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Caledonia Mining (CMCL)

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Tuesday 11 August, 2009

Caledonia Mining

Caledonia Mining 2009 Second Quarter and Half Y...



CALEDONIA MINING CORPORATION                                        August 11, 2009

Management's Discussion and Analysis

This  discussion  and analysis of the consolidated operating results and financial condition of Caledonia  Mining
Corporation ("the Corporation") for the quarters ended June 30, 2009, June 30, 2008 and June 30, 2007  should  be
read  in  conjunction  with the Unaudited Consolidated Financial Statements as at June 30, 2009  and  the  Annual
Report  for  the  year  ended December 31, 2008, all of which are available from the System for  Electronic  Data
Analysis  and  Retrieval  at  www.sedar.com  or from the Corporation's website  at  www.caledoniamining.com.  The
Unaudited  Consolidated  Financial Statements and related notes have been prepared in  accordance  with  Canadian
Generally Accepted Accounting Principles ("GAAP").

Note that all currency references in this document are to Canadian Dollars.

Listings
The Corporation is listed on the Toronto Stock Exchange as "CAL", on NASDAQ-OTCBB as "CALVF", and on London's AIM
as "CMCL".

1.      OPERATIONAL REVIEW AND RESULTS OF OPERATIONS

1.1   Gold Production

Blanket Mine - Zimbabwe

After the receipt of the Gold Dealership Licence and the production recommencement announcement on April 3, 2009,
the  required  cyanide,  explosive,  and other essential consumables were  purchased  and  sent  to  Blanket  and
production recommenced on April 7, 2009. Mining and milling production has been increased to over 400 tonnes  per
day by the end of June 2009.

It  is planned to continue the ramp-up of production to 600 tonnes per day which should be reached by the end  of
the third quarter 2009. The labour force is being rebuilt from the start-up level of 480 in April 2009 to 750-800
with particular emphasis on skilled and semi-skilled employees. Ongoing retraining is also essential to meet  the
production demands along with refurbishment and maintenance of equipment. This will allow the mine to  return  to
its 24,000 ounce per annum production level.

Underground

Frequent  unplanned power supply interruptions and load shedding continue to frustrate production  targets  on  a
daily  basis.  The  efficiency  of  the underground operations is improving  from  the  sub-optimal  levels  when
production was restarted.

Safety, Health and Environment ("SHE")
The following safety statistics were recorded for the 2nd quarter:
    -   Three restricted work activity (2008 - 3) and no (2008 4) first aid incident were recorded. In all there
        were 9 (2008 - 26) incidents and 4 (21 - 2008) near misses during the quarter. Extensive safety training was
        undertaken by management and this included:
            o   Induction training for 65 new employees, 5 employees returning from leave, 15 casual worker, 3
                change of occupation employees and 9 contractors
            o   Hazard identification and risk assessment courses attended by 160 employees.
            o   73 employees trained on mine first aid.
            o   27 supervisors underwent plant job observation refresher courses.

    -   Nine  new cases of HIV/AIDS were identified by the mine clinic. The severe economic conditions  have
        negatively affected AIDS funding from Government and NGO sources, but education continues with 18 peer
        educators being trained and a further 80 people being tested at the clinic.

There  were  no  adverse  environmental issues during the quarter and the results  obtained  from  water  testing
continue to verify this.

Even though the economic situation in Zimbabwe continues to be challenging the number of employee dismissals  due
to  desertion has decreased dramatically. The number of employees who were absent without permission in  the  2nd
quarter was 134 (820 - 2008) compared to 608 (879 - 2008) in the 1st quarter.

Capital Projects

Number 4 Shaft Expansion Project

Further  developments  on  the  No 4 shaft project await the sourcing of project funding  of  US$2,4  million  on
acceptable  terms  failing  which internally generated cash flows will be used.  It  is  still  anticipated  that
production of 1,000 tonnes per day will be achieved within a 9 months of project funding being secured which will
result in approximately 40,000 ounces of gold per annum being produced.

Operations

During  the  quarter operations were significantly hampered by daily electrical power failures or requested  load
shedding from ZESA, the local power authority. However, recent negotiations with ZESA appear to have resulted  in
a  more  predictable load shedding window which has enabled the mine to alter shifts so that load shedding  takes
place before the re-entry of a shift and allows for lower production losses. Provided ZESA continues to adhere to
the agreed load shedding schedule it will be an equitable solution to this problem.

Sufficient working capital has been provided by a local bank to meet the mine's requirements.

The net proceeds for Gold sales are being received by Blanket in full from Rand Refineries in South Africa within
the contractual time period.

--------------------------------------------------------------------------------------------   
Production results for the Quarter ended June 30              2009         2008    July 2009
--------------------------------------------------------------------------------------------   
Ore milled                             Tonnes               24,177       32,464       13,760
--------------------------------------------------------------------------------------------   
Ore Gold Grade milled                  Grams/tonne            3.99         3.36         4.51
--------------------------------------------------------------------------------------------   
Recovery %                             Per cent                89%          87%          91%
--------------------------------------------------------------------------------------------   
Gold produced                          Ounces                2,746        2,989        1,822
--------------------------------------------------------------------------------------------   
Gold Sold                              Ounces                2,164        3,089        1,322
--------------------------------------------------------------------------------------------   

Outlook

It  should  be borne in mind that the last time Blanket was able to achieve an equivalent 24,000 ounce per  annum
production  level  was  before February 2007 prior to the No. 4 Shaft being closed for equipping.  Subsequent  to
partial completion of the No. 4 shaft project, resumption of production was rendered impossible by the failure of
the  Reserve  Bank  of Zimbabwe to pay Blanket for its gold sold and which eventually caused Blanket  to  suspend
production completely in October 2008. A healthy and stable economic future continues to depend on the success of
the  Unity Government in Zimbabwe. Management's challenge is to bring the mine back to the full 24,000 ounce  per
annum production as quickly as possible and then to commence work on the completion of the No.4 shaft project  as
soon as funding is sourced.

In  a  press  release on 6 May 2009, the Corporation indicated that Blanket is targeting to achieve an annualized
production rate of approximately 24,000 ounces of gold per annum by the end of the third quarter 2009.

Subsequent  to  the  dollarization  of  the economy Blanket has reinstated public  liability  and  motor  vehicle
insurance cover and continues to assess the necessity and affordability of other forms of insurance cover.

In  recent  weeks, the frequency and duration of electricity outages and their impact on production has  reduced.
Management  will  continue to monitor this situation closely, while pursuing a number of  alternatives  including
discussion with ZESA and standby generation capacity.

1.2  Exploration and Project Development

1.2.1 COBALT AND BASE METALS

Nama Cobalt Project - Zambia

The  2nd  quarter of the financial year, April to June, is the first half of the dry season in Zambia.  The  main
field  access  roads were restored and graded in April following the damage caused during the rainy  season.  The
activities  carried out during the quarter mainly involved the detailed soil sampling and follow-up of previously
detected geochemical anomalies. This work entailed the compilation of a GIS database including all previous  work
done in the area, in particular the location of geochemical surveys and anomalous areas.

Two  main  styles  of Co mineralization occur in the Nama area, the 'D'-type iron oxide bodies which  are  mostly
enriched in cobalt, and the Ore Shale hosted Cu-Co mineralization, more common elsewhere in the Copperbelt, which
is  being  exploited by neighbouring mines. On account of the more complex metallurgy and hence  greater  capital
requirements involved in treating the D-type iron oxide bodies, previous targets identified as being of this type
are set aside for follow-up work at a time when the market conditions are more suitable.

Work,  therefore, is being carried out on the anomalous areas with a view to defining resources characterized  as
belonging  to the Ore Shale hosted Cu-Co style of mineralization. Mineralization of this type is currently  being
exploited  immediately east of the Nama License and is known to extend westwards into the license area  for  some
2,000  meters. During the 2008 field season, exploration established the existence and limited extent of the  Ore
Shale  along  the  western  margin of the Konkola Dome (close to the 'A' Resource  Body).  The  "shale"  unit  is
approximately 100 meters wide, is anomalously enriched in Co and Cu but the knowledge of the known strike  length
is  limited because the area is covered by very deep soils. Follow-up sampling employing both saturation  termite
mound  sampling  and deep auger sampling has shown encouraging results. Two drill targets have been  outlined  in
this area.

Other areas covered in the 2nd quarter include the 'B' Anomaly where detailed auger sampling has resulted in  the
delineation  of  separate  Co  and  Cu anomalies. Pitting at selected sites is currently  being  carried  out  to
establish  the cause of the anomalous enrichment. Field work at the 'F' and 'G' anomalies has revealed  that  the
metal enrichments are not typical 'D' style mineralization but thick zones of Co and Cu enrichment in sandstones.
Although  the  area involved is substantial, the average metal contents for the whole area may  not  satisfy  the
criteria for economic extraction and therefore follow-up auger sampling will be undertaken to define the areas of
greatest  potential.  Diamond drilling may then be undertaken in the higher grade areas to recover  material  for
mineralogical and metallurgical testing.

A  portion  of  the 1996 geochemical grid laid out west of the 'A' Resource Body was not sampled, probably  as  a
result of adverse ground conditions at the time. Recent limited sampling in this area suggested the existence  of
widespread  anomalous metal enrichments. In order to complete the sampling exercise, the auger  sampling  program
was  extended to this area. It is anticipated that this sampling will, in addition to giving an insight into this
important  area, also assist in deciphering the geological structure of a 10 km zone between the 'A' anomaly  and
the 'Yembela' anomaly to the northwest, two areas which host similar mineralization patterns.

The 2009 Exploration Season

The  current  field  season  is  proceeding according to the exploration plan with the  systematic  and  detailed
exploration  of the geochemically anomalous areas at Nama. In determining the nature of the anomalies,  they  are
ranked  according to style of mineralisation and structure which will enable the exploration team to  select  the
most appropriate targets for the 2009 exploration programs, and selected targets may be drilled during the latter
period of the 2009 exploration season depending on the availability of Corporate funds.

1.2.2 Rooipoort PGE/Ni/Cu Project (including Grasvally) - South Africa

Property

Rooipoort

Caledonia announced on July 1, 2009 that Mitsubishi Corporation had withdrawn from the proposed participation in
the Rooipoort and Mapochsgronde Platinum Projects ("the Projects").

Mitsubishi indicated that the conditions precedent relating to security of tenure of the prospecting rights held
by Caledonia and its subsidiaries due to the Broad-Based Black Economic Empowerment ("empowerment") requirements
imposed by the South Africa Department of Minerals ("DM") did not meet their requirements. The DM's requirement
that empowerment be introduced at the exploration stage is not currently required under South Africa law and,
accordingly, was not envisaged at this stage in the Agreement. Mitsubishi Corporation concluded that it did not
wish to extend the Agreement relating to the proposed participation by Mitsubishi in the platinum exploration
projects in South Africa. Accordingly, the Agreement terminated on June 30, 2009 and Mitsubishi will not provide
the envisaged exploration funding for the Projects. The Rooipoort and Mapochsgronde properties continue to remain
100% owned by Caledonia.

Caledonia will explore and evaluate other strategic options in respect of the Projects.

1.2.3 GOLD

Zimbabwe Exploration - Gold

Due  to  the  lack of foreign currency and the immediate focus on re-starting and ramping up production,  limited
exploration  work has taken place during the quarter and resources were allocated primarily to the resumption  of
gold production. The proposed exploration activities are being reviewed and prioritised.

2.   SUMMARY OF QUARTERLY RESULTS

The  following  information is provided for each of the 8 most recently completed quarters of the  Corporation  -
ending  on  the  dates  specified - in thousands of Canadian Dollars. The figures are extracted  from  underlying
financial statements that have been prepared according to Canadian GAAP.

--------------------------------------------------------------------------------------------------------------------
($000's-except per share amounts.)  June        Mar        Dec      Sept       June       Mar       Dec      Sept
                                   30/09      31/09      31/08     30/08      30/08     30/08     31/07     30/07
--------------------------------------------------------------------------------------------------------------------
Sales from continuing                                                                                            
 operations                        2,364          -         29     2,280      2,883     2,504     3,231     1,950
--------------------------------------------------------------------------------------------------------------------
Income/(loss) for continuing                                                                                     
 operations                         (162)      (799)    (2,066)   (2,749)      (261)      791       494      (855)
-per share basic and diluted     (0.0003)   (0.0016)   (0.0041)  (0.0055)   (0.0005)   0.0016     0.001    (0.002)
--------------------------------------------------------------------------------------------------------------------
Discontinued operations (loss)       (37)       (40)      (531)      (30)       (24)      (70)     (249)      (80)
--------------------------------------------------------------------------------------------------------------------
Net Income/ (loss) after                                                                                         
 discontinued operations            (199)      (839)    (2,597)   (2,779)      (285)      721       245      (935)
- per share basic and diluted    (0.0004)   (0.0017)   (0.0052)  (0.0056)   (0.0006)   0.0015     0.001    (0.002)
--------------------------------------------------------------------------------------------------------------------
No of shares basic '000          500,169    500,169    500,169   500,169    500,169   493,199   487,869   487,869
--------------------------------------------------------------------------------------------------------------------

Note:  The  effect of the dilution on the earnings per share has not been calculated as the result  for  2009,
2008 and 2007 was a loss and the diluted earnings per share would be anti-dilutive.

During the quarter the Corporation made $19,000 profit ($599,000 profit - 2008) from continuing operations before
unrealized foreign exchange loss of $181,000 ($860,000 loss - 2008).

The  discontinued operations relate to Barbrook and Eersteling Mines up to Q1 2008, thereafter Eersteling is  the
only discontinued operation. The loss on sale of Barbrook Mine was reclassified to discontinued operations in the
fourth  quarter 2008. Gold sales for the 2nd quarter at Blanket Mine were 2,164 (3,089 - 2008) ounces.  Blanket's
operational costs included salaries and wages of $689,000 ($403,000 - Q1 2009), consumables of $398,000 ($270,000
-  Q1 2009) and mine administration costs of $152,000 ($206,000 Q1 - 2009). The dollarization of the economy  has
impacted  on  remuneration rates as illustrated above, management is monitoring this closely  to  ensure  we  are
paying affordable and market related rates to ensure the scarce skills are attracted and retained.

Blanket is a self-sustaining operation and operates in Zimbabwe in what was a hyper inflationary economy. Due  to
the  dollarization  of  the  economy  in  February, 2009 the hyper inflationary  environment  no  longer  exists.
Accordingly  the  results of these operations are now translated into Canadian Dollars  using  the  current  rate
method. On January 1, 2009 Blanket's functional currency also changed to US Dollars following the Monetary Policy
announcement introducing the use of foreign currency in Zimbabwe for all forms of trade and business. The  assets
and  liabilities of a self-sustaining foreign operation are translated at the rate in effect at the balance sheet
date  for purposes of incorporation in the financial statements of Caledonia and, therefore, an exchange gain  or
loss will arise when the exchange rate changes. This exchange gain or loss has no direct effect on the activities
of  Caledonia. It is inappropriate to incorporate this exchange gain or loss in net income in the period in which
it arises; rather, it is reported in the financial statements as a separate component of shareholders' equity and
is  disclosed as a separate component of accumulated other comprehensive income during the period. In summary the
current rate method is as follows:

(i)     all assets and liabilities at rates at balance sheet date;
(ii)    revenue and expense transactions at the average rate of exchange prevailing during the period.

Included  in the 2nd quarter statement of operations is an exchange gain of $101,000 (Loss $275,000  -  Q1  2009)
relating  to  the translation of Blanket Mine financial results which has been disclosed under accumulated  other
comprehensive income.

3.      INVESTING

During  the 2nd quarter 2009 the Corporation invested $251,000 in capital assets and mineral properties ($269,000
in 2008 and $696,000 in 2007). Of the amount invested in 2009, $193,000 ($235,000 - Q2 2008) was spent at Nama.

4.      FINANCING

The  Corporation  financed its operations, except Blanket Mine, using funds on hand. No equity  fund  raising  is
currently  intended during 2009 and funds available from the sale of Barbrook are expected to  be  sufficient  to
finance  the  Corporation's activities. Blanket was granted a working capital loan facility from its  bankers  in
Zimbabwe and utilised $694,000 of the facility during the quarter. Working capital loan facilities that have been
secured  by  Blanket  are considered sufficient and repayment of the facilities by November 2009  is  achievable.
Additional funding of US$2,400,000 is still required for the completion of the No. 4 shaft expansion  and  it  is
the  Corporation's  intention  to  obtain  this funding in Zimbabwe or, alternatively,  to  use  it's  internally
generated  cash  flows. Various financial institutions have been approached with detailed submissions  to  obtain
this  funding but as yet no viable term sheets have been received. The outlook for obtaining the required project
funding  is considered more positive now than it was at the beginning of the 2nd quarter and discussions continue
with several financial institutions.

5.      LIQUIDITY AND CAPITAL RESOURCES

As  of June 30, 2009, the Corporation had a working capital surplus of $5,340,000 (surplus of $2,657,000 at March
31,  2009).  Current assets of $7,255,000 ($3,960,000 - March 2009) increased as inventories  have  increased  by
$345,000 and accounts receivable have increased by $3,437,000 whilst cash has decreased by $376,000. The accounts
receivable includes $520,000 due from Rand Refineries for gold sales that was received on July 1, 2009.The amount
of $2,890,301 (shown at fair value) owing to Blanket by RBZ is now classified as a current asset as the gold bond
is redeemable on February 1, 2010.

Blanket  Mine continues to be self funding. Limited amounts are currently being spent on capital development  but
will increase as working capital requirements stabilize and production ramps up in the months ahead

During  2009, it is expected that the cash requirements of the Corporation will be met from the cash on hand  and
gold sales from Blanket Mine.

Anticipated  cash  inflows  in  2009 will be used mainly by the Corporation on returning  Blanket's  annual  gold
production  back  up  to 24,000 ounces pa and then to 40,000 ounces pa provided Blanket can secure  the  required
funding required for the completion of the No.4 shaft expansion.

The  Corporation has minor obligations in respect of license fees for its exploration and mining properties.  Now
that  Motapa has withdrawn from its JV on Mulonga Plain, the Corporation will be responsible for maintaining  the
licenses. As of June 30, 2009 the Corporation had potential liabilities to do rehabilitation work on the  Blanket
and Eersteling Mines - if and when those Mines are permanently closed - at an estimated cost of $1,186,000.

6.  OFF-BALANCE SHEET ARRANGEMENTS

There are no off balance sheet arrangements.

7.    RELATED PARTY TRANSACTIONS

The Corporation had the following related party transactions:

                                                                               --------------------------
                                                                                    Six months ended
                                                                                        June 30
                                                                               --------------------------
                                                                                 2009     2008      2007
                                                                               --------------------------
                                                                                $'000    $'000     $'000
---------------------------------------------------------------------------------------------------------
   Management, and allowances paid or accrued to a company which provides the     281      256       238
   services of the Corporation's President
---------------------------------------------------------------------------------------------------------
   Rent paid to a Company owned by members of the President's family               23       21        23
---------------------------------------------------------------------------------------------------------
   Fees paid to the Chairman of the Board                                          75      537        32
---------------------------------------------------------------------------------------------------------
   Legal fees paid to a law firm where a Director is a partner                     41       43        26
---------------------------------------------------------------------------------------------------------

8.  CRITICAL ACCOUNTING POLICIES

There  are two major areas where accounting estimates are made, asset impairment and asset retirement obligation.
As significant impairment provisions have already been made against the assets and there is a reasonable level of
certainty  around the estimate it is considered unlikely that any change in estimate would result in  a  material
impact  on  the results of the Corporation. The asset retirement obligations are also considered to be  estimated
with  a  reasonable degree of certainty, although the original estimations were calculated some  years  ago.  The
estimations  are accreted annually at 5% and thus any change in circumstances is considered unlikely  to  have  a
material impact on the results of the Corporation or its operations.

The  following accounting policy changes have been adopted as of January 1, 2009 and are more fully described  in
the Interim Consolidated Financial Statements.

a. Goodwill and intangible assets

In  February  2008,  the Canadian Institute of Chartered Accountants ("CICA") issued Section  3064  Goodwill  and
intangible  assets,  replacing  Section 3062, Goodwill and other intangible  assets.  The  new  Section  will  be
applicable  to financial statements relating to fiscal years beginning on or after October 1, 2008.  Accordingly,
the  Corporation  will  adopt the new standards for its fiscal year beginning January  1,  2009.  It  establishes
standards  for  the recognition, measurement, presentation and disclosure of goodwill subsequent to  its  initial
recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are  unchanged
from  the standards included in the previous Section 3062. The adoption of this standard is not expected to  have
an effect on the Corporation's consolidated financial statements.

b. International Financial Reporting Standards

The  Canadian  Accounting  Standards  Board confirmed in February 2008  plans  to  converge  Canadian  GAAP  with
International  Financial  Reporting Standards ("IFRS") over a transition period  expected  to  be  effective  for
interim  and  annual periods commencing January 1, 2011. The transition date of January 1, 2011 will require  the
restatement for comparative purposes of amounts reported by the Corporation for the year ended December 31, 2010.
While  the Corporation has begun assessing the adoption of IFRS for 2011, the financial reporting impact  of  the
transition to IFRS cannot be reasonably estimated at this time. All of the Companies foreign subsidiaries operate
in environments where IFRS has already been adopted.

The  conversion  from Canadian GAAP to IFRS is a significant undertaking. Caledonia has not  yet  determined  the
impact  of  the transition on its consolidated financial statements. The conversion to IFRS may have  a  material
impact  on  the  balance sheet, results from operations, systems of internal controls over  financial  reporting,
disclosure  controls  and  information systems. IFRS accounting standards, and the  interpretation  thereof,  are
constantly evolving and therefore IFRS accounting policies are subject to change through 2011.

Caledonia  has  decided  to  recruit an IFRS specialist to assist with the conversion  process  but  no  suitable
candidate  has  yet  been identified. Current accounting personnel have attended various  IFRS  training  courses
during the year.

Preliminary  work  on  identifying differences between Canadian GAAP and IFRS that  effect  the  Corporation  has
started in 2009 as well as work on identifying which options the Corporation would elect on adopting IFRS.

9.    FINANCIAL RISK EXPOSURE AND RISK MANAGEMENT

The Corporation is exposed in varying degrees to a variety of financial instrument related risks by virtue of its
activities.  The  overall  financial risk management program focuses on preservation of capital,  and  protecting
current and future Corporation assets and cash flows by reducing exposure to risks posed by the uncertainties and
volatilities of financial markets.

The  Board  of  Directors  has  responsibility to ensure that an adequate financial  risk  management  policy  is
established  and  to approve the policy. The Corporation's Audit Committee oversees management's compliance  with
the Corporation's financial risk management policy.

The types of risk exposure and the way in which such exposures are managed are as follows:

i) Currency Risk

As  the Corporation operates in an international environment, some of the Corporation's financial instruments and
transactions  are  denominated  in currencies other than the Canadian Dollar. The results  of  the  Corporation's
operations  are  subject to currency transaction risk and currency translation risk. The  operating  results  and
financial  position  of  the  Corporation  are reported in Canadian Dollars  in  the  Corporation's  consolidated
financial statements.

The  fluctuation of the Canadian Dollar in relation to other currencies will consequently have an impact upon the
profitability  of  the Corporation and may also affect the value of the Corporation's assets and  the  amount  of
shareholders' equity.

A  significant  portion  of the Corporation's assets and liabilities are denominated in South  African  Rand  and
United  States Dollars. Management do not consider that the fluctuation of the value of these currencies  to  the
Canadian  Dollar  could have a significant impact on the results of operations. Blanket Mine operations  are  now
transacted using the United States Dollar as the functional currency. As a result of the introduction of  the  US
Dollar  as legal tender in Zimbabwe the hyperinflationary environment has decreased dramatically. The shareholder
loan  account  in Zimbabwe is denominated in US Dollars and will generate foreign exchange gains  or  losses  for
Blanket  Mine  depending  on  the exchange rate between the US Dollar and the Canadian  Dollar  at  the  time  of
repayment of such loans. The fair values of these financial instruments approximate their carrying values, unless
otherwise noted. The Corporation does not use any derivative instruments to reduce its foreign currency risks.

Below  is a summary of the cash or near cash items denominated in a currency other than the Canadian Dollar  that
would be affected by changes in exchanges rates relative to the Canadian Dollar.

              --------------------------------------------------
              $000                       US Dollars      SA Rand
              --------------------------------------------------
              Cash                               14        1,902
              --------------------------------------------------
              Accounts Receivable             3,173        1,394
              --------------------------------------------------
              Accounts Payable                  979          365
              --------------------------------------------------

The  table below illustrates by how much a 1% change in the rate of exchange between the Canadian Dollar and  the
currencies above will affect net income.

              --------------------------------------------------
              $000                       US Dollars      SA Rand
              --------------------------------------------------
              Cash                                -            3
              --------------------------------------------------
              Accounts Receivable                27            2
              --------------------------------------------------
              Accounts Payable                    8            1
              --------------------------------------------------

ii) Interest Rate Risk

Interest  rate  risk is the risk borne by an interest-bearing asset or liability as a result of  fluctuations  in
interest rates.

Unless  otherwise  noted,  it  is the opinion of management that the Corporation is not  exposed  to  significant
interest  rate  risk  as it is debt free, outside of Zimbabwe, and only utilizes overdraft facilities  for  short
periods  if  necessary. As a result of Blanket Mine being brought back into production working capital borrowings
have  increased  in Zimbabwe. The working capital loans will be US Dollar denominated and will  attract  interest
rates  of approximately 6% pa. It is the intention of Blanket to borrow further funds to complete the No 4  shaft
expansion  project.  No acceptable term sheet has been received for these loans and thus  the  interest  rate  is
unknown.  The  Corporation's cash and cash equivalents include highly liquid investments that  earn  interest  at
market  rates.  The  Corporation manages its interest rate risk by endeavoring to maximize  the  interest  income
earned on excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis. The
Corporation's policy focuses on preservation of capital and limits the investing of excess funds to  liquid  term
deposits in "A" grade financial institutions.

Fluctuations  in  market  interest  rates  have not had a significant impact  on  the  Corporation's  results  of
operations due to the short-term to maturity of the investments held.

iii) Concentration of Credit Risk

Credit  risk  is  the  risk of a financial loss to the Corporation if a gold sales customer  fails  to  meet  its
contractual  obligation. Credit risk arises principally from the Corporation's receivables from the Reserve  Bank
of  Zimbabwe ("RBZ") who was the sole buyer of gold produced in Zimbabwe, in terms of legislation and regulations
that prevailed until February 1, 2009.

At December 31, 2008 the RBZ owed Blanket $3,416,892 (gross value) $2,890,000 (at fair value). The amount owed to
Blanket  was  converted into a Special Tradable Gold-backed Foreign Exchange Bond ("Bond") by RBZ  following  the
Monetary Policy announcement on February 2, 2009 that has the following features;

   -    Term of 12 months
   -    Interest at 8% pa on maturity on February 1, 2010.
   -    Bond may be sold locally, regionally or internationally at an agreed price
   -    RBZ will honour the full principal plus interest on maturity

iv) Liquidity Risk

Liquidity  risk is the risk that the Corporation will not be able to meet its financial obligations as they  fall
due.

The  Corporation manages its liquidity by ensuring that there is sufficient capital to meet short and  long  term
business  requirements,  after taking into account cash flows from operations and the Corporation's  holdings  of
cash  and  cash equivalents. The Corporation believes that these sources will be sufficient to cover  the  likely
short and long term cash requirements. Senior management is also actively involved in the review and approval  of
planned  expenditures by regularly monitoring cash flows from operations and anticipated investing and  financing
activities.

v) Commodity Price Risk

The  value of the Corporation's mineral resource properties is related to the price of gold, platinum and cobalt,
and  the  outlook  for  these minerals. In addition, adverse changes in the price of certain  raw  materials  can
significantly impair the Corporation's cash flows.

Gold prices historically have fluctuated widely and are affected by numerous factors outside of the Corporation's
control,  including,  but not limited to, industrial and retail demand, central bank lending,  forward  sales  by
producers  and  speculators, levels of worldwide production, short-term changes in supply and demand  because  of
speculative  hedging activities, and macro-economic variables, and certain other factors related specifically  to
gold.

In the Monetary Policy Announcement made by RBZ on February 2, 2009, Blanket became eligible to export its gold
to a refiner of its choice and to receive 100% of the proceeds, net of the refining costs, in US Dollars paid
into its foreign currency account at a Zimbabwean commercial bank. As a result of this announcement, Blanket
resumed gold production on April 7, 2009 after receiving all the necessary licenses from the Ministry of Finance
and the RBZ.

10.   SECURITIES OUTSTANDING

As at June 30, 2009 the following securities were outstanding:

(1)     500,169,280 common shares;

(2)     Options and warrants as follows:

--------------------------------------------------------------------------------------------
Number       Description                      Exercise Price      Expiry Date
--------------------------------------------------------------------------------------------
34,430,000   Common share purchase options    Average $0.1719     Various until May 11, 2016
--------------------------------------------------------------------------------------------
Nil          Common share purchase warrants   -
--------------------------------------------------------------------------------------------

As  the Corporation's Option Plan allows the granting of options on a number of shares equal to 10% of the issued
shares,  the  Corporation could grant options on 50,016,928 shares. This figure includes any  options  previously
exercised and the current unexercised options.

11.   CONTROLS

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information  is
gathered and reported to senior management, including the Corporation's President and Chief Financial Officer, on
a  timely  basis  so  that  appropriate  decisions can be made regarding public  disclosure.  Management  of  the
Corporation,  with  the  participation  of the Chief Executive Officer and  the  Chief  Financial  Officer,  have
evaluated the effectiveness of the Corporation's disclosure controls and procedures as at December 31,  2008  and
June  30, 2009 as required by Canadian securities laws pursuant to the certification requirements of Multilateral
Instrument 52-109.

The  Corporation's  internal  controls  over financial reporting ("ICFR")  are  intended  to  provide  reasonable
assurance  regarding  the  reliability of financial reporting and the preparation  of  financial  statements  for
external purposes in accordance with applicable Canadian GAAP.

Because  of  its inherent limitations, the Corporation's ICFR may not prevent or detect any or all misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls  may
become  inadequate  because  of  changes in conditions, or that the degree of compliance  with  the  policies  or
procedures may deteriorate.

Management, including the Chief Executive Officer and Chief Financial Officer, carried out an assessment  of  the
effectiveness  of  the  Corporation's internal controls over financial reporting using a  framework  designed  by
management and considered appropriate to the conditions of the various operating environments, and concluded that
the following disclosable material weaknesses still exist, as at June 30, 2009.

Segregation of duties

Due  to limited personnel resources, adequate segregation of duties within the accounting group was not achieved.
This creates a risk that inaccurate entries could be made and not identified or corrected on a timely basis.  The
result is that the Corporation is highly reliant on the performance of mitigating procedures during its financial
close  processes  in  order  to  ensure the financial statements present fairly in  all  material  respects.  The
Corporation  continues  to  enhance and monitor this process to ensure that its  financial  accounting  reporting
system is able to prevent and detect potential significant errors.

Management  has concluded, and the Audit Committee has agreed that taking into account the present stage  of  the
Corporation's  development, the Corporation does not have sufficient size and scale  to  warrant  the  hiring  of
additional  staff  to  correct the segregation of duties weakness at this time. There  were  no  changes  in  the
Corporation's  internal  controls  over financial reporting since the year ended  December  31,  2008  that  have
materially  affected,  or  are  reasonably likely to materially affect,  its  internal  controls  over  financial
reporting.

The  Corporation  has  a  Disclosure Committee consisting of four Directors,  and  has  disclosure  controls  and
procedures which it follows in an attempt to ensure that it complies with all required disclosures on an adequate
and  timely  basis.  The  Corporation's Directors and Management, and the Disclosure Committee,  are  making  all
reasonable  efforts to ensure that the Corporation's disclosures are made in full compliance with the  applicable
rules  and  requirements. All reasonable efforts are also being made to ensure that the Corporation's  disclosure
controls  and  procedures  provide reasonable assurance that material information relating  to  the  Corporation,
including its consolidated subsidiaries, is made known to the Corporation's Certifying Officers by others  within
those entities.

12.   FORWARD LOOKING STATEMENTS

This  Management Discussion and Analysis contains certain forward-looking statements relating but not limited  to
the  Corporation's  expectations,  intentions,  plans  and beliefs.  Forward-looking  information  can  often  be
identified  by  forward-looking  words  such  as "anticipate", "believe",  "expect",  "goal",  "plan",  "intend",
"estimate",  "could",  "should",  "may"  and  "will"  or similar  words  suggesting  future  outcomes,  or  other
expectations,  beliefs,  plans,  objectives,  assumptions,  intentions  or  statements  about  future  events  or
performance.  Forward-looking  information  may include reserve  and  resource  estimates,  estimates  of  future
production,  unit  costs, costs of capital projects and timing of commencement of operations,  and  is  based  on
current  expectations that involve a number of business risks and uncertainties. Factors that could cause  actual
results  to  differ  materially from any forward-looking statement include, but are not limited  to,  failure  to
establish  estimated resources and reserves, the grade and recovery of ore which is mined varying from estimates,
capital  and  operating  costs varying significantly from estimates, delays in obtaining or  failures  to  obtain
required  governmental,  environmental  or  other  project  approvals,  inflation,  changes  in  exchange  rates,
fluctuations  in  commodity  prices,  delays in the development of projects and  other  factors.  Forward-looking
statements  are  subject  to risks, uncertainties and other factors that could cause  actual  results  to  differ
materially from expected results.

Potential  shareholders and prospective investors should be aware that these statements are subject to known  and
unknown  risks, uncertainties and other factors that could cause actual results to differ materially  from  those
suggested  by the forward-looking statements. Shareholders are cautioned not to place undue reliance on  forward-
looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and
uncertainties,  both  general and specific, that contribute to the possibility that the  predictions,  forecasts,
projections and various future events will not occur. The Corporation undertakes no obligation to update publicly
or  otherwise  revise any forward-looking information whether as a result of new information,  future  events  or
other such factors which affect this information, except as required by law.

13.       QUALIFIED PERSONS

Dr.  Trevor  Pearton,  BSc Eng (Mining Geology), PhD (Geology) FGSSA, VP Exploration is  a  qualified  person  as
defined by NI 43-101. Dr. Pearton is responsible for the technical information provided on this MD&A except where
otherwise  stated. He was assisted where appropriate by outside consultants and/or qualified persons  for  joint-
ventured  projects.  Mr.  David Grant, is the Independent Qualified Person for the NI  43-101  report  on  the  D
resource  area  of the Nama Property, prepared by Applied Geology and Mining (Proprietary)Limited whose  Managing
Director is Mr. Grant .

14.       BOARD AND SENIOR MANAGEMENT CHANGES

Mr  Robert  Liverant resigned as a Director on May 20, 2009. The management and Board would  like  to  thank  Mr.
Liverant for the contribution he made to the Corporation and the Audit Committee during his period as a director.

Mr  Chris Harvey, a current Director, was appointed a member of the Audit Committee on May 20, 2009 to replace Mr
Liverant.

Management's Responsibility for Financial Reporting

To the Shareholders of Caledonia Mining Corporation:

The  accompanying  unaudited consolidated financial statements of Caledonia were prepared by  management  in
accordance  with  accounting principles generally accepted in Canada, consistently applied  and  within  the
framework  of  the  summary of significant accounting policies in these consolidated  financial  statements.
Management is responsible for all information in the quarterly report. All financial and operating  data  in
the  quarterly  report  is consistent, where appropriate, with that contained in the consolidated  financial
statements.

The  Board  of Directors discharges its responsibilities for the consolidated financial statements primarily
through  the activities of its Audit Committee composed of three directors, all of whom are not  members  of
management.  This  Committee  meets with management to assure that it is performing  its  responsibility  to
maintain  financial controls and systems and to approve the quarterly consolidated financial  statements  of
Caledonia.

The consolidated financial statements have not been reviewed by Caledonia's auditors.

Signed "S E Hayden"                                                 Signed "S R Curtis"
S. E. Hayden                                                        S.R. Curtis
President and                                                       Vice-President Finance
Chief Executive Officer                                              and Chief Financial Officer

--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------    
                                                                                 Caledonia Mining Corporation
                                                                                  Consolidated Balance Sheets
                                                                            (in thousands of Canadian Dollars)
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------

                                                                                      June 30     December 31
Unaudited                                                                               2009             2008

--------------------------------------------------------------------------------------------------------------

     Assets                                                                                $                $
     Current                                                                                        
      Cash and cash equivalents                                                        2,174            3,652
      Accounts receivable (Note 7)                                                     3,598              132
      Inventories (Note 8)                                                             1,465            1,059
      Prepaid expenses                                                                    18               27
      Assets held for sale                                                               133              106
                                                                                  ----------------------------
                                                                                       7,388            4,976
                                                                                  ----------------------------

     Capital Assets and Mineral properties held for sale                                 712              681
     Accounts receivable (Note 7)                                                          -            2,890
     Investments (Note 1)                                                                 28               12
     Capital assets (Note 2)                                                             142              173
     Mineral properties (Note 3)                                                      14,990           14,566
                                                                                  ----------------------------
                                                                                      15,872           18,322
                                                                                  ----------------------------
                                                                                  ----------------------------
                                                                                      23,260           23,298
                                                                                  ----------------------------
                                                                                  ----------------------------

     Liabilities and Shareholders' Equity                                                           
     Current                                                                                        
      Bank overdraft                                                                     694                -
      Accounts payable                                                                 1,354              933
      Liabilities held for sale                                                           14               16
                                                                                  ----------------------------
                                                                                       2,062              949
                                                                                  ----------------------------

     Asset retirement obligation (Note 4)                                                848              839
     Asset retirement obligation - held for sale (Note 4)                                338              314
                                                                                  ----------------------------
                                                                                  ----------------------------
                                                                                       3,248            2,102
                                                                                  ----------------------------
                                                                                  ----------------------------

     Shareholders' Equity                                                                           
      Share capital (Note 5)                                                         196,125          196,125
      Contributed surplus                                                              1,917            1,902
      Accumulated other comprehensive income/(loss)                                     (157)               3
      Deficit                                                                       (177,873)        (176,834)
                                                                                  ----------------------------
                                                                                  ----------------------------
                                                                                      20,012           21,196
                                                                                  ----------------------------
                                                                                  ----------------------------
                                                                                      23,260           23,298
                                                                                  ----------------------------
                                                                                  ----------------------------

     On behalf of the Board:

       "S E Hayden"               Director

       "G R Pardoe"               Director

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated
financial statements.

----------------------------------------------------------------------------------------------------------------------
                                                                                         Caledonia Mining Corporation
                                                           Consolidated Statements of Changes in Shareholders' Equity
                                                                                    (in thousands of Canadian Dollars)
----------------------------------------------------------------------------------------------------------------------

                                                         For the periods ended June 30 2009,December 31 2008 and 2007

                                                                              Accumulated                            
                                                                                    Other                            
                                                     Share   Contributed    Comprehensive                            
Unaudited                                  Note    Capital       Surplus           Income       Deficit         Total
                                                         $             $                $             $             $
----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007                       195,006         1,040              (57)     (171,894)       24,095
Shares issued                            5(b)(i)     1,119                                                      1,119
Equity-based compensation expense                                    862                                          862
Investments revaluation to fair value                                                 (10)                        (10)
Reclassification adjustment  for  other                                                                              
 than temporary decline in value                                                       70                          70
Net loss for the year                                                                            (4,940)       (4,940)
----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2008                       196,125         1,902                3      (176,834)       21,196
Equity-based compensation expense                                     15                                           15
Investments revaluation to fair value                                                  14                          14
Translation loss from Blanket Mine                                                   (174)                       (174)
Net loss for the year to date                                                                    (1,039)       (1,039)
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2009                           196,125         1,917             (157)     (177,873)       20,012
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------

The  accompanying summary of significant accounting policies and notes are an integral part of these consolidated
financial statements.

-----------------------------------------------------------------------------------------------------------------------
                                                                                          Caledonia Mining Corporation
                                                 Consolidated Statements of Operations and Comprehensive Income/ (Loss)
                                                  (in thousands of Canadian Dollars except share and per share amounts)
-----------------------------------------------------------------------------------------------------------------------
Unaudited                                     For the three months ended June 30      For the six months ended June 30
                                                   2009        2008         2007         2009        2008         2007
Revenue and Operating Costs                                                                                           
Revenue from sales                                2,364       2,883        1,539        2,364       5,387        4,858
Operating Costs                                   1,483       1,357        1,963        2,571       2,616        6,358
                                              -------------------------------------------------------------------------
Gross profit(loss)                                  881       1,526         (424)        (207)      2,771       (1,500)
Costs and expenses                                                                                                    
 General and administrative                         751         747          646        1,144       1,157        1,041
 Interest expense/(income)                            8         (71)          44          (28)        (28)          55
 Amortization                                        99         101          499          198         202          506
 Exchange loss/(gain)                               181         860       (1,975)        (559)        760          452
 Other expense/(income)                               4         150           (3)           -         150          (11)
                                              -------------------------------------------------------------------------
                                                  1,043       1,787         (789)         755       2,241        2,043
                                              -------------------------------------------------------------------------
Income (loss) before discontinued                  (162)       (261)         365         (962)        530       (3,543)
 operations
Current Income Tax                                    -           -          (1)            -           -           (2)
                                              -------------------------------------------------------------------------
Net income(loss) before discontinued               (162)       (261)         364         (962)        530       (3,545)
 operations
Discontinued operations (loss)                      (37)        (24)        (126)         (77)        (94)        (380)
                                              -------------------------------------------------------------------------
Net (loss) after discontinued operations           (199)       (285)         238       (1,039)        436       (3,925)
                                              -------------------------------------------------------------------------
Revaluation of Investments to fair value              7           7            -           14           7            -
 (Note 1)
                                              -------------------------------------------------------------------------
Comprehensive Income/(Loss)                        (192)       (278)         238       (1,024)        443       (3,925)
                                              -------------------------------------------------------------------------

Income/(loss) per share                                                                                               
Basic and diluted from continuing               ($0.000)    ($0.001)      $0.001      ($0.002)     $0.001      ($0.008)
 operations
Basic and diluted from discontinued             ($0.000)    ($0.001)      $0.001      ($0.002)     $0.001      ($0.008)
 operations
Basic and diluted for the quarter               ($0.000)    ($0.001)      $0.001      ($0.002)     $0.001      ($0.008)

The  accompanying summary of significant accounting policies and notes are an integral part of these consolidated
financial statements.

-----------------------------------------------------------------------------------------------------------------------
                                                                                         Caledonia Mining Corporation
                                                                                Consolidated Statements of Cash Flows
                                                                                    (in thousands of Canadian Dollars)
-----------------------------------------------------------------------------------------------------------------------
Unaudited                                        For the three months ended June 30   For the six months ended June 30
                                                 2009           2008           2007           2009      2008      2007
Cash provided by (used in)                                                                                       
Operating activities                                                                                             
Income(loss)     before    discontinued          (162)          (261)           364           (962)      530    (3,545)
 operations
Adjustments to reconcile net cash  from           228            103            461             71       237       412
 operations (Note 9)
Changes  in  non-cash  working  capital          (754)          (815)        (1,758)          (580)   (2,069)    1,370
 balances (Note 9)
                                              -------------------------------------------------------------------------
Cash  flows  provided from  (used  for)          (688)          (973)          (933)        (1,471)   (1,302)   (1,763)
 continuing operations
                                              -------------------------------------------------------------------------
Investing activities
Expenditures  on  capital  assets   and          (251)          (269)          (696)          (637)     (500)   (1,380)
 mineral properties
Sale of Barbrook Mine                               -          9,232              -              -     9,232         -
                                              -------------------------------------------------------------------------
                                                 (251)         8,963           (696)          (637)    8,732    (1,380)
                                              -------------------------------------------------------------------------
Financing activities   
Bank overdraft                                    599              -           (598)           694       (13)        -
Issue  of  share capital net  of  issue             -              -          4,380              -     1,119     4,380
 costs
                                              -------------------------------------------------------------------------
                                                  599              -          3,782            694     1,106     4,380
                                              -------------------------------------------------------------------------

Cash flow from discontinued
 operations    
Operating activities                              (36)           (20)          (110)           (62)     (86)      (364)
Financing activities                                -              2              -              -        -          -
                                              -------------------------------------------------------------------------
                                                  (36)           (18)          (110)           (62)     (86)      (364)
                                              -------------------------------------------------------------------------
Increase  (decrease) in  cash  for  the          (376)         7,972          2,043         (1,476)   8,450        873
 period
Cash and cash equivalents, beginning of         2,552            554            128          3,652       76      1,298
 period
                                              -------------------------------------------------------------------------
Cash  and  cash  equivalents,  end   of         2,176          8,526          2,171          2,176    8,526      2,171
 period
                                              -------------------------------------------------------------------------

Cash  and  cash equivalents at  end  of
 period relate to:
Continuing operations                           2,174          8,527          2,169          2,174    8,527      2,169
Discontinued operations                             2             (1)             2              2       (1)         2
                                              -------------------------------------------------------------------------
                                                2,176          8,526          2,171          2,176    8,526      2,171
                                              -------------------------------------------------------------------------

The  accompanying summary of significant accounting policies and notes are an integral part of these consolidated
financial statements.

-----------------------------------------------------------------------------------------------------------------
                                                                                     Caledonia Mining Corporation
                                                            Summary of Significant Accounting Policies (continued)
                                                                                (in thousands of Canadian Dollars)
-----------------------------------------------------------------------------------------------------------------

     Nature of Business

     The  Corporation  is engaged in the acquisition, exploration and development of mineral properties  for  the
     exploitation  of base and precious metals. The ability of the Corporation to recover the amounts  shown  for
     its  capital  assets  and  mineral properties is dependent upon the existence  of  economically  recoverable
     reserves;  the  ability  of  the Corporation to obtain the necessary financing to complete  exploration  and
     development;  and future profitable production or proceeds from the disposition of such capital  assets  and
     mineral properties.

     The Corporation operates in a number of operating segments but its assets located in Zimbabwe, including its
     interests  in  gold  properties,  may  be  subject to sovereign  risks,  including  political  and  economic
     instability, government regulations relating to mining, currency fluctuations and inflation, all or  any  of
     which  may  impede the Corporation's activities in this country or may result in the impairment or  loss  of
     part or all of the Corporation's interest in the properties.

     Basis of Presentation and Going Concern

     These  unaudited  interim consolidated financial statements of Caledonia Mining Corporation ("Caledonia"  or
     the  "Corporation")  have  been  prepared by management in accordance with accounting  principles  generally
     accepted  in  Canada  ("Canadian  GAAP")  for interim financial statements.  Certain  information  and  note
     disclosures  normally included in the annual consolidated financial statements prepared in  accordance  with
     Canadian  GAAP have been condensed or excluded. As a result, these unaudited interim consolidated  financial
     statements  do  not  contain  all disclosures required to be included in the annual  consolidated  financial
     statements  and  should  be read in conjunction with the most recent audited annual  consolidated  financial
     statements and notes thereto for the year ended December 31, 2008.

     These  unaudited consolidated financial statements have been prepared on the basis of a going concern, which
     contemplates  that the Corporation will be able to realize assets and discharge liabilities  in  the  normal
     course  of  business. The Corporation's ability to continue as a going concern is dependent  upon  attaining
     profitable  operations, realising proceeds from the disposal of mineral properties and obtaining  sufficient
     financing  to  meet its liabilities, its obligations with respect to operating expenditures and expenditures
     required on its mineral properties.

     Significant Accounting Policies:

     These  unaudited  interim  consolidated  financial statements are  prepared  following  accounting  policies
     consistent with the Corporation's audited annual consolidated financial statements and notes thereto for the
     year ended December 31, 2008, except for the following changes in accounting policies:

    Adoption of New Accounting Standards

     a. Goodwill and intangible assets

     In  February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064 Goodwill and
     intangible  assets, replacing Section 3062, Goodwill and other intangible assets. The new  Section  will  be
     applicable  to  financial  statements  relating to fiscal years beginning  on  or  after  October  1,  2008.
     Accordingly, the Corporation has adopted the new standards for its fiscal year beginning January 1, 2009. It
     establishes  standards for the recognition, measurement, presentation and disclosure of goodwill  subsequent
     to  its  initial  recognition and of intangible assets by profit-oriented enterprises. Standards  concerning
     goodwill  are  unchanged  from the standards included in the previous Section 3062.  The  adoption  of  this
     standard is not expected to have an effect on the Corporation's consolidated financial statements.

     Recently issued accounting pronouncements issued and not yet effective

     International Financial Reporting Standards ("IFRS")

     In  2006,  the  Canadian  Accounting Standards Board ("AcSB") published  a  new  strategic  plan  that  will
     significantly  affect  financial  reporting requirements for Canadian companies.  The  AcSB  strategic  plan
     outlines  the  convergence  of Canadian GAAP with IFRS over an expected five year  transitional  period.  In
     February  2008 the AcSB announced that 2011 is the changeover date for public accountable companies  to  use
     IFRS,  replacing  Canada's  own  GAAP. The transition date is for interim and  annual  financial  statements
     relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011  will
     require  the restatement for comparative purposes of amounts reported by the Corporation for the year  ended
     December  31,  2010. While the Corporation has begun assessing the adoption of IFRS for 2011, the  financial
     reporting impact of the transition to IFRS cannot be reasonably estimated at this time.

     Business Combinations

     In  January  2009,  the  CICA  issued Handbook Sections 1582 - Business Combinations,  1601  -  Consolidated
     Financial  Statements  and  1602 - Non-controlling Interests which replace CICA  Handbook  Sections  1581  -
     Business  Combinations and 1600 - Consolidated Financial Statements. Section 1582 establishes standards  for
     the  accounting for business combinations that is equivalent to the business combination accounting standard
     under International Financial Reporting Standards ("IFRS"). Section 1582 is applicable for the Corporation's
     business combinations with acquisition dates on or after January 1, 2011. Early adoption of this Section  is
     permitted. Section 1601 together with Section 1602 establishes standards for the preparation of consolidated
     financial  statements.  Section  1601 is applicable for the Corporation's interim  and  annual  consolidated
     financial  statements  for  its fiscal year beginning January 1, 2011. Early adoption  of  this  Section  is
     permitted. If the Corporation chooses to early adopt any one of these Sections, the other two sections  must
     also be adopted at the same time.

     Other Existing Accounting Policies

     Inventories

     These  include gold in circuit (WIP) and bulk consumable stores. WIP is valued at the lower of the  cost  of
     production, on an average basis, at the various stages of production or net realisable value if the cost  of
     production  exceeds the current gold price. Bulk consumable stores are valued at the lower of  cost  or  net
     realisable value on an average basis.

     Capital Assets

     Producing Assets

     Producing assets are recorded at cost less grants, accumulated amortization and write-downs. Producing plant
     and  equipment assets are amortized using the unit-of-production method on the ratio of tonnes of ore  mined
     or  processed to the estimated proven and probable mineral reserves as defined by the Canadian Institute  of
     Mining, Metallurgy and Petroleum.

     Other  producing assets are amortized using the straight line method basis on the estimated useful lives  of
     the  assets.  The  estimated  life of the producing assets ranges up to 10 years.  Repairs  and  maintenance
     expenditures are charged to operations; major improvements and replacements which extend the useful life  of
     an asset are capitalized and amortized  over the remaining useful life of that asset. Eersteling Gold Mine
     remains for sale and  is  thus presented as an asset for sale in these consolidated financial statements.

     Non-Producing Assets

     Non-producing assets are recorded at cost less write downs. At the time of commercial production, the assets
     are  reclassified  as  producing. During non-producing periods, no amortization is  recorded  on  plant  and
     equipment but vehicles and computer equipment continue to be amortized.

     Assets held for sale and discontinued operations

     In  2007  the  decision  was taken to sell Eersteling Gold Mining Corporation that  had  been  on  care  and
     maintenance since 1997.

     The components held for sale are as follows:

                                                      Eersteling Gold Mine
                                                   June 30       December 31
                                                      2009              2008
                                                   -------------------------
                                                         $                 $
     Capital Assets and mineral properties             712               681
     Current Assets                                    133               106
     Current Liabilities                                14                16
     Asset Retirement obligation                       338               314

     As a consequence of this decision Eersteling Mine's results for 2009 and preceding years are disclosed under
     discontinued operations. Revenue from discontinued operations is $Nil ($Nil in 2008 and $58 in 2007).  There
     is no tax applicable to discontinued operations.

     Mineral Properties

     Producing Properties

     When  and  if properties are placed in production, the applicable capitalized costs are amortized using  the
     unit-of-production  method  as  described  above. Blanket  Mine  was  acquired  during  2006  and  has  been
     consolidated into these results from July 1, 2006 and, as such, has been presented as a producing  asset  in
     these consolidated financial statements.

     Non-Producing Properties

     Costs  relating  to the acquisition, exploration and development of non-producing resource properties  which
     are  held by the Corporation or through its participation in joint ventures are capitalized until such  time
     as either economically recoverable reserves are established or the properties are sold or abandoned.
     A  decision to abandon, reduce or expand activity on a specific project is based upon many factors including
     general  and specific assessments of mineral reserves, anticipated future mineral prices, anticipated  costs
     of  developing  and  operating a producing mine, the expiration date of mineral  property  leases,  and  the
     general  likelihood  that the Corporation will continue exploration on the project. However,  based  on  the
     results  at  the  conclusion of each phase of an exploration program, properties that are  not  suitable  as
     prospects  are  re-evaluated to determine if future exploration is warranted and that  carrying  values  are
     appropriate.

     The  ultimate recovery of these costs depends on the discovery and development of economic ore  reserves  or
     the sale of the properties or the mineral rights. The amounts shown for non-producing resource properties do
     not necessarily reflect present or future values.

     Foreign Currency Translation

     Balances  of the Corporation denominated in foreign currencies and the accounts of its foreign subsidiaries,
     except Blanket Mine, are translated into Canadian Dollars using the temporal method as follows:
           (i)     monetary assets and liabilities at period end rates;
           (ii)    all other assets and liabilities at historical rates, and
           (iii)   revenue and expense transactions at the average rate of exchange prevailing during the period.

     Exchange gains or losses arising on these translations are reflected in income in the year incurred.

     Blanket  is  a self-sustaining operation and operates in Zimbabwe in what was a hyper inflationary  economy.
     Due  to  the  dollarization of the economy in February, 2009 the hyper inflationary  environment  no  longer
     exists.  Accordingly  the  results of these operations are now translated into Canadian  Dollars  using  the
     current  rate method. On January 1, 2009 Blanket's functional currency also changed to US Dollars  following
     the  Monetary Policy announcement introducing the use of foreign currency in Zimbabwe for all forms of trade
     and  business. The assets and liabilities of a self-sustaining foreign operation are translated at the  rate
     in  effect  at the balance sheet date for purposes of incorporation in the financial statements of Caledonia
     and,  therefore, an exchange gain or loss will arise when the exchange rate changes. This exchange  gain  or
     loss  has  no direct effect on the activities of Caledonia. It is inappropriate to incorporate this exchange
     gain  or  loss  in net income of Caledonia in the period in which it arises; rather, it is reported  in  the
     financial  statements  as  a  separate component of shareholders' equity and  is  disclosed  as  a  separate
     component of accumulated other comprehensive income during the period. In summary the current rate method is
     as follows:
        (i)     all assets and liabilities at rates at balance sheet date;
        (ii)    revenue and expense transactions at the average rate of exchange prevailing during the period.

     Foreign  exchange  loss or profit arising on the translation of revenue and expense items  is  disclosed  in
     income in the period incurred.

     Included in the statement of operations, for the six month period ended June 30, is an exchange gain of $559
     (loss  $760  - 2008 and loss $452 - 2007). Due to the translation of Blanket Mine a loss of $174 (Nil  2008)
     has been disclosed under accumulated other comprehensive income.

------------------------------------------------------------------------------------------------------------------
                                                                                     Caledonia Mining Corporation
                                                                   Notes to the Consolidated Financial Statements
          (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts)
------------------------------------------------------------------------------------------------------------------

     1.         Investments

          On May 9, 2002, the Corporation participated in a private placement of the purchase of shares of Motapa
          Diamonds  Inc. ("Motapa") at a cost of $79. The shares of Motapa are listed on the TSX Venture Exchange
          in Canada.

          The  adoption of CICA Handbook Sections 3855 and 1530, retrospectively from January 1, 2007, determines
          that the Corporation records its investments in Motapa Diamonds Inc. and in Old Mutual Plc as financial
          instruments "available for sale" and they are thus recorded at fair value.

          The  fair value of the investment in Motapa Diamonds Inc is $24 ($23 -2008 and $20 - 2007) and the fair
          value of the shares held in Old Mutual Plc is $4 ($6 - 2008 and $2- 2007).

     2.         Capital Assets

                                                                        June 30, 2009
                                                        --------------------------------------------
                                                                       Accumulated              Net
                                                           Cost(1)    Amortization       Book Value
                                                        ----------    -------------      -----------
                                                                $                $                $
                  Land - plant sites                           12                -               12
                  Plant and equipment                                                              
                   - producing(2)                              24                6               18
                   - non-producing(3)                         229              229                -
                  Office equipment                            913              873               40
                  Vehicles                                    387              315               72
                                                        --------------------------------------------
                                                            1,565            1,423              142
                                                        --------------------------------------------

                                                                        December 31, 2008
                                                        --------------------------------------------
                                                                       Accumulated              Net
                                                           Cost(1)    Amortization       Book Value
                                                        --------------------------------------------
                                                                $                $                $
                  Land - plant sites                           12                -               12
                  Plant and equipment                                                              
                   - producing(2)                              24                4               20
                   - non-producing(3)                         229              229                -
                  Office equipment                            908              858               50
                  Vehicles                                    387              296               91
                                                        --------------------------------------------
                                                            1,560            1,387              173
                                                        --------------------------------------------

          (1) Cost  is  comprised  of  the  original cost of the asset, less  write-downs,  removal  of  cost  for
              disposals and government grants.
          (2) The producing plant and equipment relates to the Blanket operation.
          (3) The net book value of non-producing plant and equipment represents Zambian operations.

     3.  Mineral Properties

                                                                          June 30, 2009
                                                         --------------------------------------------
                                                                         Accumulated              Net
                                                           Cost(1)      Amortization       Book Value
                                                         --------------------------------------------
       Producing:                                               $                  $                $
        Blanket, Zimbabwe - gold property                   5,020                454            4,566
       Non-producing - exploration:                                                                  
        Rooipoort , South Africa                            4,384                  -            4,384
        Goedgevonden, South Africa(3)                           -                  -                -
        Nama, Zambia                                        6,040                  -            6,040
        Mulonga, Zambia(2)                                      -                  -                -
                                                         --------------------------------------------
                                                           15,444                454           14,990
                                                         --------------------------------------------

                                                                         December 31, 2008
                                                         --------------------------------------------
                                                                       Accumulated              Net
                                                            Cost(1)   Amortization       Book Value
                                                         --------------------------------------------
       Producing:                                                $               $                $
        Blanket, Zimbabwe - gold property                    5,006             303            4,703
       Non-producing - exploration:                                                                
        Rooipoort , South Africa                             4,399               -            4,399
        Goedgevonden, South Africa(3)                            -               -                -
        Nama, Zambia                                         5,464               -            5,464
        Mulonga, Zambia(2)                                       -               -                -
                                                         --------------------------------------------
                                                            14,869             303           14,566
                                                         --------------------------------------------

      (1)  Cost is comprised of the original cost of the asset, less write-downs, removal of cost for disposals and
           government grants, and includes the capitalized value of the estimated asset retirement obligations.

      (2)  The Corporation had entered into strategic alliances with a third party on a Zambian property (Mulonga)
           valued at $0 ($1,044 - 2008). The Zambian strategic alliance partner, Motapa Diamonds Inc., has terminated
           the strategic alliance agreement. The Corporation has applied for a retention licence over the properties.
           All interest in the strategic alliance will be transferred to the Corporation by Motapa Diamonds Inc. As a
           consequence of the current economic climate, lack of exploration in the past 2 years and no planned
           expenditure for 2009, the Mulonga property was fully written down to $Nil at December 31, 2008. It is still
           the Corporation's intention to form a joint venture with a new strategic partner.

      (3)  Due to the current economic climate, lack of exploration expenditure in the past 2 years, no planned
           expenditure for 2009 and the fact that prospecting licences are still to be granted, the Goedgevonden
           property was written down to $Nil at December 31, 2008.

      The recoverability of the carrying amount of the South African and Zambian mineral properties is dependent
      upon the availability of sufficient funding to bring the properties into commercial production, the price
      of the products to be recovered, the exchange rate of the local currency relative to the US Dollar and the
      undertaking of profitable mining operations. As a result of these uncertainties, the actual amount
      recovered may vary significantly from the carrying amount.

     4.   Asset Retirement Obligation
                                                                 June 30          December 31
                                                              --------------------------------
                                                                    2009                 2008
                                                              --------------------------------
                                                                       $                    $
     Continuing operation                                                                    
     Opening balance                                                 839                  732
     Accretion expense                                                13                   19
     Foreign exchange loss (gain)                                     (5)                  88
                                                              --------------------------------
     Closing balance - continuing operations                         848                  839
                                                              --------------------------------

     Discontinued operation                                                                  
     Opening balance                                                 314                  311
     Accretion expense                                                 1                   20
     Sale of Barbrook                                                  -                 (107)
     Foreign exchange loss (gain)                                     23                   90
                                                              --------------------------------
     Closing balance - held for sale                                 338                  314
                                                              --------------------------------

     The asset retirement obligations relate to Blanket Mine $848 ($842 - Q2 2008), and Eersteling Gold Mine $338
     ($181  -  Q2  2008)  and  are estimates of costs of rehabilitation at the end of the  mine  life,  increased
     annually for accretion expense at a rate of 5%.

     5.   Share Capital

      (a)  Authorized
           An unlimited number of common shares
           An unlimited number of preference shares.
      (b)     Issued
                                                                      Number of Shares              Amount
                                                                      ------------------------------------
          Common shares                                                                                  $
                                                                      ------------------------------------
          Balance - December 31 , 2007                                     487,869,280             195,006
          Issued pursuant to a private placement (i)                        12,300,000               1,119
                                                                      ------------------------------------
          Balance - December 31, 2008                                      500,169,280             196,125
                                                                      ------------------------------------
          Balance - June 30, 2009                                          500,169,280             196,125
                                                                      ------------------------------------

       (i) In  February  2008  the  Corporation commenced a private placement to  raise  additional  funds.  This
           placement raised $1,119 after expenses from the sale of 12,300,000 units. Each unit consisted  of  one
           common share and one share purchase warrant.

      (c)   Stock Option Plans and Stock-Based Compensation

             The  Corporation has established incentive stock option plans (the "Plans") for employees, officers,
             directors,  consultants  and other service providers. Under the Plans, as  at  June  30,  2009,  the
             Corporation has the following options outstanding:

                          Number of Options      Exercise Price               Expiry Date
                          -----------------      --------------               -----------
                                                              $                          
                                  9,950,000               0.235            April 24, 2012
                                    150,000               0.345              June 2, 2012
                                    410,000               0.260            April 29, 2014
                                  4,000,000               0.110         February 15, 2015
                                  1,000,000               0.140             July 10, 2010
                                    300,000               0.125               May 11,2016
                                  1,300,000               0.113              May 31, 2012
                                  1,000,000               0.155              July 1, 2013
                                 15,820,000               0.155              Mar 18, 2013
                                    500,000               0.100              Mar 23, 2014
                         ---------------------------------------
                                 34,430,000                      
                         ---------------------------------------

             The  continuity  of  the options granted, exercised, cancelled and expired under  the  Plans  during
             2009, 2008 and 2007 are as follows:

                                                              Number of Options   Weighted Avg. Exercise Price
                                                              -----------------   -----------------------------    
                                                                                                             $
                                                              -------------------------------------------------
               Options outstanding at December 31, 2007              18,588,000                          0.198
               Forfeited or expired                                  (1,778,000)                         (0.28)
               Granted                                               17,320,000                          0.155
                                                              -------------------------------------------------
               Options outstanding at December 31, 2008              34,130,000                          0.173
               Granted                                                  500,000                           0.10
               Forfeited or expired                                    (200,000)                          0.11
                                                              -------------------------------------------------
               Options outstanding at June 30, 2009                  34,430,000                         0.1719
                                                              -------------------------------------------------

             The  options  to  purchase  common  shares noted above, have been granted  to  directors,  officers,
             employees  and service providers at exercise prices determined by reference to the market  value  of
             the  common  shares  on the date of grant. The vesting of options is made at the discretion  of  the
             board of directors at the time the options are granted.

      (d)   Warrants

             The Corporation has no share purchase warrants outstanding as of June 30, 2009:

             The continuity of warrants issued and outstanding is as follows:

                                                             Number of Warrants
                                                             -------------------
                  Outstanding December 31, 2007                      15,437,626
                  Expired                                           (15,437,626)
                  Issued pursuant to private placements              12,300,000
                                                             -------------------
                  Outstanding December 31, 2008                      12,300,000
                  Expired                                           (12,300,000)
                                                             -------------------
                  Outstanding June 30, 2009                                   -
                                                             -------------------

     6.     Net Income/ (Loss) Per Share

             The  net income/ (loss) per share figures have been calculated using the weighted average number  of
             common  shares  outstanding  during the respective quarter which amounted  to  500,169,280  (2008  -
             500,169,280  and  2007  -  477,344,698).  Fully diluted income/  (loss)  per  share  have  not  been
             calculated as it would be anti-dilutive.

     7.      Accounts Receivable

                                                                                         June 30      December 31
             Current Assets                                                                 2009             2008
                                                                                            ----             ----
             Amount owing on Gold Backed Foreign Exchange Bond                             2,890                -
             Amount owing on current gold sales                                              528                -
             Other                                                                           180              132
                                                                                         -------------------------
                                                                                           3,598              132
                                                                                         -------------------------

             Included  in  accounts  receivable is an amount owing by the Reserve Bank  of  Zimbabwe  ("RBZ")  of
             $2,890  ($1,780  - 2007) for gold sold, plus interest accrued, during 2008. In the  monetary  policy
             statement  announced  by the Governor of the RBZ in February 2009, this debt was  converted  into  a
             Special  Tradable  Gold-Backed Foreign Exchange Bond, with a term of 12 months and  an  8%  interest
             rate.  This  bond can be sold to any interested party locally, regionally or internationally  at  an
             agreed  to  time  maturity discount. This bond plus interest is guaranteed by  RBZ  on  maturity  on
             February 1, 2010.

             At  June  30, 2009 the Corporation has disclosed this receivable as a current asset at its estimated
             fair  value. The receivable was written down to the estimated fair value at December 31,  2008.  Due
             to  the  subsequent  conversion  of the receivable into a bond, the  fair  value  was  estimated  by
             applying  a  risk  premium  of 18% to the bond value as if converted at the  year  end.  It  is  the
             intention  of  the Corporation to sell the bond before maturity but due to a lack  of  a  market  in
             these  bonds, the Corporation classified the receivable as long term, as at December 31, 2008, based
             on the legal term of the bond to January 31, 2010.

     8.     Inventory

                                                                 June 30                           December 31
                                                                    2009                                  2008
                                                                    ----                                  ----
  Gold work in progress                                              333                                     -
  Consumable stores                                                1,132                                 1,059
                                                              -------------------------------------------------
                                                                   1,465                                 1,059
                                                              -------------------------------------------------

     9.      Statement of Cash Flows

             Items not involving cash are as follows:

                                               Three months ended June 30             Six months ended June 30
                                               ---------------------------            ------------------------
                                             2009        2008        2007          2009       2008        2007
                                             -----       ----        ----          ----       ----        ----
                                                $           $           $             $          $           $
  Amortization                                 99         117           3           198        200          11
  Rehabilitation accretion                      8          11         (75)           14         22         (94)
  Blanket long term liability                   -           -          28             -        (11)          -
  Equity-based compensation expense             8          68           -            15         68           -
  Translation loss Blanket Mine               101           -           -          (175)                       
  Write down of mineral properties                          -         495                        -         495
  Other                                        12         (93)         10            19        (42)          -
                                         ----------------------------------------------------------------------
                                              228         103         461            71        237         412
                                         ----------------------------------------------------------------------

             The net changes in non-cash working capital balances for operations are as follows:

                                              Three months ended June 30             Six months ended June 30
                                              ---------------------------            ------------------------
                                            2009        2008        2007           2009        2008        2007
                                            -----       ----        ----           ----        ----        ----
                                               $           $           $              $           $           $
  Accounts payable                           162        (697)     (5,756)           420      (1,943)     (3,589)
  Accounts receivable                       (547)        (37)        565           (576)       (822)        755
  Inventories                               (346)       (146)      3,446           (406)        612       4,068
  Prepaid expenses                             -           -          27              9           2          45
  Assets held for sale                       (23)         65         (40)           (27)         82          91
                                           ---------------------------------------------------------------------
                                            (754)       (815)     (1,758)          (580)     (2,069)      1,370
                                           ---------------------------------------------------------------------

             Supplemental cash flow Information:
                                                                       2009             2008             2007
                                                                       ----             ----             ----
                                                                          $                $                $
              Interest paid                                              37               43               55
              Interest received                                          65               71                -

      10.   Segmental Information
                                                               For the six months ended June 30, 2009
                                                    --------------------------------------------------------------
                                                      Corporate      Zimbabwe   South Africa     Zambia     Total
                                                      ---------      --------   ------------     ------     -----
                                                              $             $              $          $         $
               Revenue from sales                             -         2,364              -          -     2,364
               Operating costs                                -        (2,138)          (433)         -    (2,571)
               General and administrative                (1,020)          (55)           (69)         -    (1,144)
               Interest received (paid)                      64           (38)             2          -        28
               Amortization                                   -          (184)           (14)         -      (198)
               Foreign exchange gains/(loss)                 89           231            248         (9)      559
               Other income (expense)                         -             -              -          -         -
                                                    --------------------------------------------------------------
               Income (loss) for continuing                (867)          180           (266)        (9)     (962)
                operations
                                                    --------------------------------------------------------------
                                                    --------------------------------------------------------------
               Discontinued operations (loss)                                            (77)                 (77)
               Income tax expense                             -             -              -          -         -
                                                    --------------------------------------------------------------
                                                    --------------------------------------------------------------
               Net income (loss) for the year              (867)          180           (343)        (9)   (1,039)
                                                    --------------------------------------------------------------
                                                    --------------------------------------------------------------

                                                               For the six months ended June 30, 2008
                                                    ----------------------------------------------------------------
                                                        Corporate      Zimbabwe   South Africa     Zambia     Total
                                                        ---------      --------   ------------     ------     -----
                                                                $             $              $          $         $
               Revenue from sales                               3         5,384              -          -     5,387
               Operating costs                                  -        (2,381)          (235)         -    (2,616)
               General and administrative                    (973)          (25)          (159)         -    (1,089)
               Interest                                        67           (43)             4          -        28
               Amortization                                     -          (195)            (7)         -      (202)
               Foreign exchange gains/(loss)                  (31)       (1,022)           242         51      (760)
               Other income (expense)                           -             -           (150)         -      (150)
                                                    ----------------------------------------------------------------
               Income (loss) for continuing                  (934)        1,718           (305)        51       530
                operations
                                                    ----------------------------------------------------------------
                                                    ----------------------------------------------------------------

               Discontinued operations (loss)                   -             -            (94)         -       (94)
               Income tax expense                               -             -              -          -         -
                                                    ----------------------------------------------------------------
                                                    ----------------------------------------------------------------
               Net income (loss) for the year                (934)        1,718           (399)        51       436
                                                    ----------------------------------------------------------------
                                                    ----------------------------------------------------------------

      11.   Contingent Liability

             In  the Share Sale Agreement dated May 12, 2006 pursuant to which the Corporation purchased 100%  of
             the  shares  of  Blanket,  the Corporation agreed that it would, as soon as  reasonably  practicable
             after  the  Closing of the Agreement, cause Blanket to implement a share incentive scheme considered
             by  the  Directors  to be in the best interests of Blanket, pursuant to which a  percentage  of  the
             shares  of  Blanket will be deposited in a Trust for the benefit of the management and employees  of
             Blanket.  As  at  June  30,  2009 no scheme had been established, nor were  any  shares  of  Blanket
             deposited  in a Trust for the purposes of such a scheme. The Corporation and the Board of  Directors
             of Blanket have delayed  the  establishment of the required scheme pending clarity of the anticipated
             Zimbabwe  laws relating to the indigenization of the mining industry, as it is recognized that the
             Zimbabwean  laws will  likely  have a material impact on the structure of the proposed scheme and the
             percentage  of the issued shares of Blanket required to be put into trust for the purposes of the scheme.

      12.   Fair Value of Financial Instruments

             The  Corporation  has various financial instruments comprising of cash and cash  equivalents,  trade
             receivables,  investments,  accounts payable, bank overdrafts,  accrued  liabilities  and  long-term
             debts.

             The various assets and liabilities were classified as follows on adoption:

             (i)     Cash  and  cash equivalents are classified as "assets held for trading". They are stated  at
                     fair  value  and  any  gains/losses arising on revaluation at the end  of  each  period  are
                     included  in  the statement of operations. We have no derivative financial instruments  that
                     would have been classified on a similar basis.
             (ii)    Investments are classified as "assets available for sale". They are presented at fair value and
                     the gains/losses arising from their revaluation at the end of each quarter will be included in
                     other comprehensive income. When a decline in fair value is other than temporary, the accumulated
                     loss that had been recognized directly in other comprehensive income is removed from accumulated
                     other comprehensive income and recognized in net income even though the financial asset has not
                     been derecognized.
             (iii)   Trade receivables are classified under "loans and receivables". They are recorded at their
                     original cost which is deemed their fair value at that time. Subsequent measurement will be at
                     amortized cost using the effective interest rate method.
             (iv)    Bank overdraft is classified as a "financial liability held for trading" as there is a contractual
                     obligation to deliver cash. It is measured at fair value which is book value plus accrued
                     interest. It is stated at fair value and any gains/losses arising on revaluation at the end of
                     each period are included in the statement of operations.
             (v)     Accounts payable and accrued liabilities and long term debt are classified under "other financial
                     liabilities". They are recorded at their fair value at that time. Subsequent measurement will be
                     at amortized cost using the effective interest rate method.

      13.   Financial Risk Exposure and Risk Management

             The Corporation is exposed in varying degrees to a variety of financial instrument related risks  by
             virtue  of its activities. The overall financial risk management program focuses on preservation  of
             capital,  and  protecting current and future Corporation assets and cash flows by reducing  exposure
             to risks posed by the uncertainties and volatilities of financial markets.

             The  Board  of  Directors has responsibility to ensure that adequate financial  risk  management  is
             established.   The  Corporation's  Audit  Committee  oversees  management's  compliance   with   the
             Corporation's financial risk management.

             The types of risk exposure and the way in which such exposures are managed are as follows:

             i) Currency Risk

             As  the  Corporation  operates in an international environment, some of the Corporation's  financial
             instruments  and  transactions are denominated in currencies other than  the  Canadian  Dollar.  The
             results  of  the  Corporation's  operations are subject to currency transaction  risk  and  currency
             translation  risk. The operating results and financial position of the Corporation are  reported  in
             Canadian Dollars in the Corporation's consolidated financial statements.

             The  fluctuation  of the Canadian Dollar in relation to other currencies will consequently  have  an
             impact  upon the profitability of the Corporation and may also affect the value of the Corporation's
             assets and the amount of shareholders' equity.

             A  significant portion of the Corporation's assets and liabilities are denominated in South  African
             Rand  and  United States Dollars. Management do not consider that the fluctuation of  the  value  of
             these  currencies  to  the  Canadian  Dollar could have a  significant  impact  on  the  results  of
             operations.  Blanket  Mine  operations are now transacted using the  United  States  Dollar  as  the
             functional  currency. As a result of the introduction of the US Dollar as legal tender  in  Zimbabwe
             the  hyperinflationary  environment has decreased dramatically.  The  shareholder  loan  account  in
             Zimbabwe  is  denominated in US Dollars and will generate foreign exchange losses for  Blanket  Mine
             depending  on  the exchange rate between the US dollar and the Canadian Dollar. The fair  values  of
             these  financial  instruments  approximate  their  carrying  values,  unless  otherwise  noted.  The
             Corporation does not use any derivative instruments to reduce its foreign currency risks.

             Below  is a summary of the cash or near cash items denominated in a currency other than the Canadian
             Dollar that would be affected by changes in exchanges rates relative to the Canadian Dollar.

              --------------------------------------------------
              $000                       US Dollars      SA Rand
              --------------------------------------------------
              Cash                               14        1,902
              --------------------------------------------------
              Accounts Receivable             3,173        1,394
              --------------------------------------------------
              Accounts Payable                  979          365
              --------------------------------------------------

             The  table  below illustrates by how much a 1% change in the rate of exchange between  the  Canadian
             Dollar and the currencies above will affect net income.

              --------------------------------------------------             
              $000                       US Dollars      SA Rand
              --------------------------------------------------
              Cash                                -            3
              --------------------------------------------------
              Accounts Receivable                27            2
              --------------------------------------------------
              Accounts Payable                    8            1
              --------------------------------------------------

             ii) Interest Rate Risk

             Interest  rate  risk  is the risk borne by an interest-bearing asset or liability  as  a  result  of
             fluctuations in interest rates.

             Unless  otherwise  noted, it is the opinion of management that the Corporation  is  not  exposed  to
             significant interest rate risk as it is debt free and only utilizes overdraft facilities  for  short
             periods  if necessary. As a result of Blanket Mine being brought back into production (see Note  16)
             working  capital borrowings will increase in Zimbabwe. The working capital loans will be  US  Dollar
             denominated and will attract interest rates of approximately 6% pa. It is the intention  of  Blanket
             to  borrow further funds to complete the No 4 shaft expansion project. No acceptable term sheet  has
             been  received  for  these loans and thus the interest rate is unknown. The Corporation's  cash  and
             cash  equivalents  include  highly  liquid investments that  earn  interest  at  market  rates.  The
             Corporation manages its interest rate risk by endeavoring to maximize the interest income earned  on
             excess funds while  maintaining  the  liquidity  necessary to conduct  operations  on  a  day-to-day
             basis.  The Corporation's policy focuses on preservation of capital and limits the investing of excess
             funds to liquid term deposits in "A" grade financial institutions.

             Fluctuations  in  market  interest  rates have not had a significant  impact  on  the  Corporation's
             results of operations due to the short-term to maturity of the investments held.

             iii) Concentration of Credit Risk

             Credit  risk  is the risk of a financial loss to the Corporation if a gold sales customer  fails  to
             meet  its  contractual obligation. Credit risk arises principally from the Corporation's receivables
             from  the  Reserve Bank of Zimbabwe ("RBZ") who was the sole buyer of gold produced in Zimbabwe,  in
             terms of legislation.

             At  December 31, 2008 the RBZ owed Blanket US$2,400,000 (at fair value). The amount owed to  Blanket
             was  converted  into a Special Tradable Gold-backed Foreign Exchange Bond ("Bond") by RBZ  following
             the Monetary Policy announcement on February 2, 2009 that has the following features;

                    -       Term of 12 months
                    -       Interest at 8% pa on maturity on February 1, 2010.
                    -       Bond may be sold locally, regionally or internationally at an agreed price
                    -       RBZ will honour the full principal plus interest on maturity

             The  lack  of  foreign currency in Zimbabwe affects all business sectors and management  maintains
             close  relations  with  RBZ to ensure payments are made whenever necessary, to  sustain  operations,
             within the capabilities of the RBZ.

             iv) Liquidity Risk

             Liquidity  risk is the risk that the Corporation will not be able to meet its financial  obligations
             as they fall due.

             The Corporation manages its liquidity by ensuring that there is sufficient capital to meet short
             and long term business requirements, after taking into account cash flows from operations and the
             Corporation's holdings of cash and cash equivalents. The Corporation believes that these sources
             will be sufficient to cover the likely short and long term cash requirements. Senior management is
             also actively involved in the review and approval of planned expenditures by regularly monitoring
             cash flows from operations and anticipated investing and financing activities.

             v) Commodity Price Risk

             The  value  of  the  Corporation's mineral resource properties is related  to  the  price  of  gold,
             platinum  and cobalt, and the outlook for these minerals. In addition, adverse changes in the  price
             of certain raw materials can significantly impair the Corporation's cash flows.

             Gold prices historically have fluctuated widely and are affected by numerous factors outside of  the
             Corporation's  control, including, but not limited to, industrial and retail  demand,  central  bank
             lending,  forward  sales  by producers and speculators, levels of worldwide  production,  short-term
             changes  in  supply  and  demand  because  of speculative  hedging  activities,  and  macro-economic
             variables, and certain other factors related specifically to gold.

             In the Monetary Policy Announcement made by RBZ on February 2, 2009, Blanket became eligible to
             export its gold to a refiner of its choice and to receive 100% of the proceeds in US Dollars paid
             into its foreign currency account at a Zimbabwean commercial bank. As a result of this
             announcement, Blanket resumed mining operations on April 7, 2009 after receiving all the necessary
             licenses from the Ministry of Finance and the RBZ.

      14.   Capital Management

             The  Corporation's objectives when managing capital are to safeguard its ability to  continue  as  a
             going  concern  in order to pursue the mining operations and exploration potential  of  the  mineral
             properties.

             The  Corporation's  capital includes, short-term debt, long-term debt and equity, comprising  issued
             common shares, contributed surplus and retained earnings.

             The  Corporation's primary objective with respect to its capital management is to ensure that it has
             sufficient  cash  resources to maintain its ongoing operations, to provide returns for  shareholders
             and  benefits  for  other  stakeholders  and to pursue growth opportunities.  To  secure  additional
             capital  to  pursue  these  plans,  the Corporation may attempt to raise  additional  funds  through
             borrowing and/or the issuance of equity, debt or by securing strategic partners.

             In order to maximize ongoing exploration efforts, the Corporation does not pay dividends.

             As  at June 30, 2009, the Corporation is not subject to externally imposed capital requirements  and
             there has been no change with respect to the overall capital risk management strategy.

                                                            As at June 30, 2009           As at December 31, 2008
               $000
                                                    --------------------------------------------------------------
               Issued common shares                                     196,125                           196,125
               Contributed surplus                                        1,917                             1,902
               Other comprehensive income                                  (157)                                3
               Deficit                                                 (177,873)                         (176,834)
                                                    --------------------------------------------------------------
               Total                                                     20,012                            21,196
                                                    --------------------------------------------------------------

        15.  Comparative Figures
                     The prior period figures have been reclassified to conform to the current presentation.

Directors and Management at June 30, 2009

BOARD OF DIRECTORS                                                                                       OFFICERS
G.R. Pardoe (1)(2)(3)(4)(5)                                                           G.R. Pardoe (1)(2)(3)(4)(5)
Chairman of the Board,                                                                     Chairman of the Board,
Johannesburg, South Africa                                                             Johannesburg, South Africa

S. E. Hayden (3)(4)(5)                                                                     S. E. Hayden (3)(4)(5)
President and Chief Executive Officer                                       President and Chief Executive Officer
Johannesburg, South Africa                                                             Johannesburg, South Africa

J. Johnstone                                                                                     S. R. Curtis (5)
Retired Mining Engineer                                        Vice-President Finance and Chief Financial officer
Gibsons, British Columbia, Canada                                                      Johannesburg, South Africa

F C. Harvey (1)                                                                                    Dr. T. Pearton
Retired Executive                                                                      Vice President Exploration
Oakville, Ontario, Canada                                                              Johannesburg, South Africa

C. R. Jonsson (2)(3)(5)                                                                            J.M. Learmonth
Principal of Tupper Jonsson& Yeadon                                           Vice-President Business Development
Barristers & Solicitors                                                                Johannesburg, South Africa
Vancouver, British Columbia,                                                                                     
Canada                                                                                           BOARD COMMITTEES
                                                                                              (1) Audit Committee
R. W. Babensee (1)(2)                                                                  (2) Compensation Committee
Chartered Accountant - Retired                                                 (3) Corporate Governance Committee
Toronto, Ontario, Canada                                                                 (4) Nominating Committee
                                                                                         (5) Disclosure Committee
S. R. Curtis (5)                                         
Vice-President Finance and Chief Financial officer       
Johannesburg, South Africa                               

     Corporate Directory
     CORPORATE OFFICES                                           SOLICITORS
     Canada - Head Office                                        Borden Ladner Gervais LLP
     Caledonia Mining Corporation                                Suite 4100, Scotia Plaza
     Suite 1201, 67 Yonge Street                                 40 King Street West
     Toronto, Ontario M5E 1J8 Canada                             Toronto, Ontario M5H 3Y4 Canada
     Tel:(1)(416) 369-9835 Fax:(1)(416) 369-0449                 Tupper, Jonsson & Yeadon
     info@caledoniamining.com                                    1710-1177 West Hastings St, Vancouver,
                                                                 British Columbia V6E 2L3 Canada
     South Africa - Africa Office
     Greenstone Management Services (Pty) Ltd.                   AUDITORS
     P.O. Box 834                                                BDO Dunwoody LLP
     Saxonwold 2132                                              Chartered Accountants
     South Africa                                                Suite 3300, 200 Bay Street
     Tel: (27)(11) 447-2499 Fax: (27)(11) 447-2554               Royal Bank Plaza, South Tower
                                                                 Toronto, Ontario M5J 2J8 Canada
     Zambia
     Caledonia Mining (Zambia) Limited                           REGISTRAR & TRANSFER AGENT
     P.O. Box 36604                                              Equity Transfer Services Inc.
     Lusaka, Zambia                                              Suite 400 200 University Ave
     Tel:(260)(1) 29-1574 Fax(260)(1) 29-2154                    Toronto, Ontario M5H 4H1 Canada
                                                                 Tel: (416) 361-0152 Fax:(416) 361-0470
     Zimbabwe
     Caledonia Holdings Zimbabwe (Limited)                       BANKERS
     P.O. Box CY1277                                             Canadian Imperial Bank of Commerce
     Causeway, Harare                                            6266 Dixie Road
     Zimbabwe                                                    Mississauga, Ontario L5T 1A7 Canada
     Tel:  (263)(4)701151/4  Fax:(263)(4)702248

                                                                 NOMADS AND BROKERS (AIM)
     CAPITALIZATION at August 07, 2009                           RBC Capital Markets
     Authorised: Unlimited                                       71 Queen Victoria Street
     Shares, Warrants and Options Issued:                        London EC4V 4DE
     Common Shares:     500,169,280                              Tel: +44 20 7653 4000
     Warrants:          Nil
     Options:           34,430,000                               SHARES LISTED
                                                                 Toronto Stock Exchange Symbol "CAL"
                                                                 NASDAQ OTC BB Symbol "CALVF"
                                                                 London "AIM" Market Symbol "CMCL"
                                                                 Web Site: http://www.caledoniamining.com

Caledonia Mining Corp