|Issued:
      none                                                                     |  | -          |   |  | -          |  
|Common stock                                                                           |  |            |   |  |            |  
|Authorized: 100,000,000 shares, $0.001 par value                                       |  |            |   |  |            |  
|Issued and outstanding: 52,712,784 and
      34,655,619 shares, respectively (Note 11) |  | 52,713     |   |  | 34,656     |  
|Stock to be issued (Note 11(b))                                                        |  | 70,000     |   |  | -          |  
|Additional paid-in capital                                                             |  | 7,321,728  |   |  | 5,775,889  |  
|Contra equity (Note 13)                                                                |  | (60,470    | ) |  | (418,667   | )
|Accumulated deficit                                                                    |  | (7,592,448 | ) |  | (5,540,255 | )
|Accumulated
      other comprehensive income (loss)                                    |  | 53,562     |   |  | (69,918    | )
|Total Stockholders Deficiency                                                         |  | (154,915   | ) |  | (218,295   | )
|Total Liabilities
      and Stockholders Deficiency                                   |  | 665,770    |   |  | 954,588    |  

The accompanying notes are an integral part of these consolidated
  financial statements
  F2

---

|Garuda Capital Corp.                    
|----------------------------------------
|Consolidated Statements of Operations   
|(Expressed in United States dollars)    
|(Going Concern Uncertainty  see Note 1)

|                                                    |  | For the    |   |  | For the    |  
|--------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                    |  | Year Ended |   |  | Year Ended |  
|                                                    |  | June 30,   |   |  | June 30,   |  
|                                                    |  | 2006       |   |  | 2005       |  
|                                                    |  | $          |   |  | $          |  
|REVENUE                                             |  |            |   |  |            |  
|Sales                                               |  | 768,863    |   |  | 701,637    |  
|Cost of sales                                       |  | 951,430    |   |  | 807,606    |  
|Gross loss                                          |  | (182,567   | ) |  | (105,969   | )
|EXPENSES                                            |  |            |   |  |            |  
|General and administrative (Note
      12)          |  | 1,172,630  |   |  | 985,811    |  
|Loss on extinguishment of debt                      |  | 84,200     |   |  | 446,802    |  
|Depreciation and amortization
      (Notes 5 and 6) |  | 16,395     |   |  | 14,547     |  
|Advertising and promotion                           |  | 527,879    |   |  | 252,789    |  
|Premises leases                                     |  | 69,203     |   |  | 68,341     |  
|Total expenses                                      |  | 1,870,307  |   |  | 1,768,290  |  
|Loss from operations                                |  | (2,052,874 | ) |  | (1,874,259 | )
|Other income (expenses)                             |  |            |   |  |            |  
|Foreign currency transaction gain                   |  | 12,786     |   |  | 7,659      |  
|Gain on sale of marketable securities (Note 3)      |  | 6,942      |   |  | 32,808     |  
|Other income (Note 19)                              |  | 60,030     |   |  | 17,894     |  
|Interest
      expense (Note 12)                    |  | (77,448    | ) |  | (143,690   | )
|Total other income (expense)                        |  | 2,310      |   |  | (85,329    | )
|Net loss before taxes                               |  | (2,050,564 | ) |  | (1,959,588 | )
|Income tax expense (Note 7)                         |  | (1,629     | ) |  | (7,912     | )
|Net loss                                            |  | (2,052,193 | ) |  | (1,967,500 | )
|Other comprehensive income (loss)                   |  |            |   |  |            |  
|Gain on foreign currency translation                |  | 35,203     |   |  | 21,750     |  
|Unrealized gain (loss) on marketable securities     |  | 88,277     |   |  | (88,277    | )
|Total other comprehensive
      income (loss)       |  | 123,480    |   |  | (66,527    | )
|Comprehensive loss                                  |  | (1,928,713 | ) |  | (2,034,027 | )
|Net loss per common
      share  basic and diluted |  | (0.05      | ) |  | (0.16      | )
|Weighted average number of common shares            |  |            |   |  |            |  
|outstanding,
      basic and diluted                |  | 39,486,000 |   |  | 12,468,284 |  

The accompanying notes are an integral part of these consolidated
  financial statements
  F3

---

|Garuda Capital Corp.                    
|----------------------------------------
|Consolidated Statements of Cash Flows   
|(Expressed in United States dollars)    
|(Going Concern Uncertainty  see Note 1)

|                                                             |  | For the    |   |  | For the    |  
|------------------------------------------------------------ |  | ---------- | - |  | ---------- | -
|                                                             |  | Year Ended |   |  | Year Ended |  
|                                                             |  | June 30,   |   |  | June 30,   |  
|                                                             |  | 2006       |   |  | 2005       |  
|                                                             |  | $          |   |  | $          |  
|                                                             |  |            |   |  |            |  
|OPERATING ACTIVITIES                                         |  |            |   |  |            |  
|                                                             |  |            |   |  |            |  
|Net loss                                                     |  | (2,052,193 | ) |  | (1,967,500 | )
|                                                             |  |            |   |  |            |  
|Adjustment to reconcile net loss
      to net cash:          |  |            |   |  |            |  
|Depreciation and amortization                                |  | 49,606     |   |  | 55,472     |  
|Common stock issued
      for compensation                   |  | 384,600    |   |  | 248,600    |  
|Common stock issued for services                             |  | 400,980    |   |  | 672,050    |  
|Write off of obsolete
      inventory                        |  | 56,968     |   |  | 30,407     |  
|Write off of patents and trademarks
      (Note 6)           |  | 15,474     |   |  | -          |  
|Loss on extinguishment
      of debt                         |  | 96,050     |   |  | 446,802    |  
|Common stock issued for interest                             |  | 65,506     |   |  | -          |  
|Gain from sale of
      marketable securities                |  | (6,942     | ) |  | (32,808    | )
|                                                             |  |            |   |  |            |  
|Changes in operating assets and
      liabilities:           |  |            |   |  |            |  
|Decrease in accounts receivable                              |  | 2,522      |   |  | 42,874     |  
|Decrease (increase)
      in prepaid expenses                |  | 3,593      |   |  | (11,122    | )
|(Increase) in inventory                                      |  | (42,839    | ) |  | (46,643    | )
|Increase (decrease)
      in contra equity                   |  | 388,437    |   |  | (418,667   | )
|(Decrease) in accounts payable and
      accrued expenses    |  | (76,695    | ) |  | (68,424    | )
|Increase in deferred
      revenue                           |  | 2,618      |   |  | -          |  
|Increase in income taxes payable                             |  | 1,629      |   |  | 7,912      |  
|                                                             |  |            |   |  |            |  
|Net cash used in operating
      activities                  |  | (710,686   | ) |  | (1,041,046 | )
|                                                             |  |            |   |  |            |  
|INVESTING ACTIVITIES                                         |  |            |   |  |            |  
|                                                             |  |            |   |  |            |  
|Purchase of equipment and intangibles                        |  | (19,002    | ) |  | (11,998    | )
|Proceeds from sale of marketable
      securities            |  | 464,978    |   |  | 570,933    |  
|Purchase
      of marketable securities                      |  | (63,689    | ) |  | (748,778   | )
|                                                             |  |            |   |  |            |  
|Net cash provided
      by (used in) investing activities    |  | 382,287    |   |  | (189,843   | )
|                                                             |  |            |   |  |            |  
|FINANCING ACTIVITIES                                         |  |            |   |  |            |  
|Proceeds from (repayments of)
      bank indebtedness        |  | 1,503      |   |  | (111,899   | )
|Repayments of capital lease obligations                      |  | (2,375     | ) |  | (2,670     | )
|(Repayments of) proceeds from
      bank loan                |  | (60,000    | ) |  | 56,400     |  
|Repayments of notes payable  related parties                |  | (105,852   | ) |  | (8,133     | )
|Proceeds from common stock issued
      for cash             |  | 475,410    |   |  | 875,000    |  
|Proceeds from stock to be issued                             |  | 70,000     |   |  | -          |  
|Advances from shareholders                                   |  | -          |   |  | 453,453    |  
|                                                             |  |            |   |  |            |  
|Net cash provided by financing activities                    |  | 378,686    |   |  | 1,262,151  |  
|                                                             |  |            |   |  |            |  
|Effect of exchange rate changes on cash and cash equivalents |  | (50,287    | ) |  | (31,262    | )
|                                                             |  |            |   |  |            |  
|Net increase (decrease) in cash and cash equivalents         |  | -          |   |  | -          |  
|                                                             |  |            |   |  |            |  
|Cash and cash equivalents  Beginning of Year                |  | -          |   |  | -          |  
|                                                             |  |            |   |  |            |  
|Cash and cash equivalents  End of Year                      |  | -          |   |  | -          |  
|                                                             |  |            |   |  |            |  
|Non-cash financing and investing activities:                 |  |            |   |  |            |  
|Common stock issued for compensation                         |  | 384,600    |   |  | 248,600    |  
|Common stock issued for services                             |  | 400,980    |   |  | 672,050    |  
|Common stock issued for debt                                 |  | 202,400    |   |  | 1,563,806  |  
|Common stock issued for interest                             |  | 65,506     |   |  | -          |  
|                                                             |  |            |   |  |            |  
|SUPPLEMENTARY CASH FLOW INFORMATION  NOTE 19                |  |            |   |  |            |  

The accompanying notes are an integral part of these consolidated
  financial statements
  F4

---

|Garuda Capital Corp.                               
|---------------------------------------------------
|Consolidated Statements of Stockholders Deficiency
|For the Years Ended June 30, 2006 and 2005         
|(Expressed in United States dollars)               
|(Going Concern Uncertainty  see Note 1)           

|                              |  | Common     |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|----------------------------- |  | ---------- |  |  | ------ |  |  | ---------- |  |  | ----------- |  |  | ----------- | - |  | ----------------- | - |  | -------- | -
|                              |  | Stock      |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  | Total    |  
|                              |  |            |  |  |        |  |  | Additional |  |  |             |  |  |             |   |  | Accumulated Other |   |  |          |  
|                              |  |            |  |  |        |  |  | Paid-In    |  |  | Stock to be |  |  | Accumulated |   |  | Comprehensive     |   |  | Contra   |  
|                              |  | Number     |  |  | Amount |  |  | Capital    |  |  | issued      |  |  | Deficit     |   |  | Income/(Loss)     |   |  | Equity   |  
|                              |  | #          |  |  | $      |  |  | $          |  |  | $           |  |  | $           |   |  | $                 |   |  | $        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Balance, June 30, 2004        |  | 6,373,575  |  |  | 6,374  |  |  | 2,444,715  |  |  | -           |  |  | (3,572,755  | ) |  | (3,391            | ) |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for             |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|compensation                  |  | 2,605,000  |  |  | 2,605  |  |  | 245,995    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for services    |  | 5,757,000  |  |  | 5,757  |  |  | 666,293    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for debt        |  | 11,170,044 |  |  | 11,170 |  |  | 1,552,636  |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for cash        |  | 8,750,000  |  |  | 8,750  |  |  | 866,250    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Gain on foreign currency      |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|translation                   |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | -           |   |  | 21,750            |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Unrealized loss on            |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|available for sale            |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|securities                    |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | -           |   |  | (88,277           | ) |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Net loss for the year ended   |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|June
      30, 2005           |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | (1,967,500  | ) |  | -                 |   |  | -        |  
|                              |  | 34,655,619 |  |  | 34,656 |  |  | 5,775,889  |  |  | -           |  |  | (5,540,255  | ) |  | (69,918           | ) |  | -        |  
|Contra
      equity           |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | -           |   |  | -                 |   |  | (418,667 | )
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Balance, June 30, 2005        |  | 34,655,619 |  |  | 34,656 |  |  | 5,775,889  |  |  | -           |  |  | (5,540,255  | ) |  | (69,918           | ) |  | (418,667 | )
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for             |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|compensation                  |  | 4,010,000  |  |  | 4,010  |  |  | 380,590    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for services    |  | 4,273,000  |  |  | 4,273  |  |  | 396,707    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for interest    |  | 609,165    |  |  | 609    |  |  | 64,897     |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for debt        |  | 1,890,000  |  |  | 1,890  |  |  | 200,510    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Shares issued for cash        |  | 7,275,000  |  |  | 7,275  |  |  | 468,135    |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Stock to be issued (Note      |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|11(b))                        |  | -          |  |  | -      |  |  | -          |  |  | 70,000      |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Stock-based compensation      |  | -          |  |  | -      |  |  | 35,000     |  |  | -           |  |  | -           |   |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Gain on foreign currency      |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|translation                   |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | -           |   |  | 35,203            |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Unrealized gain on            |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|available for sale securities |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  |             |   |  |                   |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Net loss for the year ended   |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|June 30, 2006                 |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | (2,052,193  | ) |  | -                 |   |  | -        |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|                              |  | 52,712,784 |  |  | 52,713 |  |  | 7,321,728  |  |  | 70,000      |  |  | (7,592,448  | ) |  | 53,562            |   |  | (418,667 | )
|Contra Equity                 |  | -          |  |  | -      |  |  | -          |  |  | -           |  |  | -           |   |  | -                 |   |  | 358,197  |  
|                              |  |            |  |  |        |  |  |            |  |  |             |  |  |             |   |  |                   |   |  |          |  
|Balance, June 30,
      2006  |  | 52,712,784 |  |  | 52,713 |  |  | 7,321,728  |  |  | 70,000      |  |  | (7,592,448  | ) |  | 53,562            |   |  | (60,470  | )

The accompanying notes are an integral part of these consolidated
  financial statements
  F5

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY

Nature of business

Garuda Capital Corp. (hereinafter Garuda or the
  Company) was incorporated in the State of Nevada on July 8, 1997 as Vanstar
  Films Inc. for the purpose of establishing itself in the film industry. Those
  efforts were abandoned in September 2001. On February 14, 2002, the corporate
  name was changed to Garuda Capital Corp.

In April 2002, Garuda acquired Hagensborg Foods Ltd., a manufacturer
  and marketer of fine chocolates and other gourmet foods and its wholly-owned
  subsidiary Hagensborg Seafoods Ltd., and Natural Program Inc., an inactive company
  that owns 100% of the outstanding shares of Natural Program Ltd., a manufacturer
  and distributor of nutraceuticals. The Company, through these four wholly owned
  subsidiaries, sells and processes specialty food products and herbal medication
  to wholesale and retail customers in North America. The Company has other wholly
  owned subsidiaries, Garuda Minerals Inc. and Garuda Gold Corporation, which
  have each signed Letter of Intent agreements regarding the exploration of minerals
  in Ghana [see notes 16[b] and 16[c]]. On April 4, 2006, the Company announced
  that its subsidiaries had elected not to exercise their options to joint venture
  these mining prospects in Ghana, and accordingly, they were allowed to expire
  on May 18, 2006. The Company also has a wholly owned subsidiary, Garuda Exploration
  Inc. (2005 - Garuda Ventures Canada Inc.), which is active in mining exploration.

The Companys year end is June 30. The Company is headquartered
  in Vancouver, British Columbia, Canada.

Going Concern Uncertainty

The consolidated financial statements have been prepared by management
  in accordance with United States generally accepted accounting principles on
  a going concern basis, which contemplates the realization of assets and the
  discharge of liabilities in the normal course of business for the foreseeable
  future.

The Company incurred a net loss of $2,052,193 for the year ended
  June 30, 2006 (2005 - $1,967,500) and, as at June 30, 2006 had a working capital
  deficiency of $385,932 and a stockholders deficiency of $154,915. As discussed
  in Note 8, the Company is in breach of its bank covenants. These factors raise
  substantial doubt about its ability to continue as a going concern. Management
  has been able, thus far, to finance the operations through a series of equity
  and debt financings. During the year ended June 30, 2006, the Company received
  net proceeds of $545,410 (2005 - $875,000) in connection with the issuance of
  equity. Management plans to continue to seek other sources of financing on favorable
  terms; however, there are no assurances that any such financing can be obtained
  on favorable terms, if at all. Management believes it has implemented significant
  cost reductions and expects to keep its operating costs to a minimum until cash
  is available through financing or operating activities. There are no assurances
  that the Company will be successful in achieving these goals.

These consolidated financial statements do not give effect to
  any adjustments to the amounts and classifications of assets and liabilities
  that might be necessary in the event the Company is unable to continue its operations
  as a going concern.

The consolidated financial statements are presented in United
  States dollars.

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

2. SIGNIFICANT ACCOUNTING POLICIES

|a) | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The accompanying consolidated financial statements include
        the accounts of the Company and its wholly-owned subsidiaries, Hagensborg
        Foods Ltd., Hagensborg Seafoods Ltd., Natural Program Inc., Natural Program
        Ltd., Garuda Minerals Inc., Garuda Gold Corporation and Garuda Exploration
        Inc (2005 - Garuda Ventures Canada Inc.)                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|b) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The preparation of financial statements in conformity
        with United States generally accepted accounting principles requires management
        to make estimates and assumptions that affect the reported amounts of
        assets and liabilities and disclosures of contingent assets and liabilities
        at the date of the financial statements and the reported amounts of revenues
        and expenses during the period. Actual results could differ from those
        estimates.

F-6

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements 
  (Expressed in United States dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

|c) | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company ships its products by common carrier and
        also sells products through brokers, distributors and directly to specialty
        stores. The Company receives its product sales price in the form of cash,
        credit card or on approved terms. Sales revenue and related discounts
        or volume incentives are recorded when the products are in the hands of
        the common carrier. The Company recognizes revenue from sales when there
        is persuasive evidence that an arrangement exists, products have been
        shipped, the sellers price to the buyer is determinable, and collectibility
        is reasonably assured.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|d) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | These consolidated financial statements, prepared in
        accordance with United States generally accepted accounting principles,
        are expressed in United States dollars as the reporting currency. The
        functional currency of Hagensborg Foods Ltd., Hagensborg Seafoods Ltd.,
        Natural Program Inc., and Garuda Gold Corporation is the Canadian dollar.                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In these consolidated financial statements, assets and
        liabilities are translated into United States dollars at the rate of exchange
        in effect at the balance sheet date. Revenues and expenses are translated
        at the average rate of exchange for the reporting period. Translation
        gains and losses are recorded as a separate component of stockholders
        deficiency, and transaction gains and losses are reflected in determining
        net loss.                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|e) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company considers all highly liquid investments
        with original maturities of three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|f) | Accounts receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company carries its accounts receivable at cost
        less an allowance for doubtful accounts. On a periodic basis, the Company
        evaluates its accounts receivable and establishes an allowance for doubtful
        accounts, based on a history of past write-offs and collections and current
        credit conditions. The Companys policy is not to accrue interest
        on overdue trade receivables.                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|g) | Advertising expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Advertising expenses consist primarily of costs incurred
        in the design, development, and printing of Company literature and marketing
        materials. The Company expenses all advertising expenditures as incurred.
        The Company incurred advertising expenses of $527,879 in the year ended
        June 30, 2006 (2005 - $252,789).                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|h) | Bad debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company estimates bad debts utilizing the allowance
        method, based upon past experience and current market conditions. At June
        30, 2006 the allowance for doubtful accounts was $nil (2005 - $nil).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|i) | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Pursuant to Statement of Financial Accounting Standards
        (SFAS) No. 115, the Companys investments in marketable
        securities are considered as available for sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Available for sale securities consist of debt and equity
        securities not classified as trading securities or as securities to be
        held to maturity. Unrealized holding gains and losses, net of tax, on
        securities available for sale are reported as a net amount in a separate
        component of other comprehensive income. When the investment is sold,
        the realized gain or loss is reported as other income or expense on the
        statement of operations.                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Gains and losses on the sale of securities available
        for sale are determined using the specific identification method and are
        included in earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-7

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements 
  (Expressed in United States dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

|j) | Inventory                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                      
|   | Inventories are stated at the lower of average cost
        or net realizable values on a first-in, first-out basis. The cost of finished
        goods includes the cost of raw material, direct and indirect labor, and
        other indirect manufacturing costs.
|   |                                                                                                                                                                                                                                                                      
|k) | Machinery and equipment                                                                                                                                                                                                                                              

Machinery and equipment is carried at
  cost. Depreciation is provided using the straight line method over the assets
  estimated useful lives as follows:

Manufacturing equipment
      15 yearsManufacturing tools
      15 yearsFurniture and fixtures
      15 yearsComputers
      5 yearsLeasehold improvements
      Term of the lease


|l) | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company reviews long-lived assets, including amortizable
        intangible assets, for impairment whenever events or changes in business
        circumstances indicate that the carrying amount of the assets may not
        be fully recoverable. The Company performs undiscounted operating cash
        flow analyses to determine if an impairment exists. For purposes of recognition
        and measurement of an impairment for assets held for use, the Company
        groups assets and liabilities at the lowest level for which cash flows
        are separately identifiable. If impairment is determined to exist, any
        related impairment loss is calculated based on fair value of the related
        long-lived asset. Impairment losses on assets to be disposed of, if any,
        are based on the estimated proceeds to be received, less costs of disposal.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|m) | Patents and trademarks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In the year ended June 30, 2002, the Company acquired
        rights to the patents and trademarks held by Hagensborg Foods, Ltd., its
        wholly-owned subsidiary. These patents are for a process used in food
        production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Patents and trademarks are stated at cost. Amortization
        is provided using the straight-line method over the estimated useful lives
        of the assets, which is ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|n) | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Leases are classified as capital or operating leases.
        Leases which transfer substantially all benefits and risks incidental
        to ownership of property are accounted for as capital leases. All other
        leases are accounted for as operating leases and the related lease payments
        are charged to expense as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|o) | Cost of sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Cost of sales consists of the purchase price of products
        sold, inbound and outbound shipping charges, packaging supplies and costs
        associated with revenues and marketplace business. Included in cost of
        sales for the year ended June 30, 2006 is manufacturing equipment depreciation
        expense of $33,211 (2005 -$34,090).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|p) | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Effective January 1, 1998, the Company adopted SFAS
        No. 130, Reporting Comprehensive Income(hereinafter
        SFAS No. 130), which was issued in June 1997. SFAS No. 130
        establishes rules for the reporting and display of comprehensive income
        (loss) and its components. SFAS No. 130 requires foreign currency translation
        and unrealized gains and losses on the Companys available for sale
        securities, which prior to adoption were reported separately in stockholders
        deficiency, to be included in comprehensive income (loss).                                                                                                                                                                                                                                                                                                   

F-8

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements 
  (Expressed in United States dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

|q) | Earnings (loss) per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On January 1, 1998, the Company adopted SFAS No. 128,
        which provides for calculation of basic and diluted
        earnings (loss) per share. Basic earnings (loss) per share includes no
        dilution and is computed by dividing net income (loss) available to common
        shareholders by the weighted average common shares outstanding for the
        period. Diluted earnings (loss) per share reflect the potential dilution
        of securities that could share in the earnings of an entity. Although
        there were dilutive securities outstanding at June 30, 2006 and 2005,
        they were not included in the calculation of diluted loss per share because
        they would have been considered anti-dilutive.                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|r) | Provision for taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Income taxes are provided based upon the liability method
        of accounting pursuant to SFAS No. 109 (hereinafter SFAS No. 109),
        Accounting for Income Taxes.Under this approach, deferred
        income taxes are recorded to reflect the tax consequences in future years
        of differences between the tax basis of assets and liabilities and their
        financial reporting amounts at each year-end. A valuation allowance is
        recorded against deferred tax assets if management does not believe the
        Company has met the more likely than not standard imposed
        by SFAS No. 109 to allow recognition of such an asset.                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|s) | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Companys financial instruments as defined
        by SFAS No. 107, Disclosures about Fair Value of Financial Instruments,include marketable securities, accounts receivable, bank indebtedness,
        accounts payable, bank loan, government loan and notes payable. All instruments
        are accounted for on a historical cost basis, which, due to the short
        maturity of these financial instruments, approximates fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|t) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company accounts for stock issued for compensation
        to employees in accordance with Accounting Principles Board No. 25, Accounting
        for Stock Issued to Employeesusing the intrinsic value method.
        Under this standard, compensation cost is the difference between the fair
        market value of the underlying stock and the exercise price of the option
        on the grant date. In accordance with SFAS No. 123, Accounting
        for Stock Based Compensation,the Company discloses the pro
        forma effects on net loss and loss per share as if compensation had been
        measured using the fair value based method described therein.                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|u) | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Certain amounts from prior periods have been reclassified
        to conform to the current period presentation. This reclassification has
        resulted in no changes to the Companys accumulated deficit or net
        losses presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|v) | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In November 2004, the FASB issued SFAS No. 151, Inventory
        Costs  an amendment of ARB No. 43, Chapter 4,which is
        the result of the FASBs project to reduce differences between U.S.
        and international accounting standards. SFAS No. 151 requires idle facility
        costs, abnormal freight, handling costs, and amounts of wasted materials
        (spoilage) be treated as current-period costs. Under this concept, if
        the costs associated with the actual level of spoilage or production defects
        are greater than the costs associated with the range of normal spoilage
        or effects, the difference would be charged to current-period expense,
        not included in inventory costs. SFAS No. 151 is effective for inventory
        costs incurred during fiscal years beginning after June 15, 2005. The
        adoption of SFAS No. 151 did not have a material impact on the Companys
        consolidated financial statements.                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In December 2004, the FASB issued SFAS No. 123(R), Accounting
        for Stock-Based Compensation.SFAS 123(R) establishes standards
        for the accounting for transactions in which an entity exchanges its equity
        instruments for goods or services. This Statement focuses primarily on
        accounting for transactions in which an entity obtains employee services
        in share-based payment transactions. SFAS 123(R) requires that the fair
        value of such equity instruments be recognized as expense in the historical
        financial statements as services are performed. Prior to SFAS 123(R),
        only certain pro-forma disclosures of fair value were required. SFAS 123(R)
        shall be effective for the Company as of the beginning of the first annual
        reporting period that begins after December 15, 2005. The adoption of
        this new accounting pronouncement may have a material impact on the Companys
        consolidated financial statements.

F-9

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements 
  (Expressed in United States dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In May 2005, the FASB issued SFAS No.
  154, Accounting Changes and Error Corrections, a replacement of AFB
  Opinion No. 20 and FASB Statement No. 3.SFAS 154 requires retrospective
  application to prior periods financial statements for changes in accounting
  principle, unless it is impracticable to determine either the period-specific
  effects or the cumulative effect of the change. SFAS 154 also requires that
  retrospective application of a change in accounting principle be limited to
  the direct effects of the change. Indirect effects of a change in accounting
  principle, such as a change in non-discretionary profit-sharing payments resulting
  from an accounting change, should be recognized in the period of the accounting
  change. SFAS 154 also requires that a change in depreciation, amortization,
  or depletion method for long-lived, non-financial assets be accounted for as
  a change in accounting estimate effected by a change in accounting principle.
  SFAS 154 is effective for accounting changes and corrections of errors made
  in fiscal years beginning after December 15, 2005. Early adoption is permitted
  for accounting changes and corrections of errors made in fiscal years beginning
  after the date this Statement is issued. The adoptions of this new accounting
  pronouncement did not have a material impact on the Companys consolidated
  financial position, results of operations or cash flows.

The FASB has also issued SFAS No. 155
  Accounting for Certain Hybrid Financial Instruments and SFAS
  No. 156 Accounting for Servicing of Financial Assets, but
  they will not have any impact on the Companys operations or financial
  position.

3. MARKETABLE SECURITIES

At June 30, 2006, the Company did not
  own any securities classified as available for sale. At June 30, 2005, the Company
  owned securities classified as available for sale with a market value of $291,315.
  The unrealized loss for the securities on hand at June 30, 2006 was $nil (2005
  - $88,277). The Company disposed of securities during the year ended June 30,
  2006 and realized a gain of $6,942 (2005 - $32,808), and an unrealized gain
  in comprehensive income of $88,277.

**4. INVENTORY**

The components of inventory at June 30, 2006 and 2005 are as
  follows:

|                   |  | 2006    |  |  | 2005    | 
|------------------ |  | ------- |  |  | ------- | 
|                   |  | $       |  |  | $       | 
|                   |  |         |  |  |         | 
|Packaging supplies |  | 158,124 |  |  | 166,167 | 
|Finished goods     |  | 99,593  |  |  | 83,897  | 
|Raw materials      |  | 44,857  |  |  | 37,666  | 
|Other supplies     |  | 147     |  |  | 464     | 
|                   |  | 302,721 |  |  | 288,194 | 

As at June 30, 2006, a total of $43,537 (2005 - $28,425) of overhead
  allocation was capitalized in inventory.

During the year ended June 30, 2006, the Company recognized $56,968
  (2005 - $30,407) as a charge for obsolete inventory.

F-10

---

|Garuda Capital Corp.                          
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|(Expressed in United States dollars)          

**5. MACHINERY AND EQUIPMENT**

The following is a summary of machinery and equipment and accumulated depreciation:

|                              |  | 2006     |   |  | 2005     |  
|----------------------------- |  | -------- | - |  | -------- | -
|                              |  | $        |   |  | $        |  
|                              |  |          |   |  |          |  
|Manufacturing equipment       |  | 560,059  |   |  | 491,825  |  
|Manufacturing tools           |  | 61,571   |   |  | 55,607   |  
|Furniture and fixtures        |  | 60,364   |   |  | 53,317   |  
|Leasehold improvements        |  | 136,084  |   |  | 122,904  |  
|Computers                     |  | 111,126  |   |  | 98,294   |  
|Total assets                  |  | 929,204  |   |  | 821,947  |  
|Less accumulated depreciation |  | (683,359 | ) |  | (576,007 | )
|Total                         |  | 245,845  |   |  | 245,940  |  

Included in machinery and equipment is manufacturing equipment
  under capital leases with a cost of $nil (2005 - $12,278) and net book value
  of $nil (2005 - $9,870).

Depreciation expense for the year ended June 30, 2006 was $42,304
  (2005 - $52,101), of which $33,211 (2005 -$40,925) is manufacturing equipment
  depreciation included in cost of sales.

**6. PATENTS AND TRADEMARKS**

The following is a summary of patents and trademarks and accumulated
  amortization:

|                              |  | 2006    |   |  | 2005    |  
|----------------------------- |  | ------- | - |  | ------- | -
|                              |  | $       |   |  | $       |  
|                              |  |         |   |  |         |  
|Patents and trademarks        |  | 35,091  |   |  | 46,219  |  
|Less accumulated amortization |  | (35,091 | ) |  | (27,644 | )
|                              |  | -       |   |  | 18,575  |  

Amortization expense for the year ended June 30, 2006 was $7,302
  (2005 - $3,371), and an impairment of $15,474 was recognized during the year
  ended June 30, 2006 (2005 - $nil).

7. INCOME TAXES

The Company is subject to United States federal and state income
  taxes at an approximate rate of 35%. The reconciliation of the provision (recovery)
  for income taxes at the United States federal statutory rate compared to the
  Companys income tax expense is as follows:

|                                     |  | 2006      |   |  | 2005      |  
|------------------------------------ |  | --------- | - |  | --------- | -
|                                     |  | $         |   |  | $         |  
|                                     |  |           |   |  |           |  
|Net Loss before taxes                |  | 2,050,564 |   |  | 1,959,588 |  
|Less: permanent differences          |  | (85,091   | ) |  | (429,302  | )
|                                     |  | 1,965,473 |   |  | 1,530,286 |  
|Expected statutory
      rate        |  | 35.00%    |   |  | 35.00%    |  
|                                     |  |           |   |  |           |  
|Tax recovery at U.S. statutory rates |  | 687,916   |   |  | 535,600   |  
|Less: Tax on expired loss            |  | (178,231  | ) |  | (163,887  | )
|                                     |  |           |   |  |           |  
|                                     |  | 509,685   |   |  | 371,713   |  
|Change in valuation allowance        |  | (434,000  | ) |  | (381,000  | )
|Difference in tax rates              |  | (55,548   | ) |  | (9,205    | )
|Other                                |  | (18,508   | ) |  | 26,403    |  
|Income tax recovery (expense)        |  | 1,629     |   |  | 7,912     |  

Deferred income taxes reflect the net tax effects of temporary
  differences between the carrying amounts of assets and liabilities for financial
  reporting purposes and the amounts used for income tax purposes. The Company
  has recognized a valuation allowance for those deferred tax assets for which
  it is not more likely than not that realization will occur.

F-11

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

7. INCOME TAXES (continued)

Significant components of the Companys deferred tax assets
  as of June 30 are as follows:

|                                    |  | 2006       |   |  | 2005       |  
|----------------------------------- |  | ---------- | - |  | ---------- | -
|                                    |  | $          |   |  | $          |  
|                                    |  |            |   |  |            |  
|US net operating loss carryforwards |  | 746,000    |   |  | 495,000    |  
|Canadian non-capital losses         |  | 1,205,000  |   |  | 1,039,000  |  
|Temporary differences               |  | 27,000     |   |  | 10,000     |  
|Total deferred tax assets           |  | 1,978,000  |   |  | 1,544,000  |  
|Valuation allowance                 |  | (1,978,000 | ) |  | (1,544,000 | )
|Net deferred tax assets             |  |           |   |  |           |  

The Company has Canadian non-capital losses of approximately
  CAD $3,886,000 expiring through June 2026 and US net operating losses of approximately
  $2,133,000 expiring through June 2026.



2007
      CAD$
      112,0002008
      CAD$
      93,0002009
      CAD$
      221,0002010
      CAD$
      721,0002014
      CAD$
      647,0002015
      CAD$
      898,0002026
      CAD$
      1,194,000








2021
      231,0002022
      89,0002023
      230,0002024
      217,0002025
      649,0002026
      717,000


Pursuant to Section 382 of the Internal Revenue Code, use of
  the Companys US net operating loss carryforwards may be limited if the
  Company experiences a cumulative change in ownership of greater than 50% in
  a moving three-year period. Ownership changes could impact the Companys
  ability to utilize net operating losses and credit carryforwards remaining at
  the ownership change date. The limitation will be determined by the fair market
  value of common stock outstanding prior to the ownership change, multiplied
  by the applicable federal rate.

8. BANK INDEBTEDNESS AND BANK LOANS

Demand loan

The Company has a demand loan facility from a bank in the amount
  of $200,000. Outstanding advances bear interest at prime plus 3.25% per annum.
  At June 30, 2006 the Company had an outstanding balance of $125,000 (2005 -
  $185,000). The loan is payable on demand by the bank and is collateralized by
  a charge on all present and future property of Hagensborg Foods Ltd. Pursuant
  to the Companys loan agreement, the Companys ratio of current assets
  to current liabilities cannot exceed 1.2 to 1.0. At June 30, 2006 and 2005,
  the Company was in violation of this condition. At June 30, 2006 and 2005, the
  Company was also in violation of a second covenant whereby the Companys
  ratio of debt to tangible net worth may not exceed 3.0 to 1.0. The bank had
  waived any action until January 31, 2007 and has not taken any action to date.

Overdraft

The Company has a bank overdraft facility in the amount of $100,000.
  Outstanding advances bear interest at prime plus 3.25% per annum, payable monthly.
  At June 30, 2006 the Company had an outstanding balance of $96,258 (2005 -$94,754)
  on this overdraft facility. The facility is personally guaranteed by a shareholder
  of the Company and all present and future property of Hagensborg Foods Ltd.

F-12

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

9. GOVERNMENT LOAN

In 2003 and 2004 the Company received monies totaling Cdn$16,608
  from the Canadian Department of Foreign Affairs and International Trade under
  a government sponsored program to fund costs incurred by the Company on eligible
  activities. Repayment of the funds would only commence if the Company earned
  annual sales outside of Canada in excess of Cdn$2,440,000.

Because the Company has been unable to generate the minimum level
  of sales revenue outside of Canada, there are no requirements to repay any of
  these monies during the year ending June 30, 2006.

10. STOCK OPTIONS

June 30, 2005On January 10, 2005, the Company entered into an employment agreement whereby
  it agreed to issue stock options to purchase up to 250,000 common shares at
  a price of $0.10 per share, exercisable to January 10, 2010, which options would
  vest 16% 90 days after the date of granting and 14% every three months thereafter.
  As of June 30, 2006, 145,000 options had vested.

On April 29, 2005, Garuda filed with the SEC a Form S-8 registering
  4,000,000 common shares to be issued to employees and consultants pursuant to
  Garudas April 2005 Non-Qualified Stock Compensation Plan approved by the
  Board on April 26, 2005. As of June 30, 2005, 3,007,000 shares have been issued
  under the plan. During the fiscal year ended June 30, 2006, 993,000 shares are
  issued under this plan. As of June 30, 2006, 4,000,000 shares have been issued
  under the plan.

On May 11, 2005, the Companys board of directors cancelled
  the Companys 2002 Stock Option Plan since this plan was never approved
  by the shareholder.

On May 11, 2005, the Companys board of directors approved
  the Companys 2005 Incentive Stock Option Plan, subject to shareholder
  approval, which authorized a maximum of 8,000,000 of shares for issuance pursuant
  to options that could be issued to employees and consultants of the Company
  and its subsidiaries (the 2005 Stock Option Plan). On June 27, 2005
  the shareholders of the Company approved the 2005 Stock Option Plan at the Companys
  Annual General Meeting.

June 30, 2006On January 19, 2006, the Companys board of directors approved the
  Companys 2006 Non-Qualified Stock Compensation Plan, which authorized
  a maximum of 5,000,000 shares of common stock that could be issued to employees
  and consultants of the Company and its subsidiaries (the 2006 Stock Compensation
  Plan).

On February 9, 2006, Garuda filed with the SEC a Registration
  Statement on Form S-8 registering 5,000,000 common shares issuable to employees
  and consultants pursuant to Garudas 2006 Non-Qualified Stock Compensation
  Plan approved by the Board on January 19, 2006. As of June 30, 2006, 4,990,000
  shares had been issued under the plan.

During the year ended June 30, 2006, the Company granted 3,500,000
  stock options at the exercise price of $0.10 per share to employees and consultants.
  At June 30, 2006, 4,500,000 stock options were available for future grant under
  the 2005 Stock Option Plan and 105,000 stock options were available for grant
  (subject to vesting requirements) pursuant to an employment agreement.

|                            |  |           |  |  |           |   |  | Options outstanding |  |  |          | 
|--------------------------- |  | --------- |  |  | --------- | - |  | ------------------- |  |  | -------- | 
|                            |  |           |  |  |           |   |  |                     |  |  | Weighted | 
|                            |  | Shares    |  |  | Number    |   |  | Price               |  |  | average  | 
|                            |  | available |  |  | of        |   |  | per                 |  |  | exercise | 
|                            |  | for grant |  |  | shares    |   |  | share               |  |  | price    | 
|                            |  | #         |  |  | #         |   |  | $                   |  |  | $        | 
|                            |  |           |  |  |           |   |  |                     |  |  |          | 
|Balance, June 30, 2004      |  | 1,600,000 |  |  | 400,000   |   |  | 0.15                |  |  | 0.15     | 
|Options vested and granted  |  |           |  |  | 40,000    |   |  | 0.10                |  |  | 0.10     | 
|Options forfeited           |  |           |  |  | (400,000  | ) |  | 0.15                |  |  | 0.15     | 
|Balance June 30, 2005       |  | 8,210,000 |  |  | 40,000    |   |  | 0.10                |  |  | 0.10     | 
|Options vested and granted  |  |           |  |  | 3,605,000 |   |  | 0.10                |  |  | 0.10     | 
|Balance June 30,
      2006 |  | 4,605,000 |  |  | 3,645,000 |   |  | 0.10                |  |  | 0.10     | 

F-13

---

Garuda Capital Corp. 
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

10. STOCK OPTIONS (contd.)

The Company applies APB Opinion No. 25 in accounting for options
  and, accordingly, recognized no compensation cost for its stock options vested
  and granted in the years ended June 30, 2006 and 2005. The following reflects
  the Companys pro forma net loss and net loss per share as if the Company
  had determined compensation costs based upon fair market values of options vested
  at the grant date, as well as the related disclosures required by SFAS 148:

|                                                                                     |  | 2006       |   |  | 2005       |  
|------------------------------------------------------------------------------------ |  | ---------- | - |  | ---------- | -
|                                                                                     |  | $          |   |  | $          |  
|                                                                                     |  |            |   |  |            |  
|                                                                                     |  |            |   |  |            |  
|Net loss as reported                                                                 |  | (2,052,193 | ) |  | (1,967,500 | )
|Add: stock-based compensation expense included in reported
      net loss            |  | 35,000     |   |  | -          |  
|Deduct: Total stock-based compensation expense
      determined under the fair value |  | (226,796   | ) |  | (5,200     | )
|based method                                                                         |  |            |   |  |            |  
|Pro forma net loss                                                                   |  | (2,243,989 | ) |  | (1,972,700 | )
|                                                                                     |  |            |   |  |            |  
|Pro forma net loss per share, basic and diluted                                      |  | (0.06      | ) |  | (0.16      | )

The fair value of the options granted was estimated using the
  Black-Scholes Option Valuation Model. The following assumptions were made to
  value the stock options:

|                        | 2006       | 2005     
|----------------------- | ---------- | ---------
|Risk-free interest rate | 4%         | 3.68%    
|Expected life           | 1.82 years | 4.8 years
|Expected volatility     | 109%       | 107%     
|Dividend yields         | nil        | nil      

The Black-Scholes option valuation model was developed for use
  in estimating the fair value of traded options, which have no vesting restrictions
  and are fully transferable. The weighted average fair value of stock options
  under employer stock option plans granted during the year was $226,796 [2005
  -$5,200].

In addition, option valuation models require the input of highly
  subjective assumptions including the expected stock price volatility. Because
  the Companys employee stock options have characteristics significantly
  different from those of traded options, and because changes in the subjective
  input assumptions can materially affect the fair value estimate, in managements
  opinion, the existing models do not necessarily provide a reliable single measure
  of the fair value of its employee stock options.

F-14

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

11. COMMON STOCK

|[a] | Authorized                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company is authorized to issue up to 100,000,000
        shares of common stock, par value $0.001 per share. The Company is also
        authorized to issue up to 10,000,000 shares of preferred stock, par value
        $0.01 per share. In July 2005, the Company increased its authorized common
        stock from 50,000,000 shares to 100,000,000 shares pursuant to the vote
        of stockholders held on June 27, 2005.                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|[b] | Issued and outstanding                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | June 30, 2005:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 8,362,000 shares of common stock
        to employees and consultants of the Company for services and compensation
        rendered: 1,555,000 shares at $0.02 per share, 3,780,000 shares at $0.10
        per share, 3,000,000 shares at $0.12 per share, and 27,000 shares at $0.15
        per share. A total of $147,500 was recorded in general and administrative
        expense related to these share issuances.                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 11,170,044 units for
        a fair market value of $0.10 per unit to settle outstanding notes payable
        to related parties. Each unit consists of one share of common stock and
        one half warrant, with each warrant to purchase one share of common stock
        at an exercise price of $0.20 per share. The warrants are exercisable
        for a period of two years from issuance. A value of $446,802 was recorded
        as a loss on extinguishment of debt using the Black Scholes Option Pricing
        Model for the issue of the warrants.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 8,750,000 of the aforementioned units
        for cash of $875,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | June 30, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued a total of 4,010,000 shares of common
        stock for compensation valued at $384,600.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 609,165 shares of common stock to
        one of the shareholders for the consideration of interest of $65,506 owed
        to the shareholder to September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued a total of 4,273,000 shares of common
        stock for services valued at $400,980.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 7,275,000 shares of common stock
        and 5,037,500 warrants pursuant to private placements for cash proceeds
        of $475,410.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company issued 1,890,000 shares of common stock
        to settle debt of $106,350. A loss on extinguishment of debt of $33,850
        was recognized. A total of 945,000 warrants were also issued, and $62,200
        was recognized as loss on extinguishment of debt.                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | On June 29, 2006, the Company received $70,000 for the
        issuance of 1,000,000 shares of common stock and 500,000 warrants. The
        warrants are exercisable at $0.20 per share on or before June 29, 2008.
        The shares were issued subsequently. Refer to Note 17.                                                                                                                                                                                                                                                                                                         

F-15

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

11. COMMON STOCK (continued)

|[c] | Warrants                                                                                                                                                
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                         
|    | As at June 30, 2006, the Company had issued 16,617,522
        warrants that had not been exercised. The outstanding warrants expire
        as follows:

|No. of     | Exercise | Expiry      
|---------- | -------- | ------------
|warrants   | Price    | date        
|           |          |             
|8,210,022  | $0.20    | March 2007  
|1,750,000  | $0.20    | June 2007   
|87,500     | $0.20    | August 2007 
|895,000    | $0.10    | January 2008
|2,675,000  | $0.20    | March 2008  
|1,150,000  | $0.10    | June 2008   
|1,850,000  | $0.10    | June 2008   
|           |          |             
|16,617,522 |          |             

During the year ended June 30, 2006 945,000 (2005  5,585,022)
  warrants were issued to settle outstanding debt the Company owed. A loss on
  extinguishment of debt of $96,050 (2005 - $446,802) was recognized in the current
  year loss.

The remaining value of the warrants has been included in additional
  paid-in capital.

During the year ended June 30, 2006, there were 500,000 warrants
  (2005 - 4,302,000 warrants) with an exercise price of $0.20 per share (2005
  - $0.70 per share) that expired without being exercised.

**12. RELATED PARTY TRANSACTIONS**

The Company is indebted to certain shareholders as follows:

|                                                         |  | 2006    |  |  | 2005    | 
|-------------------------------------------------------- |  | ------- |  |  | ------- | 
|                                                         |  | $       |  |  | $       | 
|Shareholder convertible note bearing interest at         |  |         |  |  |         | 
|1% per month due June 30, 2006                           |  |        |  |  | 100,000 | 
|Shareholder notes bearing interest at 10%,               |  |         |  |  |         | 
|no specific due dates, collateralized
      by all       |  |         |  |  |         | 
|personal property of HFL and GGC                         |  | 42,500  |  |  | 54,670  | 
|Shareholder note bearing interest at 15%,                |  |         |  |  |         | 
|no specific due dates, unsecured (Note 17 (b))           |  | 223,394 |  |  | 260,056 | 
|Advances from shareholders, unsecured,                   |  |         |  |  |         | 
|bearing interest
      at 10% with no specific due dates |  | 11,462  |  |  | 109,832 | 
|                                                         |  | 277,356 |  |  | 524,558 | 

F-16

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements 
  (Expressed in United States dollars)

12. RELATED PARTY TRANSACTIONS (Continued)

|[a] | During the year ended June 30, 2006, the holder of the
        convertible note invested all of the value of the note into units at a
        value of $0.10 per unit. Each unit consists of one share of common stock
        of the Company and one half warrant, with each warrant to acquire an additional
        share of common stock at an exercise price of $0.20 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|[b] | Total interest expense on the related party loans totaled
        $44,858 (2005 - $108,565) and is included in interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|[c] | During the year the Company entered into the following
        related party transactions in the normal course of business which were
        recorded at exchange amount:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | During the year ended June 30, 2006, the Company incurred
        $120,000 [2005 - $72,000] in management fees to the President of the Company,
        of which $90,000 was settled by the issuance of 900,000 shares of common
        stock, and $30,000 paid in cash. The Company also issued 790,000 shares
        of common stock at a price of $0.08 per share, and issued 395,000 warrants
        to the President of the Company for extinguishment of debt totaling $86,900
        [2005 - $56,000]. During the year ended June 30, 2006, the Company issued
        $nil [2005 - $34,000] in common stock to two directors of the Company
        for their services.                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | During the year ended June 30, 2006, the Company issued
        $65,506 [2005 - $nil] in common stock to a former director of the company
        for interest accrued on a shareholder loan.
      During the year ended June 30, 2006, the Company issued
        the following to the President of Hagensborg Foods Ltd.: 1,000,000 shares
        of common stock at a price of $0.065 per share, and 500,000 warrants,
        for cash totaling $65,000; 1,360,000 shares of common stock at a price
        of $0.10 per share for compensation; and 500,000 shares of common stock
        at a price of $0.05 per share for compensation. Additional compensation
        of $38,600 was charged for these transactions, to reflect the fair value
        of the stock price on the date of the transaction.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | During the year ended June 30, 2006, the Company issued
        1,000,000 shares of common stock at a price of $0.05 per share, and 500,000
        warrants, to the President of the Company. Additional compensation of
        $20,000 was charged for this transaction, to reflect the fair value of
        the stock price on the date of the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|[d] | During the year ended June 30, 2005, the Company issued
        11,170,044 shares of common stock at $0.10 per share and 5,585,022 warrants
        to settle outstanding notes payable to related parties. A loss on extinguishment
        of debt totaling $446,802 was recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

13. CONTRA EQUITY

During the year the Company issued common stock for services
  [see note 11[b]], some of which services will be rendered to the Company subsequent
  to year end. The value of the services to be rendered subsequent to June 30,
  2006 totaled $60,470 (2005 - $418,667).

F-17

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

14. SEGMENT INFORMATION

The Company has adopted Statement of Financial Accounting Standards
  No. 131, Disclosures about Segments of an Enterprise and Related Information,(hereinafter SFAS No. 131). SFAS No. 131 establishs standards
  for reporting information about operating segments in annual financial statements
  and requires selected information about operating segments in interim financial
  reports issued to stockholders. It also established standards for related disclosures
  about products and services and geographic areas. Operating segments are defined
  as components of an enterprise about which separate financial information is
  available, evaluated regularly by the chief operating decision makers, or a
  decision making group, in deciding how to allocate resources and in assessing
  performance for the company. The Companys segments are defined by product
  line.

Revenue from external customers, by location of customer, is
  as follows:

|     | Canada  | U.S.    | Total  
|---- | ------- | ------- | -------
|     | $       | $       | $      
|     |         |         |        
|2006 | 433,498 | 335,365 | 768,863
|2005 | 281,057 | 420,580 | 701,637

The Company has substantially all its assets in Canada and its
  current and planned future operations are, and will be, located in Canada.

The following table reflects certain information for the Companys
  segments:

|                              |  | Hagensborg |   |  | Hagensborg    |   |  | Natural      |   |  | Corporate        |   |  |            |  
|----------------------------- |  | ---------- | - |  | ------------- | - |  | ------------ | - |  | ---------------- | - |  | ---------- | -
|                              |  | Foods Ltd. |   |  | Seafoods Ltd. |   |  | Program Inc. |   |  | and Eliminations |   |  | Total      |  
|                              |  | $          |   |  | $             |   |  | $            |   |  | $                |   |  | $          |  
|2006                          |  |            |   |  |               |   |  |              |   |  |                  |   |  |            |  
|Revenues                      |  | 586,325    |   |  | 97,703        |   |  | 84,813       |   |  | 22               |   |  | 768,863    |  
|Gross profit (loss)           |  | (218,499   | ) |  | 45,692        |   |  | (9,783       | ) |  | 22               |   |  | (182,567   | )
|Depreciation and amortization |  | 40,844     |   |  |              |   |  | 6,265        |   |  | 2,497            |   |  | 49,606     |  
|Other income(expense)         |  | 44,815     |   |  |              |   |  |             |   |  | (42,505          | ) |  | 2,310      |  
|Net loss                      |  | (1,183,847 | ) |  | (20,033       | ) |  | (49,868      | ) |  | (798,445         | ) |  | (2,052,193 | )
|Segment assets                |  | 567,464    |   |  | 48,428        |   |  | 39,233       |   |  | 10,645           |   |  | 665,770    |  
|                              |  |            |   |  |               |   |  |              |   |  |                  |   |  |            |  
|2005                          |  |            |   |  |               |   |  |              |   |  |                  |   |  |            |  
|Revenues                      |  | 444,915    |   |  | 193,999       |   |  | 62,790       |   |  | (67              | ) |  | 701,637    |  
|Gross profit (loss)           |  | (144,392   | ) |  | 61,790        |   |  | (23,017      | ) |  | (67              | ) |  | (105,969   | )
|Depreciation and amortization |  | 49,763     |   |  |              |   |  | 4,145        |   |  | 1,564            |   |  | 55,472     |  
|Other income(expense)         |  |           |   |  |              |   |  |             |   |  | (85,329          | ) |  | (85,329    | )
|Net loss                      |  | (812,645   | ) |  | (13,598       | ) |  | (65,709      | ) |  | (1,075,548       | ) |  | (1,967,500 | )
|Segment assets                |  | 546,250    |   |  | 57,399        |   |  | 46,446       |   |  | 304,492          |   |  | 954,588    |  

15. MAJOR CUSTOMERS

During the year ended June 30, 2006, the Company recognized revenue
  from unrelated entities which individually comprised greater than 10% of total
  revenues. Revenue recognized from these four entities was 47% in 2006 [2005
  -36%]. These revenues were recorded with the segment of Hagensborg Foods Ltd.

Major customers accounted for 30% of total receivables at June
  30, 2006 [2005 - 40%].

F-18

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

16. COMMITMENTS AND CONTINGENCIES

|[a] | Rent expense for the year ended June 30, 2006
        was $179,874 (2005 - $164,290). During the year ended June 30, 2006, the
        Company allocated $110,671 (2005 - $95,949) to inventory and cost of goods
        sold, leaving a net rent expense of $69,203 (2005 - $68,341).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Company leases premises under agreements
        that expire in 2007. Base annual lease payments are $131,300 (2005 - $131,300).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[b] | During the year ended June 30, 2005, Garuda
        Minerals Inc., a wholly-owned subsidiary, entered into a Letter of Intent
        to earn the exclusive right and option to acquire a 65% right, title and
        interest in and to an exploration license on an area of approximately
        200 km2located near the town of Ho in the Volta region of
        Ghana.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In order to have the option exercised, Garuda
        Minerals Inc. must, on or before May 17, 2006, incur direct or indirect
        expenses totaling $300,000 on a program of work in respect of this particular
        property. No expenses have been incurred on this property to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On April 4, 2006, the Company announced that
        its wholly-owned subsidiary, Garuda Minerals Inc. had elected not to exercise
        its option to joint venture the mining prospects in Ghana.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[c] | During the year ended June 30, 2005, Garuda
        Gold Corporation, a wholly-owned subsidiary, entered into a Letter of
        Intent to earn the exclusive right and option to acquire a 65% right and
        interest in and to the Mining Rights to mine a hard rock vein system in
        an area in Prestia, Ghana.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In order to have the option exercised, Garuda
        Gold Corporation must on or before May 17, 2006, incur direct or indirect
        expenses totaling $300,000 on a program of work in respect of this particular
        mining rights. No expenses have been incurred on these mineral rights
        to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On April 4, 2006, the Company announced that
        its wholly-owned subsidiary, Garuda Gold Corporation had elected not to
        exercise its option to joint venture the mining prospects in Ghana.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[d] | On April 12, 2006, Leone International Marketing
        Inc. (the Claimant) filed a claim in the Supreme Court of
        British Columbia against the Companys wholly-owned subsidiary, Hagensborg
        Foods Ltd. (HFL) claiming that HFLs use of the name
        Leone to sell its chocolates infringes its trademark rights,
        causing damages. The Claimant is seeking:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | HFL intends to defend the claim. The Company
        believes it has a strong chance of success of defending the claim. No
        court date has yet been set and the upper estimate of damages the Company
        could incur is approximately $20,000 CAD.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[e] | On June 27, 2006, the Companys wholly-owned
        subsidiary, Garuda Exploration Inc., under its former name, Garuda Ventures
        Canada Inc., entered into a Letter of Intent with Xemplar Energy Corp.
        (Xemplar), to acquire a 70% interest in the Corhill uranium-
        gold-platinum property located in the Northwest Territories. The Corhill
        property is comprised of 18 mineral claims and covers 30,628 acres. The
        agreement provides for Garuda Minerals Canada Inc. to make a cash payment
        of Cdn$50,000, issue 2,000,000 restricted shares of common stock of the
        Company and incur expenditures of Cdn$1,500,000 over 3 years. The property
        is subject to a 2% net smelter return royalty. On July 7, 2006, Garuda
        Minerals Canada Inc. entered into an option agreement with Xemplar to
        formalize the above terms.

F-19

---

Garuda Capital Corp.
  Notes to the Consolidated Financial Statements
  (Expressed in United States dollars)

16. COMMITMENTS AND CONTINGENCIES (Continued)

[f] Future minimum payments and the obligations due under the
  capital leases are as follows:

|                |  | 2006 |  |  | 2005   |  
|--------------- |  | ---- |  |  | ------ | -
|                |  | $    |  |  | $      |  
|                |  |      |  |  |        |  
|                |  |      |  |  |        |  
|2006            |  | -    |  |  | 2,375  |  
|Current portion |  | -    |  |  | (2,375 | )
|                |  | -    |  |  | -      |  

17. SUBSEQUENT EVENTS

|[a] | On July 7, 2006, the Company issued 1,000,000 shares
        of common stock and issued 500,000 warrants for proceeds of $70,000 (received
        prior to year end). The warrants are exercisable at $0.20 per share on
        or before June 29, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                           
|[b] | On July 12, 2006, the Company issued 2,792,423 shares
        of common stock at a price of $0.08 per share for settlement of debt to
        a shareholder totaling $223,394 [see note 12].                                                              

|              |  | June 30, |  |  | June 30, | 
|------------- |  | -------- |  |  | -------- | 
|              |  | 2006     |  |  | 2005     | 
|              |  | $        |  |  | $        | 
|              |  |          |  |  |          | 
|Interest paid |  | 77,448   |  |  | 143,690  | 



18. SUPPLEMENTARY CASH FLOW INFORMATION

19. OTHER INCOME

|                                      |  | June 30, |  |  | June 30, |  
|------------------------------------- |  | -------- |  |  | -------- | -
|                                      |  | 2006     |  |  | 2005     |  
|                                      |  | $        |  |  | $        |  
|                                      |  |          |  |  |          |  
|Proceeds on settlement of lawsuit     |  | 21,472   |  |  |         |  
|Gain on write off of accounts payable |  | 36,728   |  |  | 23,043   |  
|Other                                 |  | 1,830    |  |  | (5,149   | )
|                                      |  |          |  |  |          |  
|                                      |  | 60,030   |  |  | 17,894   |  

F-20

---



Item 8. Changes In and Disagreements with Accountants on Accounting
  and Financial Disclosure

On July 11, 2005, Williams & Webster, P.S. (Williams)
informed us that it would no longer represent Garuda as our accountants,
effective immediately. Williams last reported on our financial statements as of
October 14, 2004. Our financial statements for the year ended June 30, 2004, as
audited by Williams, included an independent auditor's report containing an
explanatory paragraph describing substantial doubt as to Garudas ability to
continue as a going concern. During our most recent fiscal year and the
subsequent interim period through July 11, 2005, there were no disagreements
with Williams on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved, to
Williams's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.

On August 8, 2005, we engaged Ernst & Young LLP, Chartered
Accountants to serve as our independent public accounting firm.

Item 8A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2006, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. We are
responsible for establishing and maintaining adequate internal controls and
procedures for the financial reporting of Garuda. Disclosure controls and
procedures are the controls and other procedures that we designed to ensure that
we record, process, summarize and report in a timely manner the information we
must disclose in reports that we file with or submit to the SEC. Our Chief
Executive Officer and Chief Financial Officer participated in this evaluation.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the date of his evaluation, our disclosure
controls and procedures were ineffective. Our CEO and CFO intend, during the
recent quarter, to revise and improve our controls and procedures to increase
our effectiveness. We will more effectively evaluate the internal controls on a
regular base to ensure that we are in compliance with our policies. On June 13,
2006, we hired an independent accounting firm experienced in GAAP to produce and
review our financial statements. We believe that it will address our weakness in
internal controls over financial reporting.

We also plan to take several steps to further improve our
internal controls and procedures:

- To segregate accounting and financial reporting duties;
- To design a more effective internal control and procedure over financial
  reporting regarding the reliability of financial reporting and the preparation
  of financial statements for external purposes in accordance with GAAP;
- To evaluate the effectiveness of its improved disclosure controls and
  procedures as required by Section 404 of the Sarbanes-Oxley Act of 2003;

33

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- To formalize a written procedure with respect to disclosure controls to
  remediate its current weakness.

There have been no changes in our internal control over
financial reporting that occurred during our fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Item 8B. Other Information.

None.

34

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PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.

|(a) | The following table sets forth the name, age, and
      position of the executive officers and directors of Garuda as of October
      6, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

Name and Age
    Position(s) Held (1)
    Principal Occupation(s) During Past 5
      Years
    Other Directorships Held by DirectorC. Robin Relph, 57
    Director, President, CFO, CEO from April
      2002
    President of Garuda from May 2002
      Director of Hagensborg Food Corporation from 1998 to March
      2003, Also for the past five years, Mr. Relph has been the
      managing director of Buckingham Securities Ltd., an investment
      company in London, UK
    Buckingham Exploration Inc., a Nevada
      companyJurgen Wolf, 70
    Director from October 2002 Director of
      Hagensborg Foods Ltd. from 1999
    President of US Oil and Gas Resources Inc.
      (TSX: USR) from 1999 to April 25, 2005 Director of
      Odyssey Exploration Inc. (TSX-V: ODE) from April 25, 2005 to
      present
    Tasty Fries (OTC BB: TFRY), Shoreman
      Resources (TSX: SMH), August Energy Corp. (PK: OENC)
      Odyssey Exploration Inc. (TSX-V: ODE)


|(1) | Hagensborg Foods Ltd, Natural Program Inc., Natural
      Program Ltd., Garuda Gold Corporation, Garuda Exploration Inc., Garuda
      Minerals and Hagensborg Seafoods Limited, are all wholly-owned
      subsidiaries of Garuda.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

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Significant Employees

There are no individuals other than our executive officers who
are expected to make a significant contribution to the business.

Family Relationships

There are no family relationships among directors, executive
officers, or persons nominated or chosen by Garuda to become directors or
executive officers.

Legal Proceedings

There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial shareholders are an
adverse party or have a material interest adverse to us. However, on April 12,
2006, Leone International Marketing Inc. filed a claim in the Supreme Court of
British Columbia against Garudas wholly owned subsidiary, Hagensborg Foods Ltd.
claiming that Hagensborgs use of the name Leone to sell its chocolates
infringes its trademark rights, causing damages. The detail information is
referred to Item 3 Legal Proceedings on page 25.

Board of Directors and Its Committees

The Board of Directors met in person or via telephone regularly
during Garudas fiscal year ended June 30, 2006. Each member of the Board of
Directors attended at least 75% of the meetings. The Board of Directors
currently does not have a nominating committee or a compensation committee.

The Board of Directors of Garuda has an audit committee that is
currently composed of two members, Jurgen Wolf and C. Robin Relph. The audit
committee met two times during the past fiscal year. The audit committee is
responsible for the selection and retention of independent auditors, audit
reports and management recommendations made by Garudas independent auditors.
Garudas Board of Directors has determined that each audit committee member has
sufficient knowledge in financial and accounting matters to serve on the
committee and that each member is an audit committee financial expert as
defined by the rules of the Securities and Exchange Commission (the SEC). The
Board of Directors has not adopted a written charter for the audit committee.

36

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Director Nominees

Garuda does not have a nominating committee. The Board of
Directors, sitting as a Board, selects those individuals to stand for election
as members of our Board. Since the Board of Directors does not include a
majority of independent directors, the decision of the Board as to director
nominees is made by persons who have an interest in the outcome of the
determination. The Board will consider candidates for directors proposed by
security holders, although no formal procedures for submitting candidates have
been adopted. Until otherwise determined, not less than 90 days prior to the
next annual Board of Directors' meeting at which the slate of Board nominees is
adopted, the Board accepts written submissions that include the name, address
and telephone number of the proposed nominee, along with a brief statement of
the candidate's qualifications to serve as a director and a statement of why the
shareholder submitting the name of the proposed nominee believes that the
nomination would be in the best interests of shareholders. If the proposed
nominee is not the security holder submitting the name of the candidate, a
letter from the candidate agreeing to the submission of his or her name for
consideration should be provided at the time of submission. The letter should be
accompanied by a résumé supporting the nominee's qualifications to serve on the
Board of Directors, as well as a list of references.

The Board identifies director nominees through a combination of
referrals, including by management, existing Board members and security holders,
where warranted. Once a candidate has been identified, the Board reviews the
individual's experience and background and may discuss the proposed nominee with
the source of the recommendation. If the Board believes it to be appropriate,
Board members may meet with the proposed nominee before making a final
determination whether to include the proposed nominee as a member of
management's slate of director nominees submitted to shareholders for election
to the Board.

Among the factors that the Board considers when evaluating
proposed nominees are their knowledge of and experience with and knowledge of
and experience in business matters, finance, capital markets and mergers and
acquisitions. The Board may request additional information from the candidate
prior to reaching a determination. The Board is under no obligation to formally
respond to all recommendations, although as a matter of practice, it will
endeavor to do so.

Code of Ethics

Garuda has not yet adopted a code of ethics that applies to
Garudas principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions
because it has not yet finalized the content of such a code. Companies whose
equity securities are listed for trading on the OTCBB are not currently required
to do so.

37

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Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Exchange Act of 1934, as
amended (Section 16), requires that reports of beneficial ownership of capital
stock and changes in such ownership be filed with the SEC by Section 16
reporting persons, including directors, certain officers, and holders of more
than 10% of the outstanding common shares. We are required to disclose in this
Report each reporting person whom we know to have failed to file any required
reports under Section 16 on a timely basis during the fiscal year ended June 30,
2006.

To our knowledge, based solely on a review of copies of Forms
3, 4 and 5 furnished to us and written representations that no other reports
were required, during the fiscal year ended June 30, 2006, our officers,
directors and 10% shareholders complied with all Section 16 filing requirements
applicable to them, except that some of the Form 4s were filed late.

Item 10. Executive Compensation.

The following table sets forth compensation awarded to, earned
by or paid to our Chief Executive Officer (CEO), and to other persons serving as
executive officers as of June 30, 2006, whose salary and bonus for such year
exceeded $100,000 (collectively, the Named Executive Officers) for the last
three completed fiscal years.

Annual Compensation
      Long Term Compensation
      All other 
        compens 
        ation 
        $Summary Annual Compensation
      Awards
      PayoutsName 
        and 
        principal 
        position
      Year
      Salary $
      Bonus 
        $
      Other 
        Annual 
        Compensa 
        tion 
        $
      Restricted 
        Stock 
        Award(s) 
        $
      Securities 
        Underlying 
        Options/SARs 
        (#)
      LTIP 
        Payouts 
        $C. Robin 
        Relph 
        President 
        and CEO
      2006
      120,000 (1) 
        (2)
      Nil
      Nil
      Nil
      1,200,000
      Nil
      Nil2005
      72,000(1)
      Nil
      Nil
      56,000
      Nil
      Nil
      Nil2004
      72,000(1)
      Nil
      18,000
      Nil
      Nil
      Nil
      Nil


|(1) | Represents consulting fees paid to Mr. Relph as
      President.                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                         
|(2) | During the year ended June 30, 2006, Garuda incurred
      $120,000 in consulting fees to the President of Garuda, of which $90,000
      was settled by the issuance of 900,000 shares of common stock, and $30,000
      paid in cash.
|    |                                                                                                                                                                                                                                         
|(3) | 1,200,000 options were granted to Robin Relph as
      incentives related to the provision of services to us pursuant to 2005
      Incentive Stock Option Plan registered on Form S-8 on February 9,
    2006.                         

38

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Employment Agreements

We have no written employment agreements with executive
officers at this time. Consulting fees in the amount of $120,000 this year were
paid to C. Robin Relph, President during the last fiscal year.

Compensation of Directors

Directors are entitled to receive reimbursement for all
out-of-pocket expenses incurred for attendance at Board of Directors
meetings.

Other Arrangements

There are no other arrangements.

Termination of Employment and Change of Control
Arrangement

There is no compensatory plan or arrangement with respect to
any individual named above which results or will result from the resignation,
retirement or any other termination of employment with us, or from a change in
our control.

Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.

Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth certain information concerning
the number of shares of our common stock owned beneficially as of June 30, 2006
by: (i) each of our directors; (ii) each of our named executive officers; and
(iii) each person or group is known by us to beneficially own more than 5% of
our outstanding shares of common stock. Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the
shares shown to our knowledge.

Name, position & address of
      beneficial owner
    Number of Shares of Common
      Stock (1)
    Percentage of Common Stock
      (2)C. Robin Relph, Director President, CEO,
      CFO 5 Nebuck House Olde Towne at Sandyport West Bay
      Street, Nassau, Bahamas
    12,033,196 (3)
    21.4%Jurgen Wolf, Director 103  1285 
      17thAvenue Surrey, BC, V4A 1T8 Canada
    1,760,000 (4)
    3.3%Directors and Officers as a Group
    13,793,196
    24.1%


39

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|(1) | The number and percentage of shares beneficially owned is
      determined under rules of the SEC and the information is not necessarily
      indicative of beneficial ownership for any other purpose.                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Under such rules, beneficial ownership includes any
      shares as to which the individual has sole or shared voting power or
      investment power and also any shares which the individual has the right to
      acquire within 60 days through the exercise of any stock option or other
      right. The persons named in the table have sole voting and investment
      power with respect to all shares of Common Stock shown as beneficially
      owned by them, subject to community property laws where applicable and the
      information contained in the footnotes to this table.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2) | Based on 52,712,784 issued and outstanding shares of
      common stock as of June 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(3) | Includes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | e.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | f.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | g.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(4) | Includes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

40

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Item 12. Certain Relationships and Related Transactions.

During the fiscal year ended June 30, 2006, we entered into the
following transactions in which certain of our officers or directors have a
direct or indirect material interest.

During the year ended June 30, 2006 MB Internet Services Inc.,
a company controlled by Arnold Armstrong, a former director of Garuda, and a
company of which our President Robin Relph is a director, agreed to accept
609,165 common shares of our stock as payment of $65,506 for interest accrued in
full satisfaction of US$60,917.37 of principal and interest owed as of September
30, 2005.

On January 4, 2006,we entered into a subscription agreement
with our President, Robin Relph, whereby Mr. Relph purchased 790,000 units at a
price of $0.08 per unit by converting debt owed to him. Each unit consisted of
one common share and one half warrant, with each warrant carrying the right to
purchase one common share at a price of $0.10 for a period of 2 years.

On February 16, 2006, we issued stock options to our directors
as follows:

- 1,200,000 options to our President, Robin Relph, vesting date February 16,
  2006, exercise price $0.10 and expiration date February 15, 2008
- 600,000 to a director of Garuda, Jurgen Wolf, vesting date February 16,
  2006, exercise price $0.10 and expiration date February 15, 2008

On February 16, 2005, we agreed to issue 900,000 shares of our
common stock to Robin Relph as compensation for services and unpaid salary to
owing as of February 16, 2006 and as future compensation for services to March
31, 2006.

On June 7, 2006, we sold 1,000,000 units to our President,
Robin Relph at a price of $0.05 per unit, for total proceeds of $50,000. Each
unit consisted of one common share and one half warrant, with each warrant
carrying the right to purchase one common share for $0.10 per share for a period
of two years.

During the year ended June 30, 2006, we issued 360,000 shares
of our common stock with a deemed value of $0.10 per share and 500,000 shares of
our common stock with a deemed value of $0.05 per share as compensation for
services performed by Shelley Miller up to April 30, 2006. The issuance of
500,000 common stock was pursuant to an agreement with Fadelle Ventures Ltd.
(Fadelle), a company owned entirely by Shelley Miller, the President of our
wholly-owned subsidiary, Hagensborg Foods Ltd. The issuance of 360,000 common
stock was to Shelley Miller as compensation based on our Form S-8. We also
agreed to compensate Fadelle a further $4,000 by paying this amount to a third
party on Fadelle's behalf.

41

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Item 13. Exhibits.

Exhibits

|10.1 | Design Agreement between Hagensborg
        and Turner Duckworth dated March 16, 2005 (incorporated by reference as
        exhibit 10.1 to our Quarterly Report on Form 10-QSB filed on May 12, 2005)
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                       
|10.2 | Agreement between Garuda Minerals, Newhaven
        and Aquarian dated May 18, 2005 (incorporated by reference as exhibit
        10.1 to our Report on Form 8-K filed on May 25, 2005)               
|     |                                                                                                                                                                                                       
|10.3 | Agreement between Garuda
        Gold, Newhaven and Aquarian dated May 18, 2005 (incorporated by reference
        as exhibit 10.2 to our Report on Form 8-K filed on May 25, 2005)                   
|     |                                                                                                                                                                                                       
|10.4 | Agreement between Garuda and Newhaven
        dated May 6, 2005 (incorporated by reference as exhibit 10.3 to our Report
        on Form 8-K filed on May 25, 2005)                                   
|     |                                                                                                                                                                                                       
|10.5 | Agreement
        between Garuda Ventures Canada Inc. (now Garuda Exploration Inc.) and
        Xemplar Energy Corp. dated June 26, 2006                                                              
|     |                                                                                                                                                                                                       
|21   | Subsidiaries of the Registrant                                                                                                                                                                        

| | Name                     | State of
      Incorporation
| | ------------------------ | ----------------------------
| |                          |                             
| | Hagensborg Foods Ltd.    | British Columbia            
| | Hagensborg Seafoods Ltd. | British Columbia            
| | Natural Program Inc.     | Nevada                      
| | Natural Program Ltd.     | British Columbia            
| | Garuda Exploration Inc.  | British Columbia            
| | Garuda Gold Corporation  | British Columbia            
| | Garuda Minerals Inc.     | Nevada                      

|31.1 | Certification of the Chief
      Executive Officer and the Chief Financial Officer Pursuant to Rule 13a-14
      or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                               
|32.1 | Certification
        of the Chief Executive Officer and the Chief Financial Officer Pursuant
        to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
        Oxley Act of 2002 

42

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Item 14. Principal Accountant Fees and Services.

Audit and Non-Audit Fees

The following table represents approximate fees for the
professional audit services and fees billed for other services rendered by our
current auditors, Ernst & Young, LLP for the audit of our annual financial
statements for the year ended June 30, 2006 and 2005 and any other fees billed
for other services rendered by Ernst & Young LLP during that period.

Ernst & Young LLPYear Ended June 30, 2006
    Year Ended June 30, 2005Audit fees
    $44,800
    $82,500Audit-related fees
    $ 0
    $ 8,500Tax fees
    0
    0All other fees
    0
    0Total
    $44,800
    $91,000


Since 2004, our Board of Directors, performing the duties of
the Audit Committee, reviews all audit and non-audit related fees at least
annually. The Board of Directors as the Audit Committee pre-approved all audit
related services in Fiscal 2006.

43

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.

GARUDA CAPITAL CORP.

|                        | By: /s/ C. Robin Relph           
|----------------------- | ---------------------------------
|                        |                                  
|Date: November 14, 2006 | C. Robin Relph,                  
|                        | President, Chief Executive       
|                        | Officer, Chief Financial Officer,
|                        | Director,                        
|                        | Principal Accounting Officer     

Pursuant to the requirements of the Exchange Act this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|Signature                |  | Title                      | Date             
|------------------------ |  | -------------------------- | -----------------
|                         |  |                            |                  
|/s/ C. Robin
      Relph |  | President, Chief Executive | November 14, 2006
|C. Robin Relph           |  | Officer, Chief Financial   |                  
|                         |  | Officer,                   |                  
|                         |  | Director and Principal     |                  
|                         |  | Accounting                 |                  
|                         |  | Officer                    |                  
|                         |  |                            |                  
|/s/ Jurgen Wolf          |  | Director                   | November 14, 2006
|Jurgen Wolf              |  |                            |                  

44

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