UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

March 15, 2011

FORM 20-F

ANNUAL REPORT

AMENDMENT NO. 2

(Mark One)



[ ]

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



OR

[x]

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

For the fiscal year ended December 31, 2009



OR



[ ]

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

For the transition period from  to



Commission file number   013345



OR



[ ]

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

Date of event requiring this shell company report



CALEDONIA MINING CORPORATION

(Exact name of Registrant as specified in its charter)



Caledonia Mining Corporation is variously referred to in this Report

as Caledonia, the Corporation or the Company



Canada

(Jurisdiction of incorporation or organization)



24 Ninth Street, Lower Houghton, Johannesburg, Gauteng 2198, South Africa

(Address of principal executive offices)



Carl R. Jonsson, 1710-1177 West Hastings Street,

Vancouver, BC V6E 2L3, Canada;  tel: (604) 640-6357;  fax: (604) 681-0139

email:jonsson@securitieslaw.bc.ca

(Name, telephone, email and/or facsimile number and address of Company Contact Person)







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



(Title of Class)



(Title of Class)



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



Title of each class

Name of each exchange on which registered

Common shares

Toronto Stock Exchange

London Stock Exchange Alternative Investment Market

NASD OTC Bulletin Board





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.



(Title of Class)



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

500,169,280



Indicate by check mark if the registration is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes

No x



If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.



Yes

No x



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



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days



Yes

x

No





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



Large accelerated filer ______  Accelerated filer

Non-accelerated filer  x



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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP  International Financial Reporting Standards as issued by the International Accounting Standards Board

Other:

Canadian GAAP



If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

Item 17

x

Item 18



If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes

No

x



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



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.



Yes

No



NOTE:  All references to monies herein are to Canadian dollars unless otherwise specifically indicated



This Form 20-F Amendment No. 1, together with exhibits filed herewith, are being filed to clarify and expand on certain information contained in the original Form 20-F Annual Report filed on June 21, 2010 relating to the Companys mineral properties and the presentation of geological information with respect to such mineral properties, and the 20-F Amendment No. 1 filed September 29, 2010.  This Amendment No. 2 amends and restates the original Form 20-F.  Unless otherwise specifically noted herein, it does not bring the information that it contains up to date.



FORWARD LOOKING STATEMENTS

The Company cautions readers regarding forward looking statements found in this Annual Report and in any other statement made by, or on behalf of the Company, whether or not in future filings with the United States Securities Exchange Commission.  Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments.  Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Companys control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company.  The Company disclaims any obligation to update forward looking statements.



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PART 1





1.

IDENTITY of DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



Not required as this is an annual report under the Securities Exchange Act of 1934 (Exchange Act).



However, the information required above can readily be determined from Caledonias Proxy and Information Circular dated April 15, 2010 attached as Exhibit #14b.  Information is also given in Section 14A.





2.

OFFER STATISTICS AND TIMETABLE



Not required as this is an annual report under the Exchange Act.





3.

KEY INFORMATION



Selected Financial Data

Table 3 A shows the applicable selected financial data for the 5-year period 2005 to 2009 in Canadian Generally Accepted Accounting Principles.



Table 3 A (i)shows the applicable selected financial data for the 5-year period 2005 to 2009 in United States Generally Accepted Accounting Principles.



Table 3 A (ii) shows the US$exchange rates against the Canadian $ for each of the 5-year periods indicated, for the period end and average exchange rate and the range of high and low rates for each year and the high and low exchange rates for the individual six months ending March 31, 2010.







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Table 3A - Selected Financial Information - Canadian Generally Accepted Accounting Principles - the figures presented being as of the end of each such year.



|                                                            |         |         |         |         |        
|----------------------------------------------------------- | ------- | ------- | ------- | ------- | -------
|                                                            | 2009    | 2008(2) | 2007    | 2006(1) | 2005(1)
|- In Thousands of Canadian Dollars except per share amounts |         |         |         |         |        
|Revenue from Operations                                     | 11,559  | 7,696   | 10,039  | 13,586  | 6      
|Gross Profit (Loss)                                         | 3,336   | 3,258   | 294     | 5,014   | (751)  
|Expenses (General, Administration, Interest) Amortization)  | 6,247   | 7,543   | 4,195   | 2,047   | 2,997  
|Net Income (Loss) for continuing operations                 | (3,770) | (4,285) | (3,906) | 2,315   | (3,748)
|Loss from discontinued operations                           | (180)   | (655)   | (709)   | (7,990) | (5,932)
|Loss for the Year  after discontinued operations            | (3,950) | (4,940) | (4,615) | (5,675) | (9,680)
|Cash                                                        | 1,622   | 3,652   | 76      | 1,252   | 1,076  
|Current Assets                                              | 5,917   | 5,025   | 4,408   | 8,773   | 2,264  
|Total Assets                                                | 22,090  | 23,657  | 29,492  | 31,456  | 22,338 
|Current Liabilities                                         | 2,759   | 1,308   | 4,343   | 5,899   | 2,589  
|Long Term Liabilities                                       | 2,589   | 1,153   | 1,054   | 1,221   | 377    
|Working Capital (Deficiency)                                | 3,158   | 3,717   | 65      | 2,874   | (325)  
|Shareholders Equity                                        | 16,742  | 21,196  | 24,095  | 24,336  | 19,372 
|Total Capital Expenditures (including Mineral Properties)   | 1,547   | 3,023   | 3,250   | 3,579   | 5,284  
|Expenditures on Mineral Properties                          | 718     | 2,898   | 2,633   | 659     | 2,583  
|Financing Raised (incl overdraft in 2009)                   | 588     | 1,119   | 4,380   | 7,559   | 6,588  
|Dividends Declared                                          | -       | -       | -       | -       | -      







Share Information



|                                                  |         |         |         |         |        
|------------------------------------------------- | ------- | ------- | ------- | ------- | -------
|Market Capitalization ($ Thousands)               | 32,508  | 32,511  | 53,666  | 45,798  | 42,632 
|Shares Outstanding (Thousands)                    | 500,169 | 500,169 | 487,869 | 457,981 | 370,715
|Warrants & Options (Thousands)                    | 32,580  | 46,430  | 34,026  | 102,354 | 34,748 
|Earnings (Loss) per Share  continuing operations | (0.008) | (0.009) | (0.008) | 0.005   | (0.012)
|Loss per Share                                    | (0.008) | (0.010) | (0.009) | (0.013) | (0.031)



(1)

Presented to show the results of continuing and discounted operations due to the Companys decision to sell the Barbrook and Eersteling Mines.

(2)

The 2008 figures have been restated to reflect an under accrual of $310 of capitalized mineral property exploration costs plus $49 for VAT.





















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Table 3A (i) - Selected Financial Information - United States Generally Accepted Accounting Principles - the figures presented being as of the end of each such year



|                                                                   |         |         |         |         |         
|------------------------------------------------------------------ | ------- | ------- | ------- | ------- | --------
|                                                                   | 2009    | 2008(2) | 2007    | 2006(1) | 2005(1) 
|- In Thousands of Canadian Dollars except per share amounts        |         |         |         |         |         
|Revenue from Operations                                            | 11,559  | 7,696   | 10,039  | 13,586  | 6       
|Gross Profit (Loss)                                                | 4,110   | 1,070   | (2,339) | 4,355   | (2,791) 
|Expenses (General and Administration, Interest and Amortization)   | 6,247   | 7.543   | 4,195   | 2,047   | 2,997   
|Net Income (Loss) from continuing operations                       | (2,996) | (6,473) | (6,539) | 1,656   | (5,788) 
|Loss from discontinued operations                                  | (180)   | (655)   | (709)   | (7,990) | (5,932) 
|Net Loss                                                           | (3,176) | (7,128) | (7,248) | (6,334) | (11,720)
|Cash                                                               | 1,622   | 3,652   | 76      | 1,252   | 1,076   
|Current Assets                                                     | 5,917   | 5,025   | 4,408   | 8,773   | 2,264   
|Total Assets                                                       | 12,691  | 13,484  | 21,507  | 26,135  | 17,591  
|Current Liabilities                                                | 2,759   | 1,308   | 4,343   | 5,899   | 2,589   
|Long Term Liabilities                                              | 2,589   | 1,153   | 1,054   | 1,221   | 377     
|Working Capital (Deficiency)                                       | 3,158   | 3,717   | 65      | 2,874   | (325)   
|Shareholders Equity (Deficiency)                                  | 7,343   | 11,023  | 16,110  | 19,015  | 14,625  
|Total Capital Expenditures (including Mineral
Properties)          | 887     | 125     | 617     | 2,920   | 3,244   
|Expenditures on Mineral Properties                                 | 57      | -       | -       | -       | 543     
|Financing Raised                                                   | 588     | 1,119   | 4,380   | 7,559   | 6,785   
|Deemed Dividends                                                   | -       | -       | 134     | -       | 171     
|Share Information                                                  |         |         |         |         |         
|Market Capitalization ($ Thousands)                                | 32,508  | 32,511  | 53,666  | 45,798  | 42,632  
|Shares Outstanding (Thousands)                                     | 500,169 | 500,169 | 487,869 | 457,981 | 370,715 
|Warrants & Options (Thousands)                                     | 32,580  | 46,430  | 34,026  | 102,354 | 34,748  
|Basic and Diluted Income (Loss) per share -  continuing operations | (0.006) | (0.013) | (0.01)  | 0.00    | (0.02)  
|Basic and Diluted  Loss per Share                                  | (0.006) | (0.014) | (0.01)  | (0.02)  | (0.04)  



(1)

Presented to show the results of continuing and discontinued operations due to the Companys decision to sell the Barbrook and Eersteling Mines.

(2)

The 2008 figures have been restated to reflect an under accrual of $310 of capitalized mineral property exploration costs plus $49 for VAT.



Table 3A (ii) - Summary of Exchange Rates for the 5-year Period -2005 to 2009

The following table sets forth, for each of the years indicated, the exchange rate of the United States dollar into Canadian currency at the end of such year, the average exchange rate during each such year and the range of high and low rates for each such year as supplied by the Bank of Canada.









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|                                 |        |        |        |        |       
|-------------------------------- | ------ | ------ | ------ | ------ | ------
|Exchange Rate                    | 2009   | 2008   | 2007   | 2006   | 2005  
|Rate at the End of the Period(1) | 1.049  | 1.218  | 0.982  | 1.1654 | 1.1630
|Average Rate (2)                 | 1.14   | 1.066  | 1.0744 | 1.342  | 1.2114
|High Rate (1)                    | 1.036  | 0.9711 | 1.185  | 1.1794 | 1.2585
|Low Rate (1)                     | 1.2907 | 1.3008 | 0.9145 | 1.0948 | 1.1630



Notes:

(1)

The rate of exchange is the Bank of Canada closing rate for the period.



(2)

The average rate means the average of the exchange rates during the year.



The high and low rates of exchange for each of the 6 months from October 2009 to March 2010 are as follows:



|        |           |           |           |           |           |           
|------- | --------- | --------- | --------- | --------- | --------- | ----------
|        | Oct. 2009 | Nov. 2009 | Dec. 2009 | Jan. 2010 | Feb. 2010 | March 2010
|Closing | 1.072     | 1.062     | 1.049     | 1.071     | 1.052     | 1.019     
|Average | 1.055     | 1.063     | 1.056     | 1.044     | 1.057     | 1.025     
|Hi      | 1.086     | 1.086     | 1.075     | 1.070     | 1.078     | 1.057     
|Low     | 1.027     | 1.042     | 1.037     | 1.022     | 1.037     | 1.006     



C.

Risk Factors

An investment in the securities involves a high degree of risk.  Investors need to carefully consider the following risk factors, in addition to the other information contained in this document and the Exhibits hereto.



Industry Competition



The mining industry is a highly diverse and competitive international business.  The selection of geographic areas of interest are only limited by the degree of risk a company is willing to accept by the acquisition of  properties in emerging or developed markets and/or prospecting in explored or virgin territory.  Mining, by its nature, is a competitive business with the search for fresh ground with good exploration potential and the raising of the requisite capital to move projects forward to production.  Globally the mining industry is prone to cyclical variations in the price of the commodities produced by it, as dictated by supply and demand factors, speculative factors and industry-controlled marketing cartels.  Nature provides the ultimate uncertainty with geological and occasionally climatic surprises. Commensurate with the acceptance of this risk profile is the potential for high rewards.



Exploration and Development



Exploration, development and production activities are subject to political, economic and other risks, including:

-

cancellation or renegotiation of contracts;

-

changes in local and foreign laws and regulations;

-

changes in tax laws;

-

delays or refusal in granting prospecting permissions, mining authorizations and work permits for foreign management staff;

-

environmental controls and permitting

-

expropriation or nationalization of property or assets;

-

foreign exchange controls;

government mandated social expenditures;

-

import and export regulation, including restrictions on the sale of their production in foreign currencies;

-

industrial relations and the associated stability thereof;

-

inflation of cost that is not compensated for by a currency devaluation;

-

requirement that a foreign subsidiary or operating unit have a domestic joint venture partner, which, possibly, the foreign company must subsidize;



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-

restrictions on the ability of local operating companies to sell their production for foreign currencies, and on the ability of such companies to hold these foreign currencies in offshore and/or local bank accounts;

-

restrictions on the ability of a foreign company to have management control of exploration and/or development and/or mining operations;

-

restrictions on the remittance of dividend and interest payments offshore;

-

retroactive tax or royalty claims;

-

risks of loss due to civil strife, acts of war, guerrilla activities, insurrection and terrorism;

-

royalties and tax increases or claims by governmental entities;

-

unreliable local infrastructure and services such as power, communications and transport links;

-

demands or actions by native or indigenous groups;

-

other risks arising out of foreign sovereignty over the areas in which operations are conducted.

-

lack of uninterrupted power supplies

-

lack of investment funding



Such risks could potentially arise in any country in which Caledonia operates.  In Southern Africa, Black Economic Empowerment Legislation and a number of economic and social issues may result in increased political and economic risks of operating in that area.



The Republic of Zimbabwe brought its Indigenisation and Economic Empowerment Act into law in March 2008. The law seeks to ensure that a majority stake (at least 51%) in all companies is held by indigenous Zimbabweans. Additionally the
Mines and Minerals Amendment Bill is the subject of revision and will be presented to Parliament in due course..



In January 2008 the Zambian government announced the following changes to its tax laws that would have had a bearing on the Nama Cobalt Project.  The key changes were:

?

Increase in mineral royalty from 0.6% to 3%



?

Increase in profit tax rate from 25% to 30%



?

Introduction of variable profits tax of 15% for net profits above 8%



?

Introduction of a windfall profit tax for copper and cobalt mines



?

Capital allowances reduced from 100% to 25%

These measures were highly controversial with mining companies, many of which invested in the country under specific tax incentives and formalized their business models accordingly. Various representations were made by the mining companies both directly and through the Chamber of Mines to the government following the budget announcement at the end of January 2008. The Zambian government in January 2009 announced improvements to the taxation of mining companies, in particular:

·

the abolition of windfall tax

·

the return of capital allowances back to 100%.



Whilst these changes are welcome, the royalty remains unchanged at 3% and we make the observation that at low cobalt prices, the royalty can give rise to a very significant tax burden on the project.



Consequently, Caledonias exploration, development and production activities may be substantially affected by factors beyond Caledonias control, any of which could materially adversely affect Caledonias financial position or results from operations. Furthermore, in the event of a dispute arising from such activities, Caledonia may be subject to exclusive jurisdiction of courts outside North America or may not be successful in subjecting persons to the jurisdiction of the courts in North America, which could adversely affect the outcome of a dispute.



History of Losses; Accumulated Deficit; No Assurance of Revenue or Operating Profit



Since inception from February 1992, Caledonia has recorded a loss in every year except 1994 and 2000.  As at December 31, 2009, the consolidated accumulated deficit was $180,784,000.



Write-downs on capital assets and mineral properties are typical for the mining industry.  Caledonias policy is to review the carrying value of assets relative to current market conditions on an annual basis.



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Fluctuating Minerals Prices and Foreign Currency Exchange Rates



As Caledonias activities primarily relate to the exploration, development and production of minerals the fluctuating World prices for such minerals have a significant potential effect on the Companys future activities and the potential profitability of any of its minerals production activities.  There is never any assurance, when activities are undertaken, or production operations are commenced, that the World price of the minerals involved will continue at a sufficiently high price to justify the ongoing activities or the continuation of the production.



Most costs incurred by the Company in its exploration, development and production activities in southern Africa have to be paid in local currencies.  However, mineral prices are generally quoted in United States dollars.  The profitability of any production operations of the Company and the potential profitability of its exploration and development activities will therefore be seriously affected by adverse changes in the currency exchange rates.



Black Empowerment and Indigenization



The governments of the Southern African countries in which the Company operates have, or are proposing, legislation (typically referred to as black empowerment) requiring companies to allow participation in their shareholdings and business enterprises by the indigenous (i.e. black) population.  In not all instances is it assured that such interests will have to be paid for at full fair value.  In Zimbabwe, when Caledonia purchased the Blanket Mine, it agreed to establish a trust for the benefit of the employees of the Blanket Mine into which up to 30% of the issued shares of the wholly owned subsidiary which it acquired and is operating the Blanket Mine would be placed.  The ultimate terms and conditions of black empowerment regulations forced on the Company - and the Zimbabwean trust when it is established - could seriously affect the profitability and economic prospects of the Company.



Need for Additional Funds



The Companys plans for ongoing and increased activity - and the development, ultimately, of cobalt production operations in Zambia - will require funding in excess of the Companys funds on hand.  There is no assurance that all of the required additional funding can be raised and the Company may therefore have to reduce its ongoing activities.



The long-term off take agreements for future sales of cobalt concentrate remain in place with the four large Chinese refiners, who have all indicated continued support during this period of depressed commodity prices and lack of financing facilities.



Where possible the Company seeks, and will continue to seek, for new mineral property acquisitions or exploration activities joint venture agreements with other companies which will be required to supply all, or a significant portion, of the required funding.



Joint Venture Negotiations





Two of the three Rooipoort platinum prospecting rights applied for have been granted to prospect for PGMs on major portions of the Mapochsgronde tribal trust land and are currently in the process of registration.  The remaining property to the north of the area where the current rights are under appeal with the DME and its decision is awaited.



Joint venture partners are being sought for this project.



Dependence upon Key Personnel



Caledonias success depends (i) on the continued contributions of its directors, executive officers, management and consultants, and (ii) on Caledonias ability to attract new personnel whenever Caledonia seeks to implement its business strategy.   There is no assurance that the Company will always be able to locate and hire all of the personnel that it may consider that it requires.  The Company, where it considers it appropriate, engages consulting and service companies to undertake some of the work function.





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Mr. Harvey retired from his position as Technical Director in December 2005, but continues as a director and was appointed as a member of the Audit Committee in June 2009. James Johnstone retired from his position as Chief Operating Officer in September, 2006, also continues as a Director.



Mr. Steven Curtis was appointed Vice President Finance and Chief Financial Officer in April 2006,and was appointed as a Director of Caledonia Mining on June 1, 2008.Mr. Mark Learmonth, previously a Director of Macquarie First South, was appointed as VP Corporate Development and Investor Relations on July 10, 2008.



In order to split the roles of the Chairman and the CEO Mr. Rupert Pardoe of Johannesburg, South Africa was appointed as Chairman of the Board of Directors of the Corporation in February 2005. Mr. Hayden stepped down as the Chairman at that time but continues as the Corporations President and CEO.  Mr. Robert W. Babensee was appointed as a non-executive Director of the Corporation and a member of the Audit Committee on October 31, 2008.



Absence of Dividends



The Company has never paid or declared any dividends.



Possible Volatility of Share Price



Market prices for mining company securities, by their nature, are volatile. Factors, such as rapidly changing commodity prices, political unrest globally and in countries where Caledonia operates, speculative interest in mining stocks etc. are but a few factors affecting the volatility of the share price.   Caledonia listed its shares on the London Stock Exchanges Alternative Investment Market (AIM) in June 2005 and is trying to attract more institutional and stock analyst coverage of its shares.



4

INFORMATION ON THE COMPANY



A.

History and Development of Caledonia



Caledonia was incorporated, effective February 05, 1992, by the amalgamation of three predecessor companies.  It exists pursuant to the Canada Business Corporations Act



Following the creation of Caledonia its shares were listed for trading on the Toronto Stock Exchange and quoted on the NASDAQ small caps market.   In 1997, NASDAQ put Caledonia on notice that new listing requirements were in the process of being implemented. A minimum bid price of US$1.00 per share for a period of ten consecutive trade days is required for Caledonia to regain compliance with the new listing requirements.  Caledonia was unable to regain compliance and on October 16th 1998, Caledonia announced that NASDAQ would no longer quote Caledonias securities for trading.  In addition to trading on the Toronto Stock Exchange, Caledonias common stock commenced trading on NASDAQs OTC Bulletin Board system under the same symbol, CALVF, immediately after removal from the NASDAQ National Market.  In June 2005 Caledonia was admitted to the London Stock Exchanges AIM market under the ticker symbol CMCL.  Its Toronto Stock Exchange trading symbol is CAL.



The addresses and telephone numbers of Caledonias two principal offices are:



African Office - South Africa

Representational Office - Canada



Greenstone Management Services

67 Yonge Street, Suite 1201

24, 9th Street, Lower Houghton

Toronto, Ontario, Canada

Johannesburg, Gauteng, 2198

M5E 1J8

South Africa

(416) 369-9507

(27) 11 447 2499









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Exploration activities



In August 2000, Caledonia was notified by its joint venture partner on its Mulonga Plain properties in Zambia that it had expended more than US$ 3 million on exploration on the properties and as such had earned a 60% interest in that property.  The joint venture partner has continued work on the Mulonga Plain properties in 2004 - 2006 in its search for diamondiferous kimberlite pipes but has not yet announced further exploration work for the 2007 exploration season. Due to lack of work on the property over the past 2 years the Corporation has written down the carrying value of the investment by $1,044,000 during 2008 to $nil.



In August 2005 the joint venture partners, Motapa Exploration Limited and Caledonia Western Limited, a fully owned subsidiary of Caledonia, formed Motapa Mining Limited, a Zambian company, to hold and maintain the licences of the Mulonga Plain JV on behalf of the JV partners.  At present Caledonia holds 40% of Mulonga Mining Limited, Motapa Exploration Limited holds the other 60%.Motapa has withdrawn from the joint venture and intends to transfer all rights in and title to the properties to the Corporation for a nominal amount.



The Corporation has applied for a retention license over the properties managed under the joint venture.



In August 2000, Caledonia concluded a deal with a major mining company whereby the company would   spend a total of $750,000 over a 3-year period on Caledonias Kikerk Lake diamond property in northern Canada to earn a 52.5% interest in the property from Caledonia who at that time held a 70% interest.By the end of 2002 the mining group had spent in excess of $750,000 on the Kikerk property and had earned a 52.5% interest.  The joint venture parties signed a 3-way joint venture exploration agreement in early 2002. The operator of the joint venture did approximately $2,440,000 of work on the property in the 2002  2004 period.  Cost of exploration at Kikerk Lake in 2005 totalled $530,000 During 2007 Caledonia wrote down its investment in Kikerk Lake by $750,000 to a nil balance.



In August 2000, Caledonia signed a heads of agreement with a major mining group over Caledonias Nama group licences in Zambia  the Kalimba project.  The mining group undertook to spend US$ 2,500,000 over a 4-year period to earn a 30% interest in the property by funding all of the exploration work on the Kalimba project.  The mining group carried out exploration work on the Kalimba project between 2000 and March 2002 when it withdrew from the joint venture as part of its overall cutback in worldwide exploration.  The property is again fully owned by Caledonia.  Caledonia collected a 10-tonne bulk sample from Nama during the3rd quarter of 2004 and conducted metallurgical tests to produce a concentrate and confirm whether or not the specifications required by the smelter can be met.



In 1995 the Company acquired ownership of the shares of the companies which owned the Barbrook and Eersteling Mines in South Africa.  The original acquisition was of only 96.4% of the issued shares of Eersteling Gold Mining Company Ltd. - with the remaining 3.6% being acquired in mid 2004. On May 31, 2008 an agreement to sell Barbrook Mine was concluded and Caledonia was paid the full purchase price of $9,130,000 by Eastern Goldfields SA (Pty) Ltd.



Effective April 1, 2006 the Company purchased 100% of the issued shares of the Zimbabwean company Blanket Mine (1983) (Private) Limited, the owner of the operating Blanket Gold Mine.  The purchase consideration was $1,000,000 (U.S.) and the issuance to the vendor of 20,000,000 shares in the capital of Caledonia.  Because the Company bought the shares of the company owning the Blanket Mine it thereby acquired all of the assets of that company and assumed all of its liabilities.



From time to time Caledonia receives mineral property and business proposals from third parties for review as potential investment opportunities.  With the potential of improved political conditions in other Southern African countries, Caledonias management is reviewing mining opportunities in certain of these countries.



Pages 23,24 and 25 are maps respectively of northern South Africa, Zimbabwe and Zambia  which show the locations of the Companys exploration and operating  properties in those countries.





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B.

Business Overview



Mining and Exploration Activities:





Gold Production

Blanket Mine (1983) Private Limited (Blanket) - Gold



The improved gold selling conditions introduced by the RBZ in early 2009 operated satisfactorily throughout 2009. Blanket continues to export its gold production to Rand Refineries in South Africa and receives 100% of the sale proceeds in US dollars within 5 days of sale. Cash flow at Blanket continues to be tight due to lower than expected production and ongoing capital investment.  The failure to redeem the Gold Bond by the RBZ on February 1, 2010 is unfortunate, but alternative financing and revision to the capital expenditure programme should allow for the completion of the #4 Shaft expansion project by Quarter 4 of 2010.



Background

Blanket is wholly owned by the Corporations 100% owned Zimbabwean registered subsidiary Caledonia Holdings Zimbabwe, and the mine  is located 560 km south of Harare, the capital city of Zimbabwe and 150 km south of Bulawayo, the countrys second largest city.  The town of Gwanda, the provincial capital of Matabeleland South, is located 16 km east of the mine and is approximately 197 km north north-west of the South African border post of Beit Bridge.  The mine is situated in the Gwanda Greenstone Belt from which gold was first produced in the 1800s.  Blanket holds extensive exploration properties throughout this belt. The Blanket property was first pegged in 1904 with mining and metallurgical plant operations starting in 1906 and has since produced over a million ounces of gold.



Geological Setting



Like most of the gold mines in Zimbabwe, Blanket is situated in a typical greenstone terrain, the 70 km long by 15 km wide Gwanda Greenstone belt.  This terrain comprises supra crustal metavolcanic rocks similar to those found in the Barberton area of South Africa and the Abitibi area of Canada.  The Blanket property is the largest of the three remaining large gold producers, from a gold resource area that has given rise to no less than 268 gold mines.



Property Geology



Blanket is part of the group that makes up the North Western Mining camp also called the Sabiwa group of mines extending from Sabiwa and Jethro in the south, through Blanket itself to the Feudal, AR South, AR Main, Sheet, Eroica and Lima ore bodies.  The geological sequence strikes north-south, dips vertically and consists, from east to west, of a basal felsic unit which is not known to carry mineralization.  It is generally on this lithology type that the various mine tailings disposal sites are located.  Above this unit is the ultramafic unit that includes the banded iron formations hosting the eastern dormant cluster of mines and the ore bodies of the adjacent Vubachikwe mine complex.   The active Blanket ore bodies are found on the next unit, the mafics and an andesitic unit which lies to the west, caps this whole stratigraphy.  A regional dolerite sill cuts the entire sequence from Vubachikwe through Blanket to the Smiler prospect.  Ore bodies at Blanket are epigenetic and are associated with a later, regionally developed deformation zone characterized by areas of high strain, wrapping around relatively underformed remnants of the original basaltic lava flows.  It is within the higher strain regime (highly sheared rocks) that the wider of the ore bodies are located.



The Company previously published proven and probable mineral reserve and mineral resource figures for the Blanket Mine which were calculated in 2006 - which are in a Report, dated July, 2006, prepared by Applied Geological Services cc (the Report).  In the period since then the reserve and resource figures have been depleted to the extent of the production which has occurred.  The Company has not had any new formal reserve or resource figures calculated and reported by a person who is an independent qualified person pursuant to Canadian National Securities Instrument 43-101.  Therefore current figures are not reported.  Exhibit 14e contains a Table showing Blanket Mines Managements calculations as to the reported reserves and resources which have been mined since 2006 - and the presumed remaining reserves and resources calculated as of December 31, 2009.



When the reserve and resource figures were calculated in 2006 they were based on criteria which existed at that time - including a $500 per ounce gold price.  Since the calculations were done some, at least, of the criteria used in 2006 has changed including a major increase in the price of gold, an increase in production costs, the end of the hyper-inflation which existed in Zimbabwe in 2006, imposition of royalties in Zimbabwe and the alteration
of the gold selling regulations by the Zimbabwean government to allow companies to sell their gold production at international prices.  While the Company is aware of the changes in the criteria it has not attempted to quantify the exact impact of each of the changes that have occurred.  Because it is believed that most of the criteria changes would have a favourable impact it is also believed by Management that the depleted reserve and resource figures contained in Exhibit 14e will not be less than the amounts shown. Management of the Blanket Mine has also concluded that ongoing work, exploration and production operations have resulted in the establishment of at least some replacement of the reserves and resources.



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The presentation of potential depleted resource figures in Exhibit 14e, because the Company has not done new formal reserve or resource calculations, is done as an interim measure pending the Company completing new reserve and resource calculations as at December 31, 2009.  The Company has initiated the engagement of an independent reserve engineer to calculate the Blanket Mine reserve and resource figures as of December 31, 2009 taking into account all of the applicable criteria which existed as of that date.



The Company has calculated - as is presented in the audited financial statements attached as Exhibit B - depreciation and depletion  amounts relative to the Blanket Mine on what is commonly known as the straight-line method of computing depletion and depreciation.  However, United States Generally Accepted Accounting Principles require depreciation and depletion to be calculated on what is known as a units-of-production method.  The Company has analyzed the differences in the depreciation and depletion allowances taken in each of the past 3 years and has concluded that the differences resulting from using either of the methods are so small as to not be material.  The Company intends to, after obtaining new reserve and resource figures calculated as at December 31, 2009, commence adopting the units-of-production method of calculating depreciation and depletion allowances for the Blanket Mine.



Dr Trevor Pearton, FGSSA, SAIMM, Caledonias Vice President for Exploration, is the companys Qualified Person for Blanket Mines reserves and resources.  Mr. David Grant, C. Geol, FGS, Pr. Sci. Nat., the independent author of the Report, was the Independent Qualified Person for Blankets 2006 reserves figures - as required by National Instrument 43-101 of the Canadian Securities Administrators.



Production Operations

Mining



Subsequent to the receipt of the gold dealers license from the Ministry of Finance and a gold exporters license from the Reserve Bank of Zimbabwe (RBZ) in early 2009, gold production that had been suspended in 2008 due lack of foreign currency to purchase operating supplies and spares, was recommenced in April 2009 and has continued uninterrupted except for forced shutdowns caused by repeated and frequent interruptions of electricity supply.



The resumption of gold production and the successful application for short term loan funding from a Zimbabwean bank, has enabled the #4 Shaft Expansion Project to recommence. It is anticipated that the shaft project will be completed by the 4th quarter 2010.



The current underground workings can currently produce approximately 450 tonnes of ore daily (before the effect of power interruptions) using a long-hole open stoping method.   Ore is transported to one of three shafts, from which it is hoisted to surface.  Since the resumption of production in April 2009, it has not been possible to achieve a constant rate of production due to frequent power interruptions.  The #4 Shaft Expansion Project, when completed,  will increase and streamline the overall hoisting capacity of the mine and the crushing and milling capacity so that the plant can be supplied at a rate of 1,000 tonnes per day, 7 days per week from the underground ore stockpile and feed bin.



Metallurgical Process



The present crushing and milling circuit is being expanded from 600 tonnes per day to 1,000 tonnes per day ore throughput capacity to handle the planned increase in mine production from the #4 Shaft Expansion Project. The prioritization of the mills upgrading requirements is driven by Blankets need and ability to generate sufficient funds as Blanket completes the #4 shaft underground expansion tasks.



Run of mine (ROM) ore is crushed on surface to minus 12mm in the 3-stage crushing circuit.  This material is
then fed into two 1.8m by 3.6m rod mills where it is milled down to approximately 70% passing 75 microns, after which the milled slurry is pumped through two 30 inch Knelson Gravity Concentrators where approximately 49% of total mill gold production is recovered as gravity gold.  The Knelson Concentrator tails are pumped through cyclones whose underflow reports to a large 3.66m by 4.9m 750 kW regrind ball mill.  The products from the Knelson tails cyclone overflow and the regrind mill discharge are pumped into a carbon-in-leach (CIL) plant consisting of eight, 600 cubic metre leach tanks each equipped with 45 kW mixers where alkaline-cyanide leaching at 50% solids and simultaneous absorption of dissolved gold onto activated carbon takes place.  Elution of the gold from the loaded carbon and subsequent electro-winning is done on site.  During electro winning the gold is deposited on wire wool cathodes, the loaded cathodes are acid-digested and the resultant gold solids from acid digestion and the gold concentrate from Knelson Concentrate tailings are smelted.The gold bullion produced is delivered, as required by Zimbabwean gold-mining law, to the Government-operated Fidelity for sampling and onward delivery to the Rand Refineries in South Africa.  Rand Refineries undertake final refining and selling of the resultant gold with 100% of the proceeds net of refining charges being credited   to Blankets Zimbabwean bank account in US dollars within 5 days of sale.



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The CIL plant has an overall design capacity of 3,800 tonnes of milled ore per day, from its previous use for reclaimed tailings processing.  The plant tailings from CIL are reduced in cyanide content and deposited on two licensed tailing impoundment areas sited close to the plant. The tailing deposition is contracted out to the Zimbabwean subsidiary of specialized South African company Fraser Alexander Tailings



DISCONTINUED OPERATIONS



Eersteling Gold Mining Company Limited



The mine continues to be disclosed as held for sale as the Boards decision to sell remains intact.  No impairment has been made against the carrying value as the previously offered price by Oretech was significantly higher than the carrying value and the Corporation has recently rejected a purchase offer also in excess of the carrying value.  Interested parties continue to investigate the merits of purchasing the mine and the Corporation continues to seek a suitable purchaser.

MARKETING

During 2009 Blanket became entitled to export and sell its entire gold production in its own name.   Blanket has since then delivered and sold its gold production to Rand Refineries Limited in South Africa and has been paid the proceeds directly into its foreign currency account  held with a Zimbabwe commercial bank.



KEY PERFORMANCE FACTORS

During 2009, the US$ gold price per ounce continued to strengthen and with the resumption of gold production Blanket has been cash-flow positive on an ongoing basis. This along with a 6 month loan facility from Blankets local Zimbabwean bankers has allowed Blanket to fund the expenditure to date on the #4 Shaft Expansion Project. It was however very disappointing that the Gold Bonds which were issued by the RBZ to Blanket in January 2009 as payment for historic gold deliveries were not redeemed on February 1, 2010 and have been rolled over for a further 6 months.  The failure of the RBZ to redeem the Bonds has hampered the financing and has delayed the start of the #4 Shaft Expansion Project.  In addition, the required work on the Level 22 development project, a key project following the completion of the #4 Shaft Expansion Project, will be slowed down until sufficient funding is available.  The increasing duration and frequency of electrical supply interruptions in 2010 to date has also negatively affects Blankets cash position due to the high proportion of fixed costs, including wages for the consequently under-productive employees, which have to be paid despite reduced production.  Since restarting operations in April 2009, Blanket has successfully managed to replenish most of its depleted essential consumables and spares to levels that are able to support and sustain production.



The negotiations with Mitsubishi on the PGE Joint Ventures (JVs) at Rooipoort and Mapochs properties failed to be completed as Mitsubishi concluded 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 must be introduced at the exploration stage is not currently required under South Africa law and, accordingly, was not envisaged  by the Agreement.



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OPERATIONAL REVIEW AND RESULTS OF OPERATIONS

The plans for the non-revenue generating exploration projects continue to be determined by the availability of funds and are more fully described below.

8.1

Gold Production

Blanket Mine  Zimbabwe

The operational statistics reported below refer to the period from April 3 to December31 2009 as production only recommenced on April 3, 2009 after a six month shut down due to lack of payment for gold delivered to the Reserve Bank of Zimbabwe.



Safety, Health and Environment



The table below summarizes Blankets safety record for 2009 and 2008:

|                              |      |     
|----------------------------- | ---- | ----
|                              | 2009 | 2008
|Lost time injury              | 3    | -   
|Occupational illness          | -    | -   
|Medical Aid                   | 6    | 5   
|Restricted work activity case | 15   | 5   
|First Aid                     | 7    | 17  
|Total                         | 32   | 27  
|Incidents                     | 36   | 62  
|Near misses                   | 20   | 39  



The mine had a reasonable year from a safety perspective in that 3 lost time injuries (Nil -2008) were recorded during the period but 15 (5  2008) restricted work activity cases occurred. Incidents decreased to 36 (62 - 2008), and near misses also decreased to 20 (39  2008). Intensive safety training continues under the National Occupational Safety Association (NOSA) to ensure that new employees are compliant with the NOSA requirements.



The occupational health centre continues to operate on the Mine and all employees are screened for occupational ailments.  There were again no occupational health illnesses detected during the year.  HIV/AIDS continues to be an area of concern for management despite awareness programs to educate employees being in place, the voluntary testing by employees is still at disappointingly low levels.



The Mine continues to monitor the ground water in the ground-water pumping wells downstream of the tailings impoundment areas. Results continue to be well within the Governmental Environmental Management Agent (EMA) minimum levels.  Re-grassing of the outer slopes on Dam B is ongoing.



As the mining operations ramp up, the associated waste management requirements continue to increase. The items covered here include used oil, scrap metal, used batteries, domestic refuse, industrial waste and clinic waste and such items are disposed of or recycled safely according to the Zimbawean Government Regulations.



The Chamber of Mines (COM), of which Blanket is a member,  continues to negotiate wage levels for member companies. The Mine Workers Union continues to believe that quarterly increases in a US dollar based environment are appropriate as well as a 300% increase in wages, and this has caused tension at the bargaining table. There have been threats by the union to call for a national strike, but to date there have been no labour related stoppages at Blanket.

.

On the positive side, labour turnover rates have decreased significantly every quarter to finish in Q4 2009 at 0.23%



In general the labour force is now stable with the number of un-authorized absences and desertions stabilizing at acceptably low levels.



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Capital Projects



No. 4 Shaft Expansion Project



Work on this Project was resumed during Q4 2009 with the final design and procurement for the silo bottom steel work and feed chutes, the conveyor, grizzly feeder and crusher. Design and procurement also started for 765m level- the loading flasks and loading chutes on the 785m level, the spillage deflectors on the 802m level, and the spillage loading chutes on the 813m level. This was followed by the steel work fabrication and installation contract which commenced in January 2010. The final designs have necessitated additional excavation on the 765m Level Crushing Station and this was started in December and has been completed in Q1 2010. The three 750m level ore car tipping stations and their associated grizzlies, and the conveyor, grizzly feeder and primary crusher for the 765m level crushing station have been delivered to the mine and are all scheduled for installation during Q2 2010. The entire work program should take approximately 6 months to complete.



On surface at the metallurgical plant, a contractor has been selected to start with the installation of a refurbished rod mill in the primary milling circuit and its associated infrastructure. After completion of the rod mill work, the contractor will start work at the tertiary crushing plant where installation of two large cone crushers and a vibratory fine ore screen is planned.  The existing crushing plant conveyor layout will be modified to suit the new installed equipment.  The final stage of the plant expansion project will be the increase in the size of the fine ore bin to a capacity of about 2,000 tonnes. All the steel required for the mill and crushing plant installations has been ordered and be completed by the 4th quarter of 2010.



750m AR  Lima Haulage



The significant delay in the overall #4 Shaft Project has resulted in the original mining plan for the expanded 1,000 tonne per day operation now becoming unattainable due to the planned feeder stopes above the 510m level in AR Main and South mining areas having been exhausted.  The result is that more than 90% of the ore will now have to be mined from below 510 Level. This  has required  the triple handling of  the ore up through the No.6 winze and the Eroica shaft to the mid-shaft loading on the 510m Level for hauling to surface.  This situation will persist until such time as 765m level crushing, its loading circuits and the three ore bins  being part of the #4 Shaft Expansion Project, are commissioned in Q3, 2010.



Consequently, the primary 22 level (750m) development is behind the original schedule in the mine plan and will need to be accelerated to link the Blanket and Lima shafts to enable the higher mining production levels of 1000 tonnes per day to be sustainable..  Crosscuts from this haulage will then provide the required drilling platforms from which the deeper ore bodies above and below the 22 level can be explored, evaluated and developed.



This 22 level capital development work was not in the original scope of the #4 Shaft Expansion Project.  The budgeted cost of the 22 level Development Project utilizing internal resources is estimated to be about US$ 900 per metre advanced for the planned 2,400m which should take 2.5 years to complete assuming one blast per day and cost about $US 2.16 million.  This further development of the 22 level haulage has already been started but is progressing slowly due to waste handling constraints on the 750m level but is expected to improve once the 765m level crushing and loading circuits have been commissioned in Q3 of 2010. The 22 level development will continue simultaneously with normal mining production until complete.



Operations



Since production recommenced in April, 2009 power supply problems have been the most limiting factor from both a mining and a milling production perspective. From June to December 2009 Blanket has lost 10.6% of available time solely due to power interruptions.  The power supply interruptions have increased in Q1 as they have become a routine daily occurrence and resulted in 15% lost time in January and 22.5% lost time in February 2010.



Monthly gold production has generally averaged above 1,000 ounces since mining and milling operations were resumed in April 2009 but Blanket has not been able to return to pre #4 Shaft Expansion Project levels due to  various factors beyond the mines control, some of which are discussed above.



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Production results for year to December 20082009**2008*2007Ore minedTonnes94,71481,688100,082Development advance (ROM)Meters1,267472669Development advance (Capital)meters165-504Ore milledTonnes103,44481,688100,082Ore Gold Grade milledgrams/tone3.663.333.58Ore  Gold RecoveredOunces11,0277,6879,885Sands ProcessedTonnes--125,137Sands Gradegrams/tone--1.29Sands Gold RecoveredOunces--3,414Gold producedOunces11,0277,68713,299Gold SoldOunces11,0938,36413,985


*   Production was temporarily suspended in October 2008.

** For 9 months April to December 2009



Production tonnages increased on a quarterly basis during 2009 but despite the improvement in tonnage processed, the gold ounces produced remained static in the last 2 quarters mainly as a result of ore reserve depletion above the 510m, mid-shaft loading station which is solely due to the delay of over 2 1⁄2 years in completing the #4 Shaft Expansion Project. This delay was caused by the adverse economic situation prevailing in Zimbabwe during this period.   The lower grades in Q3 and Q4 were predominantly from the production areas in Blanket/Feudal and the AR Main ore zones and mining from these stopes has since been suspended pending a re-evaluation.  In these areas, mining was forced to take place at the extremity of the ore bodies where the mineralization is fractured resulting in lower grades



Underground



The underground operations were affected by the following:



·

Low compressed air volume and pressure due to breakdowns in the compressor fleet.  This situation has since been corrected by the delivery of 7 reconditioned screw type compressors with a combined air delivery capacity of some 11,400 CFM.  Three of these compressors have been installed and commissioned whilst another two are being installed.  The remaining two compressors are earmarked for installation at Blankets satellite projects.



·

Electrical power outages are continuing and increasing in frequency and duration which makes it difficult to plan mining and milling operations.



·

The quality of machine crews who have been trained for over six months is still not at the required standard resulting in low drilling efficiencies.  This lack of experience has resulted in targeted drilled meters not being achieved and breaking efficiencies are still unsatisfactory.  Further intensive training of these machine crews and the associated underground management has been carried out and the mine is now beginning to see some improvement.



Completion of the #4 Shaft Project is a critical necessity, not only for the expansion of production but to sustain current lower levels of production.  All current production is taking place below the 510m level necessitating that the mined ore and waste has to be transported up two shafts viz; No. 6 winze and Eroica to reach the surface.  The maximum combined capacity of these two shafts is approximately 500 tonnes per day assuming 100% availability.  Furthermore, attempts to mine remnant ore pockets above the 510m level have resulted in significant grade dilution and increased operating costs, in the latter part of the 3rd quarter and for the whole of the 4th quarter.  Management has decided to concentrate mining production on higher grade ores below the 510 m level. However there will be an increase in operating costs due to multiple handling until completion of the #4 Shaft Expansion Project but this should be counteracted by the higher grade mined.







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Outlook



The main aims and objectives of Blanket for 2010 are; to design, fabricate, install and commission the #4 shaft expansion equipment and to implement the ramp-up to the planned average production rate of 40,000 oz of gold per annum by the end of the 2010 financial year: The main work consists of:



Above 750m Level

·

To complete the mechanical and electric audit of the #4 Winder and Headgear

·

To design, fabricate and install  improved shaft inspection cages on the #4 Shaft Winder

·

To remove the temporary bulkheads on 14 and 18 levels and install shaft doors below the 14 Level loading station so that mid shaft loading can continue as and when required.



On 750m Level

·

Install the three ore car tipping stations and their associated grizzlies (loading screens).

·

Excavate the three, 750 tonne capacity ore storage bins once the 765m level crushing and loading station has been completed.



On 765m Level:

·

Complete the excavation of the crusher, conveyor station and the crusher pit.

·

Install shaft doors below 765m level.

·

Install the travel gantry, conveyor and the three bulkheads, loading boxes, and control platforms.

·

Install the ore pass wear plates, the grizzly feeder and the jaw crusher.



Below 765m Level

·

Install the deflector plates on 802m level and the spillage handling equipment on 813m level.

·

Install the loading chutes, loading flasks and automatic skip loading equipment on 789m level.



On Surface:

·

Install the refurbished Rod mill, the rod handling system, mill pumps, feed conveyor, and piping.

·

Install the new double deck vibrating screen and the two new gyratory crushers.

·

Reconfigure the conveyors on the tertiary crushing circuit.

·

Install a six replacement CIL mixers.

·

Install a new AARL-type elution circuit and associated electro-winning cells.

·

Refurbish the activated carbon regeneration kiln and carbon handling circuit.



Exploration Projects:

·

Erect headgears and winders and re-commence shaft sinking on the prioritized exploration Projects.



Further information with respect to the Blanket property is given in Exhibits 14c, 14e and 14g.



EXPLORATION AND PROJECT DEVELOPMENT



Base Metals

Nama Copper/Cobalt Project  Zambia



Property



Caledonia Nama Limited (Nama), a wholly owned subsidiary of the Corporation, has been granted four contiguous 25 year Large Scale Mining Licenses in northern Zambia on which near-surface Cobalt/Copper mineralization has been discovered. This area lies immediately northwest of the operating Konkola Copper mine and adjoins the extensive land holdings of the Teal Mining/CVRD joint venture.  These Mining Licenses consist of four separate licenses covering a combined area of 786.1 square kilometers.

The Zambian Development Agency has also granted Nama a 10 year investment license which provides for 10 years of income tax concessions which range from 100% exemption for the first 5 years, 50% exemption for years 6, 7 and 8 and 25% exemptions for years 9 and 10, together with Duty and VAT exemptions and deferrals on imported equipment and materials.





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Types of Mineralization at Nama





Two main styles of cobalt (Co) mineralization occur in the Nama area, the D-type iron oxide bodies which are mostly enriched in Co, and the copper(Cu) dominated Ore Shale hosted Cu-Co mineralization, more common elsewhere in the Copperbelt, which is being exploited by neighboring mines to the east and south of Nama.



D-Type iron oxide Co bodies



D-type ores at Nama consist essentially of massive hematite and magnetite concentrations encapsulated by less well mineralized talcose schist alteration zones.  These concentrations occur associated with dyke-like gabbroic intrusions which appear to disrupt the iron-rich bodies.  On account of the complex metallurgy and hence larger capital and operating cost requirements involved in treating the typical D-type iron oxide bodies, further work on those target areas identified as being of this type during the initial exploration, has been suspended until the market and economic conditions are more favorable.



Ore Shale hosted Cu-Co deposits



Mineralization of this type is currently being exploited immediately to the east of the Nama license and is known to extend into the Nama license for a distance of about 2,000 meters.  The neighboring Konkola Mine and the Teal/CVRD joint venture have both defined substantial copper resources on their properties.  Although the A resource body has often been regarded as belonging to the Ore Shale style of mineralization, it must be noted that its unusual stratigraphic position coupled with the iron and manganese enrichments make this a hybrid style of mineralization.  Exploration activities at Nama have, however, resulted in the definition of resource targets characterized as belonging to the Ore Shale-hosted Cu-Co style of mineralization.



Work Completed



Details of the previous years exploration work completed at Nama can be found in the MD&A reports included in prior years Annual Reports.



In the light of the depressed base metal markets and low level of interest in base metal exploration, the 2009 exploration program was planned with a specific mandate to evaluate all of the Co/Cu anomalies found in the 1995/7 geochemical exploration program.  Of the 20 known Co anomalies, only 5 had been investigated in any detail prior to the start of the 2009 year.  This represented a risk that the current exploration was potentially being conducted on targets that may not have offered the best return.  In order to minimize such risk, a work program was set out to gather sufficient exploration information from all the previously-determined anomalous areas so as to grade these areas into primary and secondary targets.  The bulk of the work of the 2009 program entailed geochemical sampling using an auger capable of penetrating 2 to 3 meters deep.  Sampling in this way at these depths has provided more detailed information on the targets and has enabled the potential of the various targets to be assessed.



One of the major benefits of the above program was the gathering of detailed geological information in the areas of extremely sparse surface rock exposure.  This has enabled the compilation of a substantially improved geological map of the Nama project area, which in turn has made it possible to define exploration targets on the basis of structure in areas where no Co or Cu enrichments are present at surface.



Of the 20 Cu/Co geochemical anomalies known to exist at Nama, 4 have been shown to have Cu/Co resources at least at the inferred category, while work on another 4 has been terminated on account of their limited mineralization potential.  Three new target areas show encouraging signs of mineralization and have been scheduled for drilling when funds are available.  The remaining 9 anomalies still require additional work and evaluation.  This evaluation will be carried out during 2010 and should enable the prioritization of the anomalies for follow-up work.



Drill Targets



The following drill targets have been defined within the Nama License area.  However, execution of the drill programs is dependent on the availability of adequate funding.





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E Anomaly  Yembela Clearing



Research into previous geochemical surveys carried out in the 1960s indicated that further anomalies had been located by localized sampling programs both east and west of the Yembela Clearing.  These anomalous sites were located and follow-up sampling has verified the existence of the anomalies  Yembela East and Yembela West.  Co values of up to 0.16% were encountered in soils which form a thick cover over the two new anomalous areas.  Coincident geophysical anomalies suggest that the mineralization occurs in the form of steeply dipping fold or shear structures.  The association of a prominent fault and tillite floor rocks to the south is a very similar structure to that at the A resource body and supports the interpretation that this occurrence is likely to be analogous to the A-type mineralization which is known to be amenable to lower cost extraction techniques.  Drill targets have been established and will receive priority in future drilling programs.



Konkola West



During the 2008 field season, exploration established the existence and extent of the Ore Shale horizon along the western margin of the Konkola Dome (south of the A Resource Body).  A shale unit, approximately 100 meters wide containing anomalous values of Co and Cu has been located in an area of very deep soil cover.  Surface material (float) from this area was found to contain 0.1% Co and 0.2% Cu.  The area is referred to as the Konkola West area. Two drill targets have been outlined in this area based on the seasons work, in particular, the use of termite hill sampling.  Based on the current interpretation, it appears that the target horizon has a north-south strike extent of about 3 km before crossing into the Democratic Republic of Congo (DRC).



A second anomaly with a much stronger geochemical response occurs to the west of the Ore Shale target.  The area is referred to as the Fault Target and appears to be the result of a fault or shear zone mineralization and may therefore be similar in character to the A anomaly.



Konkola East



The Konkola East prospect covers the westward continuation of the Ore Shale from where it crosses the boundary with the Teal/CVRD joint venture property.  The prospect has a strike of 3 km while the Ore Shale is known to extend for about 5 km along strike to the license boundary.  Eight boreholes were drilled into this area in 1970 by Zamanglo and an historical non NI 43-101 resource of 5.4 million tonnes, gradings of 0.74% Cu was estimated (Co was not assayed). This information is provided for the benefit of all shareholders as some of this information may already be in the public domain but we cannot comment on its reliability  Exploration drilling by Teal on the adjoining property to the east of the Konkola property has proved particularly successful and has established that the Ore Shale dips down to a depth of about 800 m below surface and then extends to their southern boundary in an undulating manner  a distance of approximately 5 km.  The resource potential of this 25 square kilometer target area is significant and has the potential to be a large Cu and Co resource.



New Target Area



A significant contribution to the exploration during the year has been the complete revision of the Corporations geological map of the Nama Licence area.  This map has contributed to the prioritizing of the various anomalies and will continue to form the basis for the assessment of the full potential of the Nama area.  An indirect result of this work has been the understanding of the major structural trends in the Nama area, in particular the identification of those areas where the Copperbelt type lithologies are closest to surface but not actually exposed.  These areas represent ideal targets for deeper drilling programs (500-1000 meters) and have the advantage that the Ore Shale, if intersected, would have a shallow dip. A target area of approximately 20 square kilometres has been defined.



Exploration program for 2010



The coming exploration season will first deal with the remaining work required to assess the economic potential of the nine remaining un-assessed Cu/Co anomalies.  Further work will be carried out on the structural analysis of the area and in particular the use of geophysics to gain a detailed understanding of both the current and future targets.  Depending on the availability of financial resources, diamond core drilling on three of the target areas is planned for drier season when large drill rigs can access the target areas.  The Corporation is in the early stages of discussions with potential JV partners.



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Further information with respect to the Nama properties is given in Exhibits 14c, 14d and 14g.



PGEs

Rooipoort & Mapochs Platinum, Gold, Palladium /Ni/Cu (PGMs) Project - South Africa

The Rooipoort rights, previously held by Eersteling Gold Mine, have been re-registered under the name of Maid O the Mist, which is a wholly owned subsidiary of the Corporation.  Maid O the Mist is the vehicle that will be used to manage the Rooipoort platinum exploration program.

The prospecting rights granted to the Corporation to prospect for PGEs on the major portions of the Mapochsgronde tribal trust land are currently in the process of registration.  A further application has been made for an adjoining property to the north of the current rights.  The Corporation is still waiting the issuing of the prospecting right.



The Corporation is seeking Joint-Venture partnerships for the Rooipoort and Mapochsgronde properties.



Further information with respect to the Rooipoort property is given in Exhibits 14c, 14fr and 14g.



Gold

Zimbabwe Exploration  Gold



The Corporations exploration activities in Zimbabwe are conducted by Blankets exploration department.  Blankets current exploration title holdings in the form of registered mining claims in the Gwanda Greenstone Belt total 78 claims, including a small number under option, covering a total area of 2,500 hectares.  Forty seven(47) of these claims are registered as precious metal (gold) blocks covering 415 hectares and  31 claims were pegged and are registered as base metal (Cu, Ni, As) blocks covering a total area of 2,085 hectares.



Blankets main exploration efforts have been focused in certain key areas in the Gwanda Greenstone Belt (that are within economic trucking distance of the Blanket plant) such as GG and Mbudzane properties which are  believed to have the greatest chance of success. A drilling program initiated in late 2005 to probe for down-dip and strike extension mineralization associated with the GG prospect was continued into 2007 with 281 meters of drilling completed.  Two zones of potentially economic gold mineralization have been established.  The main exploration activities involved diamond core drilling and the development of a prospect shaft down to the first level aimed at exposing the ore body and providing a bulk sample for metallurgical testing.



Blankets Bubi Greenstone Belt ground holding portfolio comprises a total of 27 base metal claims covering a combined total area of 2,820 hectares.   Reconnaissance exploration work by soil sampling and geological mapping has been completed in all the claim areas.  As soon as the Zimbabwean economic climate stabilizes, follow-up work will be carried out to define drill targets within the geochemical anomalies defined by previous work.   The work in the Sandy Claims has been prioritized to form part of the detailed follow-up exploration work.

Depending on the availability of funds, Blankets exploration focus will initially be centered on the Gwanda area with the main emphasis being delineation of potentially economic ore resources at the GG prospect and at Mbudzane.  At GG, this will be achieved through core drilling from the surface to establish the strike extent of previously-established mineralization as well as by deepening the prospect shaft and extending underground development. At Mbudzane, a second phase core-drilling program has been planned to follow up on several highly prospective deep seated IP-anomalies that were identified.

Blanket is also conducting basic reconnaissance exploration work on the Bunnys Luck claims, to determine the potential strike length of a 1 m to 1.5 m wide shear zone hosted quartz vein  that has previously been mapped over a strike length of 300 m.  Blanket is formulating an exploration development strategy to prioritize work on its properties in the Gwanda area in particular and elsewhere in general, in order to prevent potential forfeiture under the current Mining legislation.







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Diamonds



Mulonga Plain and Kashiji Plain  Zambia



The Corporation has applied for a retention license over the properties previously managed under the joint venture and waits the granting of this license from the Zambian Ministry of Mines and Minerals Development. The Kashiji license expired in June 2008, and the Corporation has also applied for retention licenses covering the Kashiji and Lukulu areas.



Outlook



The outlook for the aforementioned exploration properties is difficult to quantify.  Exploration by its nature is speculative with a high degree of risk accompanied by the potential for high returns.  The Corporation manages this risk by using well-qualified exploration professionals.  Lower prices for the platinum group and base metals in late 2008 and early 2009 coupled with a severe shortage of equity for exploration projects resulted in a severe contraction of exploration expenditures by mining companies and could affect the likelihood of the Corporation negotiating joint venture agreements for its wholly-owned exploration properties.

The Corporation intends, where possible, to continue to focus its exploration activities of prospective properties by developing the properties through strategic alliances with other mining companies and metal producers.

The Zimbabwe economy continues to be depressed and Zimbabwes economic capacity may possibly continue to shrink.  Although rampant hyper-inflation has been replaced by deflation, considerable pressure remains for unrealistic wage and price increases from labour and Zimbabwean suppliers.  There is also considerable pressure for higher taxes, both from national and local government and for increased supply tariffs from the state-owned electricity utility (ZESA), notwithstanding its inability to provide any semblance of normal supply. The resuscitation of the mining industry is a high priority of the Government as its ability to generate foreign currency is of paramount importance.  However, this aim has been undermined by recent regulations which seek to enforce stringent indigenization requirements which will deter new investment into the Zimbabwean mining industry.  Caledonias proposed response to the indigenization requirements is discussed below.  Managements focus is to complete the #4 Shaft Expansion Project and thereby bring production up to the 1,000 tpd /40,000 ounces gold per annum level.  Cash flow management will be important to ensure that the internally-generated cash flows augment the limited amount of local debt that is available so that this project can be completed as planned.  Management will, subject to generation of and continued availability of sufficient foreign exchange, re-commence exploration in the areas near the Blanket to enable Blanket to expand its operation if this remains commercially attractive.



The President of the Republic of Zimbabwe brought the Indigenization and Economic Empowerment Act (the Act) into law through decree in March 2008. The law seeks to ensure that at least 51% of all businesses in Zimbabwe are held by Indigenous Zimbabweans. In February 2010, the Minister for Youth Development, Indigenization and Empowerment (the Minister) issued Regulations which gave effect to the Act.   The regulations require that, inter alia, the Corporation submit a proposal to the Minister by the middle of April 2010 which will set out how the Corporation proposes to achieve the required level of indigenization.  The Chamber of Mines Zimbabwe (COMZ), of which Caledonia is a member, continues to make proposals and representations to the Government of Zimbabwe regarding potential revisions to the Act for mining companies.  The Corporation is actively participating with COMZ in this exercise.



The Minister of Finance, of the Republic of Zimbabwe, in the Finance Act, which was passed in December 2009, provided that, as announced in his budget speech in early December, the rate of royalties on precious metals will increase from 3% to 3.5% with effect from 1 January 2010.  In addition, the Act provides that the rate of Income Tax applied to mining companies would be increased from 15% to 25%.





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General Comments



Caledonias activities are centered in Southern Africa .  Generally, in the gold mining industry the work is not seasonal except where heavy seasonal rainfall can affect surface mining or exploration.  Caledonia is not dependent, to any material extent, on patents, licenses, contracts, specialized equipment or new manufacturing processes at this time.  However, there may be occasions that Caledonia may wish to adopt such patents, licenses, specialized equipment, etc. if these are economically beneficial to its operations.



All mining and exploration activities are conducted under the various Economic, Mining and Environmental Regulations of the country where the operations are being carried out.  It is always Caledonias standard that these regulations are complied with by Caledonia otherwise its activities risk being suspended.





(C)   
Organizational Structure - Subsidiaries



Caledonia Mining Corporation owns 100% of the shares of the following incorporated subsidiary  companies:



Zambia:

Barbados:



- Caledonia Mining (Zambia) Limited

- Blanket (Barbados) Holdings Limited

- Caledonia Western Limited

- Caledonia Holdings (Africa) Limited

- Caledonia Nama Limited

- Caledonia Kadola Limited



South Africa:

Zimbabwe:



- Eersteling Gold Mining Company Limited

- Blanket Mine (1983) (Private Limited

- Greenstone Management Services Limited

- Caledonia Holdings Zimbabwe Limited

- Fintona Investments (Proprietary) Ltd

- Caledonia Mining Services Limited

- Maid OMist (Proprietary) Limited

- Mapochs Exploration (Pty) Ltd

Panama:



-  Dunhill Enterprises Inc.



(D)      Property, Plant and Equipment



(a)

South Africa:



The  Eersteling gold mine, indirectly owned by the Company through its ownership of 100% of the shares of  Eersteling Gold Mining Company Limited, is essentially a fully equipped mine with all of the underground and surface equipment needed to conduct mining operations and the treatment and concentration of ore mined from the properties.  Due to the lengthy period of care and maintenance at Eersteling there has been some deterioration in the surface facilities which will require rehabilitation work before operations can be recommenced.  The underground workings at Eersteling were allowed to flood and will require dewatering before mining access can be resumed.  Because the Company is currently attempting to sell this mine it has no plans to expend further amounts on plant or equipment for them or to in any way expand or improve the facilities.



On February 21, 2008 the Corporation accepted an offer from Eastern Goldfields to purchase the entire issued share capital in Barbrook Mines Limited, its debts to the Corporation, and its payables of approximately $1,440,000 for $9,130,000.



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The sale of Barbrook gold mine,indirectly owned by the Company through its ownership of 100% of the shares of Barbrook Mines Limited was concluded on May 31, 2008.



(b)

Zimbabwe:



The Blanket Mine, in Zimbabwe, which the Company indirectly owns through its ownership of 100% of the shares of Blanket Mine (1983) (Private) Limited, the owner and operator of the Mine, is a fully equipped mine with all of the necessary plant and equipment to conduct mining operations and the production of gold from the ore mined from the Mine.  As is noted above the Company is currently involved in the completion of the #4 shaft expansion project.  To March 2010 Blanket had expended approximately the equivalent of $6,000,000 (Cdn.) on the Mine and plant expansion. Due to lack foreign currency as a result of lack of payment by the Reserve Bank of Zimbabwe (RBZ) for gold sold during 2008, gold production was suspended at Blanket Mine in October 2008 and only recommenced in April 2009 once Blanket had received the Gold Dealing and Export licenses necessary to allow Blanket to export its gold to a refiner of its choice. It was estimated in May 2009 that, to complete the Mine plant expansion and achieve production of 40,000 ounces of gold per annum, would require the further expenditure of approximately US$2,200,000. The necessary funding was raised via local borrowings and from Blankets cash flow as the approximately $US 3 million foreign currency owed to Blanket Mine for unpaid gold sales by the RBZ was converted into a Special Tradable Gold-Backed Foreign Exchange Bond, with a term of 12 months and an 8% interest rate.  This bond plus interest was guaranteed by RBZ on maturity at January 31, 2010.  However,the Bond was not redeemed on the due date but was extended by RBZ for a further period of 6 months.



5

OPERATING AND FINANCIAL REVIEW AND PROSPECTS



A

Operating Results



SELECTED ANNUAL INFORMATION -

The following information is given for the last three fiscal year-ends of the Corporation:



C$000s except for earnings per share amounts.December 31, 2009December 31, 2008December 31, 2007Net sales or total revenues11,5597,69610,039Net (loss) income from continuing operations:
- per share basic and diluted continuing operations(3,770)
($0.008)(4,285)
($0.009)(3,906)
($0.008)Discontinued  Operations(180)(655)(709)Net loss(3,950)(4,940)(4,615)- per share basic and diluted($0.008)($0.010)($0.009)Comprehensive loss(4,503)(4,880)(4,703)Total assets(1)22,09023,65729,492Total long-term liabilities2,5891,1531,054Cash dividends declared per shareNilNilNil


(1)

The 2008 figures have been restated to reflect an under accrual in 2008 of capitalised mineral property exploration costs and the respective liability plus $49 for vat.



The above data was prepared in accordance with Canadian Generally Accepted Accounting Principles.

The results for 2008 and prior years have been presented on the basis that Barbrook (2007) and Eersteling Mines are discontinued operations and were classified as assets held for sale.



Despite there being no gold production in Q1 2009, the Corporation achieved a gross operating profit of $3,336,000 for the year ($3,258,000  2008 and $294,000  2007) on gold sales of 11,093 ounces (8,364  2008 and 13,985  2007).   The higher gold production in 2007 compared to 2008 was due to the processing of tailings in addition to underground ore in 2007 and the suspension of operations in October 2008. An average gold price of  $1,039 was achieved during 2009.



Total gold production for the year was 11,027 ounces (7,687  2008 and 13,299 ounces 2007) which was
negatively affected by frequent and increasing power interruptions.  Gold production for the 9 months in 2009 was at a higher level than 2008 as towards the latter part of 2008, before the mine was temporarily shut down due to non payment for gold delivered, a lack of consumables resulted in decreased production levels.



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The loss of $3,770,000 is affected  by the unusually large non-operating, non-cash flow items totaling $4,547,000 being the impairment of mineral property at Nama of $1,434,000 ($1,168,000  2008 $750,000 - 2007) , the creation of a provision of $2,502,000 ($526,000  2008 $nil - 2007) against the RBZ Gold Bonds to recognize  the uncertain timing of future redemption, an unrealized foreign exchange gain of $248,000 ($1,876,000  loss  2008 $1,012,000 loss  2007) and a future tax charge of $859,000 ($Nil  2008 and $5  2007) arising from the future tax liability increase.  The future tax charge has come about due to the increase in the mining tax rate in Zimbabwe from 15% to 25% as of January 1, 2010. Due to the dollarization of the Zimbabwean economy in February 2009, Blankets functional currency changed to the US dollar and thus the unrealized foreign exchange loss, on translation, of $600,000 was debited to other accumulated comprehensive loss and not to the unrealized exchange loss in the Statement of Operations and Comprehensive Income/ (Loss) The interest received includes $280,000 as an accrual for interest payable by RBZ in respect of the outstanding Gold Bond owed to Blanket. This accrual has been taken into account when the estimated recoverable amount was determined and the provision created.



Interest and finance charges paid amounted to $95,000 ($103,000  2008 and $485,000  2007) and were as a result of Blanket requiring occasional working capital finance.



During 2009, the Corporation invested $1,547,000 in capital assets and mineral properties ($3,023,000 in 2008 and $3,250,000 in 2007).   Of the amount invested in 2009, Blanket accounted for $860,000 ($91,000) Nama accounted for $616,000 ($2,680,000)  and Rooipoort accounted for $44,000 ($163,000). No funds were raised in 2009 from the market ($1,119,000 in 2008 and $4,380,000 in 2007).



The basic net loss per share, for continuing operations, of $0.008 ($0.009 in 2008 and $0.008 in 2007) has been calculated using a weighted average number of shares of 500,169,280 (498,450,650 in 2008 and 477,930,290 for 2007).



B.     Trend Information



With the completion of the No. 4 Shaft expansion project gold production will increase from the current level of approximately 15,000 ounces pa to 40,000 ounces pa. It is anticipated that the employee headcount will increase from the current level of 755 to approximately 850 employees. The productions costs per ounce are therefore expected to reduce significantly at the 40,000 ounce production level as the fixed employment costs are amortized over higher monthly production volumes.



Sales revenues are also expected to benefit from the increasing gold price as no production is hedged.



6.

INVESTING

During the 4th quarter 2009 Caledonia invested $699,000 ($521,000  Q3, $251,000  Q2 2009 and $76,000  Q1 2009) in capital assets and mineral properties.  Of the amount invested $184,000 ($165,000  Q3, $193,000  Q2 2009 and $74,000  Q1 2009) was spent at Nama and $501,000 ($332,000  Q3, $17,000  Q2 2009 and $10,000  Q1 - 2009) at Blanket.

7.

FINANCING

Caledonia financed its operations, except Blanket, using funds on hand.  No equity fund raising is currently intended during 2010.  Caledonias operations will be financed from existing cash resources and loan repayments and surplus cash flow from Blanket.  Blanket was granted a working capital loan facility of US$1.25 million by its bankers in Zimbabwe and utilized $588,000 of the facility by year end.



8.

LIQUIDITY AND CAPITAL RESOURCES

With the increase of production at Blanket, inventory levels of consumables, spares and gold in process have risen to $2,589,000 ($1,059,000 - 2008). Accounts payable levels of $2,156,000 ($1,292,000 - 2008) have increased accordingly and this along with Corporate capital expenditure of $1,547,000 has resulted in the cash
balance at the yearend decreasing to $1,622,000 ($3,652,000 - 2008).  The Rand Refinery payment from gold refining continues to be cleared within a contracted 10 day period thereby assisting the cash flow.



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The failure by the RBZ to redeem the Bond has put a strain on Blankets working capital but it should not affect the completion of the #4 shaft expansion.

Blanket has been advised that additional overdraft facilities may be made available and the necessity of utilising these are being considered.



Caledonia has 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 $1,730,000.



9.      OFF-BALANCE SHEET ARRANGEMENTS

There are no off balance sheet arrangements.



10.    CONTRACTUAL OBLIGATIONS



|                                            |                                                           |               |           |           |                  
|------------------------------------------- | --------------------------------------------------------- | ------------- | --------- | --------- | -----------------
|                                            | Payments due by Period  in thousands of Canadian Dollars
|                                            | Total                                                     | Within 1 year | 1-3 years | 3-5 years | More than 5 years
|Short term debt                             | 588                                                       | 588           | -         | -         | -                
|Purchase obligations                        | 2,156                                                     | 2,156         | -         | -         | -                
|Asset retirement obligations (1)            | 1,406                                                     | -             | -         | -         | 1,406            
|Asset retirement obligations  for sale (2) | 324                                                       | 324           | -         | -         | -                
|Total                                       |                                                           |               |           |           |                  

(1)

This relates to a provision created for the potential rehabilitation liability that would exist if and when the Blanket Mine ceases operations and is permanently shut down.

(2)

This relates to a provision created for the potential rehabilitation liability that would exist if and when the Eersteling Gold Mine ceases operations and is permanently shut down. The obligation is shown as within 1 year as this mine is for sale.





11.    RELATED PARTY TRANSACTIONS



The Corporation had the following related party transactions:

|                                                                                                     |      |      |     
|---------------------------------------------------------------------------------------------------- | ---- | ---- | ----
|In thousands of Canadian Dollars                                                                     | 2009 | 2008 | 2007
|                                                                                                     | $    | $    | $   
|Fees and allowances paid to a Corporation which provides the services of the Corporation's president | 558  | 635  | 560 
|Rent for office premises paid to a company owned by members of the Presidents family                | 50   | 43   | 46  
|Interest paid to directors on outstanding fees and expenses                                          | -    | 4    | -   
|Other fees paid to Directors                                                                         | 62   | 65   | 19  
|Legal fees paid to a law firm where a Director is a partner                                          | 53   | 117  | 85  
|Fees, allowances and interest paid to the Chairman of the Board                                      | 150  | 334  | 46  



The Corporation has entered into a management agreement with Epicure Overseas S.A. (Epicure), a Panamanian corporation, for management services provided by the President.  The Corporation is required to pay a base annual remuneration adjusted for inflation and bonuses set out in the agreement.  In the event of a change of control of the Corporation, Epicure can terminate the agreement and receive a lump sum payment equal to 200% of the remuneration for the year in which the change occurs.



On January 31, 2005, the Corporation entered into an agreement (the Chairmans Agreement) with the Corporations Chairman for services as the non-executive Chairman of the board of directors of the Corporation.  The Chairmans Agreement provides for the payment of an annual fee and a fee for services provided by the Chairman.  The Chairmans Agreement provides that the fees will be reviewed annually by the Chairman and the
Corporations compensation committee with the object that the parties will bona fide negotiate any changes in the fees.  The Chairmans Agreement was reviewed by the Chairman and the compensation committee for the 2009 year.



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12

CRITICAL ACCOUNTING POLICIES



The major areas where accounting estimates are made are asset impairment, asset retirement obligations, future tax liabilities and the recoverable amount of the Gold Bonds.  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 Caledonia.  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 estimation for Blanket was recalculated before December 31, 2009.  The estimations are accreted annually at rates between 1.7% and 5% and thus any change in circumstances is considered unlikely to have a material impact on the results of Caledonia or its operations.



The estimated recoverable amount of the RBZ Bond has been calculated based on the weighted average  estimated probability of receiving payment. Based on the circumstances prevailing in Zimbabwe we have considered the probabilities of receiving payment over a number of different time periods ranging from 6 months from original redemption to 60 months. A discount factor of 43% was used in arriving at the estimated recoverable amount. The Corporation still believes the Bond redemption will be honoured by RBZ but the time period is considered uncertain due to the financial constraints evident in Zimbabwe.



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



12.1       Changes in accounting policies:



(a)  
Goodwill and Intangible assets

Effective January 1, 2009, the Corporation adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook section 3064, Goodwill and Intangible assets.This standard establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this standard did not have an impact on the Corporations consolidated financial statements.



(b) 
Credit Risk

Effective January 1, 2009, the Corporation adopted the new recommendations of CICA issued EIC 173, Credit risk and the fair value of financial assets and liabilities.This abstract requires companies to take counterparty credit risk into account when measuring the fair value of financial assets and liabilities, including derivatives. The adoption of this standard did not have an impact on the Corporations consolidated financial statements.



(c)  
Mining Exploration Costs



On March 27, 2009, the Emerging Issues Committee of the CICA approved abstract EIC- 174 Mining Exploration Costs, which provides guidance on capitalization of exploration costs related to mining properties in particular and on impairment of long-lived assets in general. Application of this new standard was taken into account in determining the fair value of the exploration properties.



(d) 
Financial Instruments

The Corporation adopted amendments to CICA Handbook Section 3855 effective January 1, 2009. Amendments to this section have added guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category; changed the categories into which a debt instrument is required or permitted to be classified; changed the impairment model for held-to-maturity financial assets to the incurred credit loss model of CICA Handbook Section 3025, Impaired Loans; and require reversal of previously recognized impairment losses on available-for-sale financial assets in specified circumstances.



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Adoption of these amendments did not result in an impact on the Corporations consolidated financial statements.



The Corporation also adopted the amendments to CICA Handbook Section 3862, Financial Instruments  Disclosures, which was amended to improve financial instrument disclosures to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. The impact of adopting these amendments for the year ended December 31, 2009 resulted in additional disclosures included within these consolidated financial statements.



In June 2009, the CICA amended Section 3862 Financial Instruments  Disclosurewhich requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The accounting standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. CICA Handbook Section 3862 prioritizes the inputs into three levels that may be used to measure fair value:

a) Level 1  Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

b) Level 2  Applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly such as quoted prices for similar assets or liabilities in active markets or indirectly such as quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions.

c) Level 3  Applies to assets or liabilities for which there are not observable market data.



The Corporations financial instruments consist principally of cash, cash equivalents, accounts receivable, investments, bank overdraft, accounts payable and accrued liabilities. Pursuant to CICA Handbook Section 3862, fair value of assets and liabilities measured on a recurring basis include cash and cash equivalents and investments that are determined based on Level 1 inputs. The Corporation believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.



(e) 
Financial Statement Concepts



Effective January 1, 2009, the Corporation adopted the amendments to CICA Handbook Section 1000, Financial Statement Concepts,which focused on the capitalization of costs which truly meet the definition of an asset and de-emphasises the matching principle. The adoption of these changes did not have an impact on the Corporations consolidated financial statements.



12.2

Recently issued accounting pronouncements issued and not yet effective.

The CICA issued three new accounting standards in January 2009: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statementsand Section 1602, Non-Controlling interests.Section 1582 replaces section 1581 and establishes standards for the accounting of a business combination. It provides the Canadian equivalent to IFRS 3 - Business Combinations.The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.



Sections 1601 and 1602 together replace section 1600, Consolidated Financial Statements.Section 1601, establishes standards for the preparation of consolidated financial statements. Section 1601 applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Section 1602 establishes standards for accounting of a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS lAS 27 - Consolidated and Separate Financial Statementsand applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011 and all three sections must be applied concurrently. The Corporation does not anticipate that the adoption of these standards will impact its financial results.

Financial instruments  recognition and measurement, Section 3855



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This Section has been amended to clarify the application of the effective interest method after a debt instrument has been impaired. This amendment is effective for fiscal years beginning on or after July 1, 2009.

This Section has also been amended to clarify when an embedded prepayment option is separated from its host debt instrument for accounting purposes. This amendment applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted.

The third amendment provides guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held for trading category. This amendment was made in August 2009 with prospective application. The Corporation does not anticipate the adoption of these amendments will impact its financial results.





12.3

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 amounts reported by Caledonia for the year ended December 31, 2010.

Caledonia is assessing the adoption of IFRS for 2011 by using the services of an independent consultant to produce an Impact Assessment Report (the Report).  The Report sets out the preliminary assessment of the potential impact of Caledonias conversion from Canadian GAAP to IFRS and was based on Caledonias publicly reported financial information for the year ended 31 December 2008.

The approach followed was:

·

A review of Caledonias accounting policies and accompanying financial statements for the year ended 31 December 2008 and compared them with the requirements of IFRS; and

·

Discussions with management to discuss the key differences between IFRS and Canadian GAAP and the applicability to Caledonia.



This approach provided Caledonia with a clear and concise format for understanding and communicating the effects of implementing IFRS to senior management, the Audit Committee and the Board.  Reference to the relevant standards and other authoritative material will be made and specific advice taken before acting if considered necessary.

It should also be noted that the Report primarily focuses on differences between IFRSs and Canadian GAAP from a recognition and measurement perspective and does not deal with disclosure requirements (except for the IFRS 1 disclosures), which will be addressed in the near future.

We have considered all standards and interpretations in issue at the date of the Report that will also be effective for Caledonias first IFRS financial statements, being the year ending 31 December 2011.  A review of the impact that the IFRS requirements would have on Caledonias systems was not performed at this stage as all subsidiaries are operating in IFRS compliant jurisdictions.

IFRS 1 states that, if an entity becomes a first-time adopter later than its subsidiaries, the entity shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary at the same carrying amounts as in the financial statements of the subsidiaries after adjusting for consolidation.  Therefore, for the purposes of the transition to IFRSs, Caledonia would have to use the financial statements of these subsidiaries and cannot make any adjustments.  However, Caledonia would have to assess the consolidation entries made to evaluate whether any IFRS 1 exemptions can be applied to these entries.

The areas that require additional work and quantitative evaluation are:



·

Business combinations



·

Deemed cost on property, plant and equipment



·

Mineral property valuation.



·

Decommissioning liabilities



·

Exploration and evaluation assets





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As Zimbabwe has emerged from a hyperinflationary environment into a US dollarized economy in 2009, a revaluation exercise has taken place on property, plant, and equipment (PP&E) for the 2009 IFRS compliant annual financial statements in Zimbabwe.  The residual values and useful remaining lives have also been reviewed.  The outcome of this exercise will be evidenced in Caledonias financial statements on transition to IFRS in 2011.  Initial indications are that PP&E net book value would be approximately $13 million higher and the resulting amortization expense is expected to be approximately $1.9 million higher on an annual basis.



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 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 fair value of the Corporations financial instruments approximates their carrying value unless otherwise noted. The types of risk exposure and the way in which such exposures are managed are as follows:



(a) 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.

As noted below, the Corporation has certain financial assets and liabilities denominated in foreign currencies. 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 exchange rates relative to the Canadian dollar. The values are the Canadian dollar equivalent of the respective asset or liability that is denominated in a currency other than the Canadian dollar.



|                    |            |          |            |         
|------------------- | ---------- | -------- | ---------- | --------
|                    | 2009       | 2008    
|C$000s             | US Dollars | SA  Rand | US Dollars | SA  Rand
|Cash                | 1,230      | 40       | 1          | 1,386   
|Bank overdraft      | 588        | -        | -          | -       
|Accounts receivable | 2,122      | 233      | 3,187      | 197     
|Accounts payable    | 1,658      | 689      | -          | 64      



The table below illustrates by how much a 5% change in the rate of exchange between the Canadian dollar and the currencies above will affect net income.

|                    |            |          |            |         
|------------------- | ---------- | -------- | ---------- | --------
|                    | 2009       | 2008    
|C$000s             | US Dollars | SA  Rand | US Dollars | SA  Rand
|Cash                | 59         | 2        | -          | 69      
|Bank overdraft      | 29         | -        | -          | -       
|Accounts receivable | 106        | 11       | 159        | 10      
|Accounts payable    | 83         | 33       | -          | 3       





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34



(b) 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 apart from short term borrowings utilized in Zimbabwe.  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 high credit quality financial institutions.

Cash held in foreign banks is subject to the interest rates ruling in those particular countries and this can have an effect on the results of the Corporation due to higher interest rates being paid in African countries compared to Canada. Cash held in interest bearing accounts amounted to $1,622 ($3,451- 2008) and short term borrowings in Zimbabwe were $588 (Nil  2008). At December 31, 2009, with all other variables unchanged, a 1% change in interest rates would result in an increase of interest expense of $6 ($35 income  2008).

The interest payable by RBZ on the Bonds is subject to the same recovery risk as the principle amount. The estimated recoverable amount includes a discounted amount for interest receivable on the Bond.

Fluctuations in market interest rates have not had a significant impact on the Corporations results of operations.



(c) 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 Gold Bonds payable by the RBZ as the amount owing by the RBZ is no longer increasing as gold is no longer sold to the RBZ. Future credit exposure to RBZ is limited to the recovery of the value of the Gold Bonds.

Current gold sales are made to Rand Refineries in South Africa and the payment terms are stipulated in the service delivery contract and are adhered to in all instances.



(d) 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 its likely cash 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 anticipated 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.

Since the inception of dollarization in Zimbabwe certain insurance cover has been reinstated. The Zimbabwean operations are now covered for Public Liability risk and Comprehensive cover on all motor vehicles. Further insurance cover is currently under review.



(e) 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.



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35





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.

As Blanket has a license to export its gold to a refiner of its choice it is paid full value in USD for the gold sold.

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, equity, comprising issued common shares, contributed surplus, accumulated deficit and accumulated other comprehensive income.

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, accommodate any asset retirement obligation and to pursue growth opportunities.

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



As at December 31, 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.



|                                  |                         |                        
|--------------------------------- | ----------------------- | -----------------------
|Shareholders Equity             
|                                  | As at December 31, 2009 | As at December 31, 2008
|$ Thousands Cdn.                  |                         |                        
|Issued common shares              | 196,125                 | 196,125                
|Contributed surplus               | 1,951                   | 1,902                  
|Other comprehensive income/(loss) | (550)                   | 3                      
|Deficit                           | (180,784)               | (176,834)              
|Total                             | 16,742                  | 21,196                 



The increase in other comprehensive income is attributable to the adoption of the current rate method of translation of the Zimbabwean operations from US dollars into Canadian dollars as explained in Foreign Currency Translations policy.  During 2009 $600,000 (Nil 2008) was charged to other comprehensive income/ (loss).



15.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



A

Directors and Senior Management



A brief profile of each of the Directors and the senior management is given below:



Rupert Pardoe  Director and Non-executive Chairman



Rupert Pardoe graduated from the University of Cape Town with a BA in Comparative African Government and Law and completed his honors degree cum laude in Development Administration and Politics at the University of South Africa. After a year in Paris, studying at the Sorbonne, he joined Anglo American as a management trainee in 1981, where he held various roles over a twenty year period, including Personal Assistant to Gavin Reilly, then Chairman, Finance Director of Anglo American Industrial Corporation (AMIC) and Finance Director of the Corporation from 1997 to 2001.  Mr. Pardoe was also a member of AMICs Executive
Committee, Audit Committee, Administration Committee and Credit Committee, which he chaired.  He was also a member of the Investment Committee of Anglo American
plc. At ABSA, he was a member of the Group Executive Committee and its Group Investment Committee. He was also Chairman of both ABSAs Retail Bank Board and its Commercial Bank Board.



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36







Mr. Pardoe has served on a number of boards, both in South Africa and abroad, including AECI, Amgold, Anglo Coal, Anglo Platinum, Boart Longyear, FirstRand, Highveld Steel and Vanadium, Rand Merchant Bank and Mondi.  He currently operates as a business consultant in South Africa and specializes in assisting South African companies with black economic empowerment matters.



Mr. Pardoe was appointed to the Caledonia board and elected Chairman in February 2005.



Stefan E. Hayden, Director,  President and Chief Executive Officer



Mr. Hayden has extensive experience as a company manager in South Africa. Initially he founded, developed and managed an engineering company that manufactured flameproof mining machinery. He followed this by managing a company holding the Massey Ferguson franchise in the Transvaal and the Orange Free State and returned it to profitability for the then owners Standard Corporate Merchant Bank. He then founded and managed the South African agency for heavy electrical equipment sales and installations for Toshiba Corporation of Japan.  He has been Managing Director of Industrial Brokers, a family company specializing in the procurement of steel and mining machinery, since 1971 and continues in this position.



With his wide managerial, electrical and mechanical, and mining experience Mr. Hayden has acted as technical advisor to numerous mines and companies in Southern Africa.  Prior to the Caledonia acquisition, Mr. Hayden as the Chief Executive Officer of Eersteling Gold Mining Company Limited and Barbrook Mines Limited was responsible for both operations. He joined Caledonia in 1995 and was appointed Managing Director, African Operations responsible for the development of Caledonias business in Africa. In June 1996, Mr. Hayden was elected as a Director of Caledonia and subsequently appointed Deputy Chairman of Caledonia. In January 1997 he was appointed Chairman of Caledonia and in June 1997 the position of President and Chief Executive Officer was added to his responsibilities. In February 2005, Mr. Hayden relinquished the position of Chairman when Mr. Rupert Pardoe was elected as a director and appointed as Chairman by the Board.



James Johnstone,B.Sc., ARCST, P.Eng., Director



A graduate-mining engineer Mr. Johnstone has 40 years experience in mine operations in North America, Africa and Europe. He has experience in both underground and open pit operations.  For the past 20 years he has been employed as General Manager or Vice-President Operations for mining companies producing gold, base metals and industrial minerals. Mr. Johnstone has been responsible for the construction, start up and commissioning of two major mines in addition to the commissioning of Caledonia's Filon Sur operation. He has also been involved in the orderly closure of three operations. He has operated successfully in environmentally sensitive areas and has a good understanding of the permitting process in Canada and the United States. Mr. Johnstone joined Caledonia in April 1997 as Vice President Operations and was responsible for Caledonia's operations in Zambia and South Africa and for all activities in Canada. He was elected a Director of Caledonia in June 1997. Mr. Johnstone is a director of several of Caledonias subsidiaries..  He retired from active employment with Caledonia in September, 2006.



Christopher Harvey, LRIC, HNC (Chem.), Director



A Chemistry graduate from Wigan Mining College, Mr. Harvey has spent his career in the international mineral processing industry. Prior to immigrating to Canada in 1987 he worked for the Anglo American Group in a number of senior metallurgical positions. These included projects associated with gold and copper/cobalt production, gold, uranium and sulfuric acid production. Mr. Harvey joined Doelcam, a predecessor company of Caledonia in 1989 as Vice-President Operations and was responsible for a number of property evaluations in several countries. He was appointed Senior Vice President of Caledonia at its inception in 1992 and has been a Director since 1993.  He has since held a number of senior positions within the company and was the company's Technical Director until December 2005 when he retired. He continues as a Director of Caledonia.  From late 1996 to the end of September 1998, Mr. Harvey was seconded to Filon Sur in Spain for the construction, commissioning and ongoing operation of the expansion to the heap-leach expansion project. He has also
coordinated metallurgical studies for most of the company's projects, such as the Nama copper/cobalt project, the Eureka copper/gold project and the Kadola copper project in Zambia, Barbrook gold mine refractory gold recovery project and the provisional Rooipoort platinum project in South Africa and the Cononish gold project in Scotland.



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37







Carl Jonsson, LL B- Director, Secretary and legal adviser to Caledonia



Mr. Jonsson is a lawyer and has been associated with the resource industry for over 40 years.  In his legal practice he has specialized in securities and corporate work. He has been a director of Caledonia since February 1992 and prior to that date he was a director of one of its predecessor companies, Golden North Resources Inc.  Mr. Jonsson resides in Vancouver, British Columbia, Canada and is a principal of the law firm Tupper, Jonsson and Yeadon.  Mr. Jonsson acts as the Companys principal Canadian lawyer.  Mr. Jonsson sits on the board of directors of several companies in Canada, including Acrex Ventures Ltd., Bonterra  Energy Corp. (formerly Bonterra Energy Income Trust), Comet Industries Ltd., Dolly Varden Resources Inc., Earthworks Industries Inc.  (Secretary only) and Comaplex Minerals Corporation.



Steven Curtis Director,Vice-President Finance and Chief Financial Officer



Mr. Curtis is a Chartered Accountant with over 24 years experience and has held a number of senior financial positions in the manufacturing industry.  Before joining Caledonia in April 2006, he was Director Finance and Supply Chain for Avery Dennison SA and prior to this, Financial Director and then Managing Director of Jackstadt GmbH South African operation.  Mr. Curtis is a member of the South African Institute of Chartered Accountants and graduated from the University of Cape Town.



Mr. Curtis was appointed Vice-President Finance and Chief Financial Officer of the Company in April, 2006.



Robert W. Babensee  Director



Mr Babensee is based in Toronto, Ontario, Canada and joined Caledonias Board in October 2008. He has been a member of the Institute of Chartered Accountants of Ontario, Canada since 1968.



From 1984 until his retirement in 2004, he was a partner of the Canadian accounting firm BDO Dunwoody LLP as an assurance specialist. He served as Chief Financial Officer for Golden China Resources Corporation, a natural resource company, between February 2005 and July 2006.



Mr Babensee is also currently a non-executive Director and a member of the audit, compensation and nominating committees of Apollo Gold Corporation, which is listed on the Toronto, New York and American Stock Exchanges whose business focus is on gold exploration, development and production in North America and has gold exploration, development and producing assets in Canada, the USA and Mexico.



Dr. Trevor Pearton  Vice President Exploration



Dr. Pearton has worked for Caledonia since 2001.  During the time, he was responsible for the establishment and management of the resource bases at the Blanket Mine (operating) and the Barbrook and Eersteling Mines (now on care and maintenance) and the assessment of the Nama project, resulting in a reinterpretation of the ore body and an improved definition of the resources and mineralogical characteristics.  This work provided the basis for the 2007 (completed) and the 2008 exploration programs.  Prior to joining Caledonia, Dr. Pearton worked for a number of financial institutions in South Africa as a highly rated gold analyst, as well as consulting to a number of mining companies.  He graduated from the University of the Witwatersrand with a BSc Eng (Mining Geology) and was awarded a PhD in Geology for research into Archaean gold and antimony deposits (Witwatersrand University).  He is a member of the Geological Society of South Africa; elected a Fellow of the Society in 2004, a member of the South African Institute for Mining and Metallurgy and a member of the Witwatersrand University Mining Engineers Association.



Mark Learmonth-Vice President, Corporate Development and Investor RelationsMr Learmonth joined Caledonia in July 2008. Prior to this, he was a Division Director of Investment Banking at Macquarie First South in South Africa, and has over 17 years experience in corporate finance and
investment banking, predominantly in the resources sector. Mr Learmonth graduated from Oxford University and is a chartered accountant.



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38









Arrangements, Understandings, etc.



To the best knowledge of Caledonia, there are no arrangements or understanding with any major shareholders, customers, suppliers or others, pursuant to which any person referred to above, was selected as a director or member of senior management.



B

Compensation



The amount of compensation paid, and benefits in kind granted to Caledonias directors who are also senior management is given under the "Summary Compensation Table" on page 7 of the 2009 Information Circular attached as Exhibit # 14b, incorporated herein by reference.



A $20,000 fee is paid  or accrued in favour of  each director annually.

A $5,000 fee is paid or accrued to members of Caledonias Audit Committee.



The Company has a Stock Option Plan pursuant to which it grants options to directors, offices and key employees from time to time.  The numbers of shares covered by the various options granted are determined by the Companys Compensation Committee subject to approval by the Board of Directors.  One hundred percent (100%) of the share purchase options which are presently outstanding are in favour of directors, offices and key employees of the Company and, in some cases, its subsidiaries.



Caledonia does not have a bonus or profit-sharing plan.  Caledonia does not have a pension, retirement or similar benefits scheme.



C

Board Practices



The directors all hold their positions for an indefinite term, subject to re-election at each annual general meeting of the shareholders.  The officers hold their positions subject to being removed by resolution of the Board of Directors.   The term of office of each Director expires as of the date that an Annual General Meeting of the shareholders is held - subject to the re-election of the Directors at such Annual General Meeting.



There are no service contracts between Caledonia and any of the Directors of Caledonia or its subsidiaries except for (i) a "Key Executive Severance Protection Plan" between Caledonia and  its President dating from 1996, and (ii) the indirect employment of Caledonias president and CEO through a management and administrative agreement.  The Corporation has Appointment Letters with each of the other directors; there is no allowance for any termination benefit in these agreements.



Details concerning Caledonias Board Composition, Audit, Compensation, Nominating, Disclosure and Corporate Governance committees are given in the 2009 Information Circular attached as Exhibit #14b.



The following persons  all of whom are Directors  comprise the following committees:





|             |              |            |            |           
|------------ | ------------ | ---------- | ---------- | ----------
|Audit        | Compensation | Governance | Nominating | Disclosure
|G R Pardoe   | G R Pardoe   | G R Pardoe | G R Pardoe | G R Pardoe
|R W Babensee | R W Babensee | S E Hayden |            | S E Hayden
|F C Harvey   | C Jonsson    | C Jonsson  |            | C Jonsson 
|             |              |            |            | S R Curtis





Terms of reference of the Audit Committee are given in the Charter of the Audit Committee.  The Charters of Company Committees are available on the Companys website at www.caledoniamining.com or, on request, from the Companys offices listed in Section 4A of this report.





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39







D

Employees  of Caledonia and its subsidiaries



The average, approximate number of employees, their categories and geographic location for each of the last 5 years are summarized in the table below:



Geographic Location and Number of Employees:



|                                                            |      |      |      |      |     
|----------------------------------------------------------- | ---- | ---- | ---- | ---- | ----
|Employee Location etc.                                      | 2005 | 2006 | 2007 | 2008 | 2009
|Total Employees                                             |      |      |      |      |     
|South Africa (African Office)                               | 9    | 7    | 7    | 9    | 8   
|Zimbabwe                                                    | -    | 770  | 700  | 500  | 750 
|South Africa (Mine Security and Operations and Exploration) | 496  | 1    | 1    | -    | 2   
|Zambia (Head Office and Security)                           | 8    | 8    | 8    | 8    | 8   
|Total Employees at All Locations                            | 516  | 786  | 715  | 517  | 768 
|                                                            |      |      |      |      |     



|                                          |    |    |    |    |   
|----------------------------------------- | -- | -- | -- | -- | --
|Management and Administration:            |    |    |    |    |   
|Employee Locations:                       |    |    |    |    |   
|Canada                                    | 3  | -  | -  | -  | - 
|Zimbabwe                                  | -  | 4  | 4  | 4  | 9 
|South Africa (African Office)             | 6  | 6  | 6  | 7  | 7 
|South Africa (Exploration and Operations) | 9  | 1  | 1  | 1  | 2 
|Zambia (Head Office and Security)         | 2  | 2  | 4  | 4  | 4 
|Total Management and Administration       | 20 | 13 | 15 | 15 | 22



E

Share Ownership



(a)

The direct and indirect shareholdings of the Companys Directors and Officers are as follows:





| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



All of the shares held by the Directors are voting common shares and do not have any different voting or other rights than the other outstanding common shares of the Company.  Their aggregate shareholdings amount to less than 1.0% of the Companys issued shares.



(b)

Share purchase options outstanding as of May 31 2010  being as to a total of 32,580,000









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40





|                             |                   |                   |                  
|---------------------------- | ----------------- | ----------------- | -----------------
|Name                         | Exercise Price C$ | Expiry Date       | Number of Options
|FC Harvey                    | 0.07              | 24 April , 2012   | 2,000,000        
|FC Harvey                    | 0.07              | 18 March, 2013    | 400,000          
|SE Hayden                    | 0.07              | 24 April , 2012   | 4,000,000        
|SE Hayden                    | 0.07              | 18 March, 2013    | 6,000,000        
|J Johnstone                  | 0.07              | 24 April , 2012   | 2,000,000        
|J Johnstone                  | 0.07              | 18 March, 2013    | 400,000          
|C Jonsson                    | 0.07              | 24 April , 2012   | 1,450,000        
|C Jonsson                    | 0.07              | 18 March, 2013    | 1,000,000        
|GR Pardoe                    | 0.07              | 01 February, 2015 | 4,000,000        
|GR Pardoe                    | 0.07              | 18 March, 2013    | 2,500,000        
|E Merringer                  | 0.07              | 18 March, 2013    | 70,000           
|A Lawson                     | 0.07              | 29 April ,2014    | 60,000           
|A Lawson                     | 0.07              | 18 March, 2013    | 75,000           
|T Pearton                    | 0.07              | 29 April ,2014    | 150,000          
|T Pearton                    | 0.07              | 18 March, 2013    | 400,000          
|SR Curtis                    | 0.07              | 11 May, 2016      | 300,000          
|SR Curtis                    | 0.07              | 31 May, 2012      | 400,000          
|SR Curtis                    | 0.07              | 18 March, 2013    | 2,300,000        
|Caledonia Holdings Africa(1) | 0.07              | 31 May, 2012      | 900,000          
|Caledonia Holdings Africa(1) | 0.07              | 18 March, 2013    | 600,000          
|R Babensee                   | 0.07              | 23 March, 2014    | 500,000          
|Dr P Maduna                  | 0.07              | 18 March, 2013    | 300,000          
|M Kater                      | 0.07              | 18 March, 2013    | 75,000           
|M Learmonth                  | 0.07              | 1 July, 2013      | 1,000,000        
|A Pearton                    | 0.07              | 18 March, 2013    | 100,000          
|J Liswaniso                  | 0.07              | 18 March, 2013    | 100,000          
|A Tang                       | 0.07              | 18 March, 2013    | 250,000          
|E Yeo                        | 0.07              | 18 March, 2013    | 750,000          
|J Yu                         | 0.07              | 18 March, 2013    | 500,000          
|TOTAL                        |                   |                   | 32,580,000       



(1)

The options granted to Caledonia Holdings (Africa) Limited  a subsidiary of Caledonia  are for the benefit of certain employees of a subsidiary of Caledonia.



In September 4, 2009 the Board had approved a proposal to reduce the exercise price of 32,580,000 share purchase options currently outstanding from exercise prices averaging approximately $0.1706 per share to $0.07 per share.  These share purchase options are in favour of directors, officers, and service providers.  This reduction recognises the fact that the existing options are all substantially out of the money due to the reduced trading price of the Corporations shares which, in common with some other publicly traded shares, has been adversely affected by the recent economic and market downturn.  The existing option arrangement no longer provides an incentive to directors, officers, and service providers and is the reason for this proposal.  The Toronto Stock Exchange rules require that  the reduced exercise prices  be approved by it and the Companys disinterested shareholders.  The  proposal was submitted for approval at the annual general meeting of Caledonias shareholders  held on May 18, 2010 and was approved.  The Company is in the course  of completing filings with the Exchange.  The reduction in the exercise price will not become effective until the Exchange approves  - and while there is no assurance that Exchange approval will be received Management is optimistic that Exchange approval will be received.



16.

MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS



Significant shareholders



To the best of Caledonia's knowledge, as of December 31, 2009 there are two known shareholders that beneficially own, directly or indirectly, or exercises control or direction over more than 5% of the voting shares of Caledonia  being Epicure Overseas SA of Panama, which is believed to control 29,470,667 (5.89%) shares of the Company and Pintree Resource Partnership which is believed to control 37,910,000 (7.58%) shares of the Company.



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41









The only shares issued by Caledonia are common shares.    All shareholders have the same voting rights as all other shareholders of Caledonia.



To the best of the knowledge of Caledonia, based on information in its Share Register,  the portion of the common shares of Caledonia is held in the following geographic locations:





|                |                       |                            
|--------------- | --------------------- | ---------------------------
|Geographic Area | Number of Shares Held | Percentage of Issued Shares
|USA             | 93,168,809            | 18.7                       
|Canada          | 398,674,390           | 79.7                       
|Other           | 8,326,104             | 1.6                        



There are 1,319 recorded holders of the Companys issued shares.



Caledonia is not, to the best of its knowledge, directly or indirectly owned or controlled by another corporation or corporations, by any other natural or legal person or persons severally or jointly or by any foreign government.



Caledonia is not aware of any arrangement, the operation of which may at some subsequent date result in a change of control of Caledonia.



The foregoing information in this paragraph 15 is based exclusively on information with respect to recorded shareholders in the Companys shareholders register.  The Company does not have actual information available as to who may be the beneficial owners of the Companys issued shares and, specifically, does not know who are the beneficial owners of the shares registered in two large intermediaries.



B

Related party transactions



During 2009 the Company made payments pursuant to what are designated as related party transactions.  Details are provided in Note 13 to the 2009 Annual Financial Statements attached as Exhibit 14.a and in Clause 10 on page 27 hereof.



There were no loans outstanding as at December 31, 2008 to any Company directors, officers or employees.



17.

FINANCIAL INFORMATION



A

Consolidated Statements and Other Financial Information



Attached as Exhibit 14a is the 2009 audited Consolidated Annual Financial Statements of Caledonia, which are incorporated herein by reference. Note 21 of these financial statements titled "Generally Accepted Accounting Principles in Canada and the United States" compares the differences in GAAP between the two countries.



The 2009 consolidated financial statements have been audited by BDO Canada LLP and comprise the following:



Auditors Report

Comments by Auditors for U.S. Readers

Balance sheet

Statement of Changes in ShareholdersEquity

Statement of Operations and Comprehensive Loss

Statement of cash flows

Summary of significant accounting policies

Notes to the consolidated financial statements





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42







Caledonia has no significant ongoing legal or arbitration proceedings at May 31, 2010.



To the best knowledge of Caledonia, neither any of its directors or senior management or its affiliates is a party adverse to Caledonia or its subsidiaries, or has a material interest adverse to Caledonia or its subsidiaries.



The Company has never paid or declared any dividends.



Apart from the decision to bring Blanket Mine back into production having received the necessary gold dealing and export licenses, there have been no significant changes since December 31, 2008.



18.

LISTINGS



Caledonias stock trades on the Toronto Stock Exchange under the symbol "CAL" on the NASDAQ Stock Exchanges "Over-the-counter Bulletin Board" under the symbol "CALVF" and since June 2005 on the AIM market in London, England under the symbol CMCL



The trading history is as follows:



(a)

5 Year Market Trading Record- for the following calendar years:



|                  |         |         |         |         |       
|----------------- | ------- | ------- | ------- | ------- | ------
|Stock Exchange    | 2005    | 2006    | 2007    | 2008    | 2009  
|TORONTO ($Cdn.)   |         |         |         |         |       
|High              | $0.18   | $0.23   | $0.23   | $0.20   | $0.095
|Low               | $0.10   | $0.095  | $0.09   | $0.03   | $0.05 
|Volume (1000s)    | 61,214  | 132,323 | 105,226 | 119,534 | 99,885
|NASDAQ (US$)      |         |         |         |         |       
|High              | $0.15   | $0.204  | $0.20   | $0.205  | $0.084
|Low               | $0.08   | $0.082  | $0.07   | $0.03   | $0.045
|Volume (1000s)    | 105,151 | 212,028 | 187,988 | 170,944 | 79,107
|LONDON
(UK pence) |         |         |         |         |       
|High              | 6.25p   | 11.0p   | 9.0p    | 10.0p   | 6.2p  
|Low               | 4.50p   | 4.9p    | 4.09p   | 2.5p    | 2.5p  
|Volume (1000s)    | 856,154 | 12,240  | 8,530   | 2,099   | 1,031 





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43









(b)

2 Year Market Trading Record by Quarter for the last 8 quarters ending March 31, 2010



|                 |            |          |                |       |       |      
|---------------- | ---------- | -------- | -------------- | ----- | ----- | -----
|Stock Exchange   | London AIM | TSE

TSE | NASDAQ

NASDAQ
|Share Price      | High       | Low      | High           | Low   | High  | Low  
|2008   - 2nd Qtr | 9.74p      | 8.00p    | $0.18          | $0.16 | $0.20 | $0.16
|2008   - 3rd Qtr | 8.75p      | 5.75p    | $0.16          | $0.10 | $0.17 | $0.09
|2008   - 4th Qtr | 5.62p      | 2.38p    | $0.10          | $0.03 | $0.10 | $0.03
|2009  - 1st Qtr  | 4.3p       | 2.5p     | $0.07          | $0.05 | $0.07 | $0.04
|2009  - 2nd Qtr  | 6.2p       | 3.8p     | $0.10          | $0.05 | $0.08 | $0.05
|2009  - 3rd Qtr  | 4.5p       | 3.5p     | $0.07          | $0.05 | $0.07 | $0.05
|2009  - 4th Qtr  | 5.9p       | 3.6p     | $0.09          | $0.05 | $0.08 | $0.05
|2010  - 1st Qtr  | 4.3p       | 4.0p     | $0.07          | $0.06 | $0.07 | $0.06



(c)

6 Month Market Trading Record by Month  October 2009 to March 2010



|               |            |          |             |       |       |      
|-------------- | ---------- | -------- | ----------- | ----- | ----- | -----
|Stock Exchange | London AIM | TSE

TSE | NASDAQ

TSE
|Share Price    | High       | Low      | High        | Low   | High  | Low  
|October 2009   | 5.9p       | 4.0p     | $0.09       | $0.05 | $0.08 | $0.06
|November 2009  | 5.2p       | 4.3p     | $0.07       | $0.07 | $0.07 | $0.06
|December 2009  | 5.0p       | 3.7p     | $0.07       | $0.06 | $0.07 | $0.05
|January 2010   | 4.3p       | 4.3p     | $0.07       | $0.06 | $0.07 | $0.06
|February 2010  | 4.3p       | 4.0p     | $0.07       | $0.06 | $0.07 | $0.06
|March 2010     | 4.4p       | 4.1p     | $0.07       | $0.06 | $0.07 | $0.06











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43









19.

ADDITIONAL INFORMATION



A

Memorandum and Articles



Copies of the Memorandum and Articles of Caledonia may be obtained upon request being made to one of Caledonias offices shown in section 4A of this document.



B

Material contracts



There are no material contracts other than contracts entered into in the ordinary course of business that create obligations.



C

Exchange controls



There are no governmental laws, decrees or regulations existing in Canada (where Caledonia is incorporated), which restrict the export or import of capital, or the remittance of dividends, interest or other payments to non-resident holders of Caledonia's securities.  Nor does Canada have foreign exchange currency controls.



D

Taxation



To the best of Caledonia's knowledge, there are no taxes or similar levies which holders of Caledonia's shares resident in the United States are subject to.  However, Caledonia understands that pursuant to a Canada - U.S. tax treaty, any dividends which Caledonia might declare will be subject to such Canadian withholding taxes as the then current provisions of the treaty may require.



E

Documents on display



The documents referred to in this report are either attached as Exhibits to this report or can be viewed at Caledonias offices whose addresses are given in section 4 of this report  or can be viewed on the Companys website:  www.caledoniamining.com.



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44







F

Subsidiary information



To the best knowledge of Caledonia there is no other information related to Caledonia's subsidiaries that requires to be provided.



20

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



As Caledonia is considered to be a small business issuer as defined, information is not required to be provided for this section.





21

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



Caledonia has no outstanding  nor is it registering any  securities other than its common shares.





PART 2



22

DEFAULTS, DIVIDEND ARREARAGES and DELINQUENCIES



There have been no material defaults in the payment of interest or principal or any dividend arrearages or material delinquencies.



23

MATERIAL MODIFICATIONS to the RIGHTS of SECURITY HOLDERS and USE OF PROCEEDS



There has been no material modification to the rights of Caledonia's or subsidiaries security holders.



24

CONTROLS AND PROCEDURES



a)

Evaluation of disclosure controls and procedures.

The Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures, and assessed the design of the Companys internal control over financial reporting as of December 31, 2009.

As required by Rule 13(a)-15 under the Exchange Act, in connection with this annual report on Form 20-F, under the direction of our Chief Executive Officer, we have evaluated our disclosure controls and procedures as of December 31, 2009, and we have concluded our disclosure controls and procedures were ineffective and that certain disclosable material weaknesses existed, as at December 31, 2009 as disclosed below.



Based on that evaluation the CEO and CFO have determined that the Company still has insufficient personnel to ensure appropriate segregation of duties within the Financial Reporting and Review Process. Specifically, the responsibilities assigned to the Companys CFO include substantially all financial statement and note creation functions. No additional personnel in the Company, apart from the members of the Audit Committee, perform functions at a level of precision and involvement that would adequately prevent or detect material misstatements on a timely basis. As an additional result of the insufficient personnel the Company did not maintain formal policies and procedures regarding end-user computing control over the access to, completeness, accuracy, validity, and review of, certain spreadsheet information that supports the financial reporting process.  As reported below the company experienced and discovered an operational deficiency in that an under accrual of exploration expenditure occurred in 2008 due to late invoicing by the outside contractor.



Management has concluded that, despite the lack of segregation of duties and computing controls, a material misstatement in financial reporting is not a reasonable possibility (as defined in applicable SEC guidance).  The Blanket Mine (which is operated by the Companys wholly owned subsidiary
Blanket Mine (1983) (Private) (Limited) is the Companys only operating mine and preparation of its operating results are performed by the CFO of the subsidiary and an accounting team in Zimbabwe. These results are reviewed by Company management and then incorporated into the consolidated financial statements of the Company.



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45







The Company 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 Companys Directors and Management, and the Disclosure Committee, are making all reasonable efforts to ensure that the Companys disclosures are made in full compliance with the applicable rules and requirements.  All reasonable efforts are also being made to ensure that the Companys disclosure controls and procedures provide reasonable assurance that the material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys Certifying Officers by others within those entities and to allow timely decisions regarding required disclosures.





(b)

Managements annual report on internal control over financial reporting (ICFR)



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting by the Company. The Companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, the Corporation's ICFR may not prevent or detect 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.



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, 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.



The Corporation has also engaged independent consultants to carry out an assessment of the effectiveness of its internal controls over financial reporting using an internationally acceptable framework.



Based on the above and having carried out a review of the independent consultants report on the effectiveness of the Corporation's internal controls over financial reporting, management concluded that our internal control over financial reporting was not effective as of December 31, 2009, due to the existence of material weaknesses as described in greater detail below.



Unaccrued Liabilities



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46







It was ascertained in 2009 that two invoices for exploration drilling in Zambia, which was conducted in November and December 2008, were not accrued in the 2008 annual financial statements. This error occurred as the contractor only raised the invoices on February 18, 2009 and they were passed to the Caledonia Africa office by its Zambian subsidiary company in March 2009 for payment. This has been confirmed as an isolated incident but, due to the amount involved of $310,000, the comparative balance sheet for 2008 has been restated. In future the post reporting period payments will be reviewed to identify any accruals that are necessary and the management in Zambia has been instructed to forward any unpaid liabilities at the year and quarter ends to Caledonias Africa office. There is no known recurrence of any under-accrual at the end of 2009.



Segregation of duties



Due to limited personnel resources at the Corporations Africa office in Johannesburg, 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 potentially significant errors.



As a consequence of the above, an additional accounting member of staff was recruited in November 2009 to the Corporations Africa office in Johannesburg to improve the segregation of duties and lighten the work load of existing staff.



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 any more 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, 2009 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.



(c)

Attestation Report of registered public accounting firm



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



(d)

Changes in internal controls over financial reporting.

There were no significant changes in the Companys internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of 17 CFR 240.13a-15 or 240.15d-15 that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting.   See also the information given in section 5A with respect to critical accounting policies.





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47











25A

Audit Committee Financial Expert



(a)

Caledonias Board of Directors has determined that the three members of its Audit Committee are all financial experts.



(b)

The financial experts serving on the audit committee are Mr. G.R. Pardoe, Mr. R. Babensee  and Mr. F.C Harvey who are also all independent directors under the NASDAQ rules.



25B

Code of Ethics



(a)

On April 8, 2004 the registrants Board of Directors adopted a code of ethics that applies to the registrants Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions.



(b)

The registrant has filed a copy of this code of ethics that applies to the registrants Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, or persons performing similar functions.  The code of ethics was filed as Exhibit 1 to the 2003 Form 20F Annual Report and is incorporated herein by reference.  It has not been amended.



(c)

The text of this code of ethics has been posted on the company website at http://www.caledoniamining.com



25C

Fees charged by principal accountant



(a)

The fees charged or estimated for the past two fiscal years for auditing and the other services  by the Companys auditors have been:





|                     |          |            
|-------------------- | -------- | -----------
|                     | 2008     | 2009       
|Audit fees           | 187,531  | 180,600    
|Audit  related fees | 9,010    | 3,000      
|Tax fees             | -        |            
|All other fees       | -        |            
|TOTAL                | $196,541 | $183,600(1)







(1)The figures shown for 2009 are estimates from Caledonias auditors as the final billings have not yet been completed.



(b)

Prior to the start of the audit process, Caledonias audit committee receives an estimate of the costs, from its auditors and reviews such costs for their reasonableness. After their review and pre-approval of the fees, the audit committee recommend to the board of directors to accept the estimated audit fees given by the auditors.



25D

Exemptions from the Listing Standards for Audit Committees



Nil.



25E

Purchases of Equity Securities by the Issuer and Affiliated Purchasers



There were no purchases made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuers equity securities that are registered by the issuer pursuant to section 12 of the Exchange Act.





PART 3





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48







26.

FINANCIAL STATEMENTS



The audited consolidated financial statements and related notes of Caledonia at December 31, 2009, 2008 and 2007 are attached as Exhibit 14a by reference.



27.

FINANCIAL STATEMENTS



The registrant has elected to provide financial statements pursuant to Item 17 that include, as Note 21 the differences between Canadian and US GAAP's.



28.         EXHIBITS



The following are attached to and form part of this

Statement and are incorporated herein by reference:



12.   Certifications Pursuant to Rule 13a-14(a)(17CFR240.13a-14(a) or Rule 15d-14(a)(17CFR240.15d-14(a).



13.

A Certification Pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14.a

Caledonia Mining Corporation, 2009 Consolidated Annual Audited Financial Statements.

14.b

Proxy and Information Circular

14.c

Mineral Properties.

14.d

Summary of Report on Nama Property

14.e

Summary of Report on Blanket Mine Property

14.f

Summary of Report on Rooipoort property

14.g

Property and Claims Information with respect to the Blanket, Nama and Rooipoort properties



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49











SIGNATURE



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



DATED at Johannesburg, South Africa, on the 27th day of September, 2010.



CALEDONIA MINING CORPORATION



Per: (Signed)

Stefan Hayden

President, Chief Executive Officer and Director











































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50































EXHIBIT #12












CALEDONIA MINING CORPORATION







CERTIFICATIONS

























---

51











CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Stefan E. Hayden, certify that:





1.

I have reviewed this annual report on Form 20-F of Caledonia Mining Corporation (the Company).



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;



4.

The Companys other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Company, and have:



a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



c.

Evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



d.

Disclosed in this report any change in the Companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is likely to materially affect, the companys internal control over financial reporting; and



5.

The Companys other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the Audit Committee of the Companys Board of Directors (or persons performing the equivalent function);



a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and



b.

Any, fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.







Date:

September 27, 2010

(signed) S.E. Hayden



President and Chief

Executive Officer















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52















CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I  Steven Curtis,certify that:





1.

I have reviewed this annual report on Form 20-F of Caledonia Mining Corporation (the Company).



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;



The Companys other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Company, and have:



a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



c.

Evaluated the effectiveness of the companys disclosure controls and procedures  and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



d.

Disclosed in this report any change in the Companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is likely to materially affect, the Companys internal control over financial reporting; and



5.

The Companys other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent function);



a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to  adversely affect the companys ability to record, process, summarize and report financial information; and



b.

Any, fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.









Date:  September 27, 2010

(signed) Steven Curtis



Vice- President Finance and Chief

Financial Officer







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53









































| |  | 
| |  | 





CALEDONIA MINING CORPORATION





Certifications Pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002























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54









Exhibit 13a



CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report on Form 20-F of Caledonia Mining Corporation (the Company) for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the Report), that I, Stefan E. Hayden, President and Chief Executive Officer of  Caledonia , certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 18 U.S.C.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:



1.

The Report fully complies with the requirements of Rule 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.





By:

(signed)S. E. Hayden

Stefan E. Hayden, President and Chief Executive Officer

Caledonia Mining Corporation



Date:

September 27, 2010



A signed original of this written statement required by Section 906 has been provided by Stefan E. Hayden and will be retained by Caledonia Mining Corporation and furnished to the Securities and Exchange Commission or its staff upon request.



CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report on Form 20-F of Caledonia Mining Corporation (the Company) for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), that I, Steven Curtis, Vice President Finance and Chief Financial Officer of  Caledonia , certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 18 U.S.C.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:



1

The Report fully complies with the requirements of Rule 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.





By:   (signed)Steven Curtis

Steven Curtis, Vice President Finance and Chief Financial Officer

Caledonia Mining Corporation



Date:

September 27, 2010



A signed original of this written statement required by Section 906 has been provided by Steven Curtis and will be retained by Caledonia Mining Corporation and furnished to the Securities and Exchange Commission or its staff upon request.



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55





























| |  | 
| |  | 

















CALEDONIA MINING CORPORATION





2009 ANNUAL AUDITED CONSOLIDATED FINANCIAL STATEMENTS

























---









|                                                     
|-----------------------------------------------------
|MANAGEMENTS RESPONSIBILITY FOR FINANCIAL INFORMATION



To the Shareholders of Caledonia Mining Corporation:



Management has prepared the information and representations in this annual report. The consolidated financial statements of Caledonia Mining Corporation have been prepared in conformity with generally accepted accounting principles applied in Canada and, where appropriate, these statements include some amounts that are based on best estimates and judgment. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects.



Financial information used elsewhere in the Annual Report is consistent with that in the financial statements. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.



The Corporation maintains adequate systems of internal accounting and administrative controls, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that relevant and reliable financial information is produced. Our independent auditors have the responsibility of auditing the annual consolidated financial statements and expressing an opinion on them.



Management have concluded that as a result of the relatively small size of the Corporations head office finance department personnel, the Internal Controls over Financial Reporting (ICFR) assessment concluded that there were limited resources to adequately segregate duties and to permit or necessitate the comprehensive documentation of all policies and procedures that form the basis of an effective design of ICFR.



In order to mitigate the risk of material misstatement in the Corporations consolidated financial statements, the Corporation implemented additional cash flow review and monitoring controls at head office on a monthly basis and as part of their monitoring and oversight role the Audit Committee performs additional analysis and other post closing procedures. No material exceptions were noted based on the additional year end procedures and no evidence of fraudulent activity was found.



The Board of Directors, through its Audit Committee, is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control. The Audit Committee is composed of three unrelated directors. This Committee meets periodically with management and the external auditors to review accounting, auditing, internal control and financial reporting matters.



The consolidated financial statements have been audited on behalf of the shareholders by the Corporations independent auditors, BDO Canada LLP, in accordance with generally accepted auditing standards in Canada and the standards of the Public Company Accounting Oversight Board (United States).  The auditors report outlines the scope of their examination and their opinion on the consolidated financial statements.







Signed

Signed



S. E. Hayden

S. R. Curtis

President and Chief Executive Officer

Vice-President, Finance and Chief Financial Officer





56





---







Auditors Report







To the Shareholders of

Caledonia Mining Corporation



We have audited the consolidated balance sheets of Caledonia Mining Corporation as at December 31, 2009 and 2008 and the consolidated statements of changes in shareholders equity, operations and comprehensive loss and cash flows for each of the years in the three year period ended December 31, 2009.  These consolidated financial statements are the responsibility of the Corporations management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).   Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.  The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporations internal control over financial reporting. Accordingly, we express no such opinion.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.



In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009 in accordance with Canadian generally accepted accounting principles.





(Signed) BDO Canada LLP



Chartered Accountants, Licensed Public Accountants

Toronto, Ontario

March 29, 2010



57





---



















Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict







In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Corporations ability to continue as a going concern, such as those described in the summary of significant accounting policies. The United States reporting standards also require the addition of an explanatory paragraph when prior period financial statements are restated, such as those described in Note 16 and 21(a), which has a material effect on the consolidated financial statements. Our report to the shareholders dated March 29, 2010 is expressed in accordance with Canadian generally accepted auditing standards which do not require a reference to such events and conditions in the auditors report when these are adequately disclosed in the consolidated financial statements.







(Signed) BDO Canada LLP



Chartered Accountants, Licensed Public Accountants

Toronto, Ontario

March 29, 2010



3





---







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



December
31







|                                                      |        |          
|----------------------------------------------------- | ------ | ---------
|Assets                                                | $      | $        
|Current                                               |        | (Restated
|                                                      |        | Note 16) 
|Cash and cash equivalents                             | 1,622  | 3,652    
|Accounts receivable                                   | 1,547  | 181      
|Inventories (Note 11)                                 | 2,589  | 1,059    
|Prepaid expenses                                      | 57     | 27       
|Assets - held for sale                                | 102    | 106      
|                                                      | 5,917  | 5,025    
|                                                      |        |          
|Capital assets and mineral properties - held for sale | 670    | 681      
|Accounts receivable (Note 10)                         | 810    | 2,890    
|Investments (Note 1)                                  | 59     | 12       
|Capital assets (Note 2)                               | 876    | 173      
|Mineral properties (Note 3)                           | 13,758 | 14,876   
|                                                      | 16,173 | 18,632   
|                                                      | 22,090 | 23,657   



|                                                     |       |      
|---------------------------------------------------- | ----- | -----
|Liabilities and Shareholders Equity                 |       |      
|Current                                              |       |      
|Bank overdraft (Note 12)                             | 588   | -    
|Accounts payable                                     | 2,156 | 1,292
|Liabilities -  held for sale                         | 15    | 16   
|                                                     | 2,759 | 1,308
|                                                     |       |      
|Future tax liability(Note 6)                         | 859   | -    
|Asset retirement obligation(Note 4)                  | 1,406 | 839  
|Asset retirement obligation  - held for sale(Note 4) | 324   | 314  
|                                                     | 5,348 | 2,461



|                                              |           |          
|--------------------------------------------- | --------- | ---------
|Shareholders Equity(Note 5)                  |           |          
|Share capital                                 | 196,125   | 196,125  
|Contributed surplus                           | 1,951     | 1,902    
|Accumulated other comprehensive income/(loss) | (550)     | 3        
|Deficit                                       | (180,784) | (176,834)
|                                              | 16,742    | 21,196   
|                                              | 22,090    | 23,657   



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.









4





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|                                                          
|----------------------------------------------------------
|Caledonia Mining Corporation                              
|Consolidated Statements of Changes in Shareholders Equity
|(in thousands of Canadian dollars )                       



|                                                    
|----------------------------------------------------
|For the years ended December 31, 2009, 2008 and 2007







|                                                                      |          |         |             |               |           |        
|--------------------------------------------------------------------- | -------- | ------- | ----------- | ------------- | --------- | -------
|                                                                      |          |         |             | Accumulated   |           |        
|                                                                      |          |         |             | Other         |           |        
|                                                                      |          | Share   | Contributed | Comprehensive |           |        
|                                                                      | Note     | Capital | Surplus     | Income/(loss) | Deficit   | Total  
|                                                                      |          | $       | $           | $             | $         | $      
|Balance at December 31, 2006                                          |          | 190,626 | 989         | 31            | (167,279) | 24,367 
|Warrants exercised                                                    |          | 4,380   |             |               |           | 4,380  
|Adjustment to opening                                                 |          |         |             |               |           |        
|equity-based compensation expense                                     | 5 (b)    |         | 51          |               |           | 51     
|Investments revaluation to fair value                                 |          |         |             | (88)          |           | (88)   
|Net loss for the year                                                 |          |         |             |               | (4,615)   | (4,615)
|Balance at December 31, 2007                                          |          | 195,006 | 1,040       | (57)          | (171,894) | 24,095 
|Shares issued                                                         | 5(a)(ii) | 1,119   |             |               |           | 1,119  
|Equity-based compensation expense                                     | 5(b)     |         | 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                                     | 5(d)     |         | 49          |               |           | 49     
|Investments revaluation to fair value                                 |          |         |             | 47            |           | 47     
|Translation loss at Blanket Mine                                      | 5(e)     |         |             | (600)         |           | (600)  
|Net loss for the year                                                 |          |         |             |               | (3,950)   | (3,950)
|Balance at December 31, 2009                                          |          | 196,125 | 1,951       | (550)         | (180,784) | 16,742 



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









5





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|                                                            
|------------------------------------------------------------
|Caledonia Mining Corporation                                
|Consolidated Statements of Operations and Comprehensive Loss
|(in thousands of Canadian dollars except per share amounts) 



For the years ended December 31





|                            |        |       |       
|--------------------------- | ------ | ----- | ------
|Revenue and operating costs | $      | $     | $     
|Revenue from sales          | 11,559 | 7,696 | 10,039
|Operating costs (Note 11)   | 8,223  | 4,438 | 9,745 
|Gross profit                | 3,336  | 3,258 | 294   



|                                 |       |       |      
|-------------------------------- | ----- | ----- | -----
|Costs and expenses               |       |       |      
|General and administrative       | 2,147 | 3,896 | 2,123
|Interest (received)/paid         | (264) | (385) | 309  
|Amortization                     | 436   | 397   | 18   
|Write-down of mineral properties | 1,434 | 1,168 | 750  
|Exchange loss/(gain)             | (248) | 1,876 | 1,012
|Other expense (income) (Note 8)  | 2,742 | 591   | (17) 
|                                 | 6,247 | 7,543 | 4,195



|                                                   |         |         |        
|-------------------------------------------------- | ------- | ------- | -------
|Loss before income tax and discontinued operations | (2,911) | (4,285) | (3,901)
|Income tax(Note 6)                                 | (859)   | -       | (5)    
|Loss from continuing operations                    | (3,770) | (4,285) | (3,906)



|                                                                      |         |         |        
|--------------------------------------------------------------------- | ------- | ------- | -------
|Loss from discontinued operations                                     | (180)   | (655)   | (709)  
|Net loss                                                              | (3,950) | (4,940) | (4,615)
|Revaluation of investments to fair value (Note 1)                     | 47      | (10)    | (88)   
|Reclassification adjustment for other than temporary decline in value | -       | 70      | -      
|Translation loss at Blanket Mine                                      | (600)   | -       | -      
|Comprehensive loss                                                    | (4,503) | (4,880) | (4,703)
|                                                                      |         |         |        
|Net Loss per share                                                    |         |         |        
|Basic and diluted from continuing operations                          | (0.008) | (0.009) | (0.008)
|Basic and diluted from discontinued operations                        | (0.000) | (0.001) | (0.001)
|Basic and diluted for the year                                        | (0.008) | (0.010) | (0.009)





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











6





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|                                     
|-------------------------------------
|Caledonia Mining Corporation         
|Consolidated Statements of Cash Flows
|(in thousands of Canadian dollars)   



For the years ended December 31



|                           |  |           | 
|-------------------------- |  | --------- | 
|Cash provided by (used in) |  | (Restated | 
|                           |  | Note 16)  | 



|                                |         |         |        
|------------------------------- | ------- | ------- | -------
|Operating activities            | $       | $       | $      
|Loss from continuing operations | (3,770) | (4,285) | (3,906)



|                                                           |       |       |    
|---------------------------------------------------------- | ----- | ----- | ---
|Adjustments to reconcile net cash from operations (Note 9) | 4,829 | 2,228 | 908



|                                                        |         |         |      
|------------------------------------------------------- | ------- | ------- | -----
|Changes in non-cash operating account balances (Note 9) | (1,917) | (1,049) | 1,318



| |       |         |        
| | ----- | ------- | -------
| | (858) | (3,106) | (1,680)



|                                                      |         |         |        
|----------------------------------------------------- | ------- | ------- | -------
|Investing activities                                  |         |         |        
|Expenditures on capital assets and mineral properties | (1,547) | (3,023) | (3,250)
|Proceeds on the sale of Barbrook Mine                 | -       | 9,359   | -      
|                                                      | (1,547) | 6,336   | (3,250)



|                                               |       |       |      
|---------------------------------------------- | ----- | ----- | -----
|Financing activities                           |       |       |      
|Bank overdraft                                 | 588   | (13)  | 13   
|Issue of share capital net of issue costs      | -     | 1,119 | 4,380
|                                               | 588   | 1,106 | 4,393
|                                               |       |       |      
|Cash flow from discontinued operations         |       |       |      
|Operating activities                           | (179) | (646) | (680)
|Investing activities                           | -     | -     | -    
|Financing activities                           | -     | -     | 6    
|Effect of foreign currency translation on cash |       | -     | (4)  
|                                               | (179) | (646) | (678)



|                                                    |         |       |        
|--------------------------------------------------- | ------- | ----- | -------
|Effect of foreign currency translation on cash      | (35)    | (112) | (7)    
|Increase (decrease) in cash for the year            | (2,031) | 3,578 | (1,222)
|Cash and cash equivalents, beginning of year        | 3,654   | 76    | 1,298  
|Cash and cash equivalents, end of year              | 1,623   | 3,654 | 76     
|                                                    |         |       |        
|Cash and cash equivalents at end of year relate to: |         |       |        
|Continuing operations                               | 1,622   | 3,652 | 76     
|Discontinued operations                             | 1       | 2     | -      
|                                                    | 1,623   | 3,654 | 76     



See Note 9 for supplementary cash flow information

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





7





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





Nature of Business



The Corporation is engaged in the acquisition, exploration and development of mineral properties for the exploitation of base and precious metals.



Basis of Presentation and Going Concern



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.



These 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 operating profitably in Zimbabwe, 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.



Measurement Uncertainties



Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period.  The more significant areas requiring estimates relate to the fair value of mineral resources, future cash flows associated with capital assets, mineral properties, the net realizable value of the bonds receivable, the obligation under asset retirement obligations and the measurement of future tax assets and liabilities.  Managements calculation of reserves and resources and cash flows are based upon engineering and geological estimates and financial estimates including gold prices and operating costs.  The Corporations realization of its accounts receivable and its Blanket Mine assets are highly reliant on the monetary policies being implemented by the Zimbabwe government. The amount ultimately recovered could be materially different than the estimated values.



Principles of Consolidation



The consolidated financial statements include the accounts of the Corporation together with all its subsidiaries.  All significant inter-Corporation balances and transactions have been eliminated on consolidation.

The Corporations consolidated subsidiaries (all 100% owned) are:

|                                                      |                                                                    
|----------------------------------------------------- | -------------------------------------------------------------------
|Blanket Mine (1983) (Private) Limited (Blanket)     | Caledonia Nama Limited (Nama)                                    
|Blanket (Barbados) Holdings Limited (Barbados)      | Caledonia Western Limited (Western)                              
|Caledonia Holdings (Africa) Limited (CHA)           | Eersteling Gold Mining Corporation Limited  ("Eersteling")         
|Caledonia Holdings Zimbabwe (Private) Limited (CHZ) | Fintona Investments (Proprietary) Limited (Fintona)              
|Caledonia Mining Services Limited (CMS)             | Greenstone Management Services (Proprietary) Limited (Greenstone)
|Caledonia Kadola Limited (Kadola)                   | Maid O The Mist (Pty) Ltd (Maid)                                
|Caledonia Mining (Zambia) Limited (CMZ)             | Mapochs Exploration (Pty) Ltd                                      













8







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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







Cash and Cash Equivalents



Cash and cash equivalents represent cash on hand in operating bank accounts, and money market funds with initial maturities less than three months.



Inventory



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.



Investments



The marketable securities are recorded at fair value. Changes in fair value are recognized in the statements of operations and comprehensive loss except for losses that are considered other than temporary which are recognised in operations.



Revenue Recognition



Revenue from the sale of precious metals is recognized when the metal leaves the mine for delivery to the respective refineries, risk and benefits of ownership are transferred and the receipt of proceeds are substantially assured.



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 assets for sale in these consolidated financial statements. Barbrook Mine was sold during 2008 but was presented as assets for sale in 2007.



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.























9







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







Assets held for sale and discontinued operations

Eersteling Gold Mining Corporation has been on care and maintenance since 1997 and in 2007 the decision to sell Eersteling was taken by the Board. Despite the fact that the sale of Eersteling to Oretech Resources fell through in 2008, the property continues to be disclosed under assets held for sale as the mine is still for sale and various parties have shown interest in the property.



The components held for sale are as follows:



|                                      |                      |      
|------------------------------------- | -------------------- | -----
|                                      | Eersteling Gold Mine
|                                      | 2009                 | 2008 
|                                      | $                    | $    
|Capital assets and mineral properties | 670                  | 681  
|Current assets                        | 102                  | 106  
|Current liabilities                   | (15)                 | (16) 
|Asset retirement obligation           | (324)                | (314)



As a consequence of this decision, Eersteling Mines results for 2008 and prior years have been disclosed under discontinued operations. Revenue from discontinued operations is $0 ($0 in 2008 and $60 in 2007). The loss from discontinued operations for 2008 included a loss of $364 arising from the sale of Barbrook. 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 under Capital assets. 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.

















10







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







Asset
Impairment



Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. If the undiscounted value of the future cash flows is less than the carrying amount of the asset, impairment is recognised based on the fair value of the assets.



Asset retirement obligation



The fair value of the liability of an asset retirement obligation is recorded when it is legally incurred and the corresponding increase to the mineral property is depreciated over the life of the mineral property. The liability is adjusted over time to reflect an accretion element considered in the initial measurement at fair value and revisions to the timing or amount of original estimates and for draw downs as asset retirement expenditures are incurred.



Strategic Alliances



In the past the Corporation has entered into various agreements under which the participants earn a right to participate in the mineral property by incurring exploration expenditures in accordance with the conditions of the agreements. Upon satisfaction of the conditions of the agreement a joint venture may be formed with customary joint venture terms and provisions and then accounted for on a proportionate consolidation basis. Until a joint venture is formed, only the expenditures on the properties incurred by the Corporation are reflected in these consolidated financial statements. Currently there are no active strategic alliances that would result in a joint venture.



Foreign Currency Translation



Balances of the Corporation denominated in foreign currencies and the accounts of its foreign subsidiaries, except for Blanket Mine are translated into Canadian dollars 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 have been 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.  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; and

(ii)

revenue and expense transactions at the average rate of exchange prevailing during the period.









11









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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







Included in the statement of operations and comprehensive income/loss is an exchange gain of $248 (loss $1,876  2008 and loss $1,012 - 2007).  Due to the translation of Blanket Mine a loss of $600 (Nil 2008) has been disclosed under accumulated other comprehensive income/(loss).



Income Taxes



The Corporation accounts for income taxes using the asset and liability method.  Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs.



Equity-based Compensation



The Corporation operates a share option plan as described in note 5(b).  The Corporation accounts for equity-based compensation granted under such plans using the fair value method of accounting. Under such method, the cost of equity-based compensation is estimated at fair value and is recognized in the statement of operations and comprehensive loss as an expense.  This cost is amortized over the relevant vesting period for grants to directors, officers and employees, and measured in full at the earlier of performance completion or vesting for grants to non-employees.  Any consideration received by the Corporation on exercise of share options together with amounts previously credited to contributed surplus for these options is credited to share capital.



Financial Instruments



All financial instruments are classified into one of the following five categories: held for trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their initial classification.



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



1.

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. The Corporation has no derivative financial instruments that would have been classified on a similar basis.

2.

Investments are classified as assets available for sale. Investments are presented at fair value and the gains/losses arising from their revaluation at the end of each period 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.

3.

Accounts receivables are classified as 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. The Reserve Bank of Zimbabwe Gold Bond is recorded at an estimated recoverable amount.

4.

Bank overdraft is classified as other financial liability as there is a contractual obligation to deliver cash. It is measured at fair value which is the carrying 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.









12









---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







5.

Accounts payable is classified as other financial liability. They are recorded at their fair value upon initial recognition. Subsequent measurement will be at amortized cost using the effective interest rate method.



Changes in accounting policies:



1.

Goodwill and Intangible assets



Effective January 1, 2009, the Corporation adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook section 3064, Goodwill and Intangible assets.This standard establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this standard did not have an impact on the Corporations consolidated financial statements.



2.

Credit Risk



Effective January 1, 2009, the Corporation adopted the new recommendations of CICA issued EIC 173, Credit risk and the fair value of financial assets and liabilities.This abstract requires companies to take counterparty credit risk into account when measuring the fair value of financial assets and liabilities, including derivatives. The adoption of this standard did not have an impact on the Corporations consolidated financial statements.



3.

Mining Exploration Costs



On March 27, 2009, the Emerging Issues Committee of the CICA approved abstract EIC- 174 Mining Exploration Costs, which provides guidance on capitalization of exploration costs related to mining properties in particular and on impairment of long-lived assets in general. Application of this new standard was taken into account in determining the fair value of the exploration properties.



4.

Financial Instruments



The Corporation adopted amendments to CICA Handbook Section 3855 effective January 1, 2009. Amendments to this section have added guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category; changed the categories into which a debt instrument is required or permitted to be classified; changed the impairment model for held-to-maturity financial assets to the incurred credit loss model of CICA Handbook Section 3025, Impaired Loans; and require reversal of previously recognized impairment losses on available-for-sale financial assets in specified circumstances. Adoption of these amendments did not result in an impact on the Corporations consolidated financial statements.



The Corporation also adopted the amendments to CICA Handbook Section 3862, Financial Instruments  Disclosures, which was amended to improve financial instrument disclosures to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. The impact of adopting these amendments for the year ended December 31, 2009 resulted in additional disclosures included within these consolidated financial statements.



In June 2009, the CICA amended Section 3862 Financial Instruments  Disclosurewhich requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The accounting standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair
value measurement. CICA Handbook Section 3862 prioritizes the inputs into three levels that may be used to measure fair value:

a) Level 1  Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

b) Level 2  Applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly such as quoted prices for similar assets or liabilities in active markets or indirectly such as quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions.

c) Level 3  Applies to assets or liabilities for which there are not observable market data.



13







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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







The Corporations financial instruments consist principally of cash, cash equivalents, accounts receivable, investments, bank overdraft, accounts payable and accrued liabilities. Pursuant to CICA Handbook Section 3862, fair value of assets and liabilities measured on a recurring basis include cash and cash equivalents and investments that are determined based on Level 1 inputs. The Corporation believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.



5.

Financial Statement Concepts



Effective January 1, 2009, the Corporation adopted the amendments to CICA Handbook Section 1000, Financial Statement Concepts,which focused on the capitalization of costs which truly meet the definition of an asset and de-emphasises the matching principle. The adoption of these changes did not have an impact on the Corporations consolidated financial statements.



Recently issued accounting pronouncements issued and not yet effective



The CICA issued three new accounting standards in January 2009: Section 1582, Business Combinations, Section 1601, Consolidated Financial Statementsand Section 1602, Non-Controlling interests.Section 1582 replaces section 1581 and establishes standards for the accounting of a business combination. It provides the Canadian equivalent to IFRS 3 - Business Combinations.The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.



Sections 1601 and 1602 together replace section 1600, Consolidated Financial Statements.Section 1601, establishes standards for the preparation of consolidated financial statements. Section 1601 applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Section 1602 establishes standards for accounting of a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS lAS 27 - Consolidated and Separate Financial Statementsand applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011 and all three sections must be applied concurrently. The Corporation does not anticipate that the adoption of these standards will impact its financial results.

Financial instruments  recognition and measurement, Section 3855

This Section has been amended to clarify the application of the effective interest method after a debt instrument has been impaired. This amendment is effective for fiscal years beginning on or after July 1, 2009.

This Section has also been amended to clarify when an embedded prepayment option is separated from its host debt instrument for accounting purposes. This amendment applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted.



14







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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





The third amendment provides guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held for trading category. This amendment was made in August 2009 with prospective application. The Corporation does not anticipate the adoption of these amendments will impact its financial results.

International Financial Reporting Standards (IFRS)

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 amounts reported by Caledonia for the year ended December 31, 2010.



























15







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





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 were listed on the TSX Venture Exchange in Canada prior to Motapa being acquired by Lucara (LUC.V) In terms of the transaction one Motapa share was exchanged for 0.9055 Lucara shares



The adoption of CICA Handbook Sections 3855 and 1530, retrospectively from January 1, 2007, determines that the Corporation records its investments in Lucara Diamond Corp. and in Old Mutual Plc as financial instruments available for sale and they are thus recorded at fair value. In terms of Section 3862 the fair values are determined based on Level 1 inputs as both shares are quoted on stock exchanges.



The fair value of the investment in Lucara is $54 ($9 -2008) and the fair value of the shares held in Old Mutual Plc is $5 ($3  2008). The Corporation has decided to sell the Lucara shares in 2010.



2.

Capital Assets

|                    |                            |                          |           |           |                         | 
|------------------- | -------------------------- | ------------------------ | --------- | --------- | ----------------------- | 
|                    | COST                      
|                    | As at December 31, 2008(1) | Exchange rate difference | Additions | Disposals | As at December 31, 2009
|                    | $                          | $                        | $         | $         | $                      
|Land  plant sites  | 12                         | (3)                      | -         | -         | 9                      
|Plant and equipment |                            |                          |           |           |                        
|- producing (2)     | 24                         | (4)                      | 796       | -         | 816                    
|- non-producing (3) | 229                        | -                        | -         | -         | 229                    
|Office equipment    | 908                        | (3)                      | 34        | -         | 939                    
|Vehicles            | 387                        | (22)                     | -         | -         | 365                    
|                    | 1,560                      | (32)                     | 830       | -         | 2,358                  



|                    |                          |                          |           |           |                         | 
|------------------- | ------------------------ | ------------------------ | --------- | --------- | ----------------------- | 
|                    | ACCUMULATED AMORTIZATION
|                    | As at December 31, 2008  | Exchange rate difference | Additions | Disposals | As at December 31, 2009
|                    | $                        | $                        | $         | $         | $                      
|Land  plant sites  | -                        | -                        | -         | -         | -                      
|Plant and equipment |                          |                          |           |           |                        
|- producing (2)     | 4                        | (1)                      | 35        |           | 38                     
|- non-producing (3) | 229                      | -                        | -         | -         | 229                    
|Office equipment    | 858                      | (2)                      | 30        | -         | 886                    
|Vehicles            | 296                      | 1                        | 32        | -         | 329                    
|                    | 1,387                    | (2)                      | 97        | -         | 1,482                  





|               |     |  |  |  |    
|-------------- | --- |  |  |  | ---
|Net Book Value | 173 |  |  |  | 876









16







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





(1)

Opening 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 which recommenced gold production in April 2009.

(3)

Non-producing plant and equipment represents Zambian operations.



3.

Mineral Properties





|                                  |                            |                          |           |            |                         | 
|--------------------------------- | -------------------------- | ------------------------ | --------- | ---------- | ----------------------- | 
|                                  | COST                      
|                                  | As at December 31, 2008(1) | Exchange rate difference | Additions | Impairment | As at December 31, 2009
|                                  | $                          | $                        | $         | $          | $                      
|Producing:                        |                            |                          |           |            |                        
|Blanket, Zimbabwe - gold property | 5,006                      | (716)                    | 650       | -          | 4,940                  
|Non-producing - exploration:      |                            |                          |           |            |                        
|Rooipoort , South Africa          | 4,399                      | -                        | 44        | -          | 4,443                  
|Goedgevonden, South Africa(3)     | -                          | -                        | -         | -          | -                      
|Nama, Zambia(4)                   | 5,774                      | -                        | 616       | (1,434)    | 4,956                  
|Mulonga, Zambia(2)                | -                          | -                        | -         | -          | -                      
|                                  | 15,179                     | (716)                    | 1,310     | (1,434)    | 14,339                 



|                                  |                          |                          |           |           |                         | 
|--------------------------------- | ------------------------ | ------------------------ | --------- | --------- | ----------------------- | 
|                                  | ACCUMULATED AMORTIZATION
|                                  | As at December 31, 2008  | Exchange rate difference | Additions | Disposals | As at December 31, 2009
|                                  | $                        | $                        | $         | $         | $                      
|Producing:                        |                          |                          |           |           |                        
|Blanket, Zimbabwe - gold property | 303                      | (62)                     | 340       | -         | 581                    
|Non-producing - exploration:      |                          |                          |           |           |                        
|Rooipoort , South Africa          | -                        | -                        | -         | -         | -                      
|Goedgevonden, South Africa(3)     | -                        | -                        | -         | -         | -                      
|Nama, Zambia                      | -                        | -                        | -         | -         | -                      
|Mulonga, Zambia(2)                | -                        | -                        | -         | -         | -                      
|                                  | 303                      | (62)                     | 340       | -         | 581                    



|               |        |  |  |  |       
|-------------- | ------ |  |  |  | ------
|Net Book Value | 14,876 |  |  |  | 13,758





















17





---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





(1)

Opening 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 ($0  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. The Mulonga property was fully written down to $Nil in 2008. It is still the Corporations intention to form a joint venture with a new strategic partner.



(3)

The Goedgevonden property was also written down to $Nil in 2008.



(4)

The 2008 opening cost has been increased by $310 as a result of an under accrual of capitalised exploration expenditure that was only invoiced by the contractor in 2009 (Note 16).



The Nama property has been impaired by $1,434 during 2009 to recognise the fact that D type anomalies       are not considered being economically viable in the near term. All costs associated with exploring these anomalies have been identified and written off.



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

20092008$$Continuing operation839732Accretion expense2519Increase in asset retirement obligation592-Foreign exchange loss (gain)(50)88Closing balance  continuing operations1,406839Discontinued operationsOpening balance314311Accretion expense1120Sale of Barbrook Mine-(107)Foreign exchange loss (gain)(1)90Closing balance  held for sale324314




The asset retirement obligations relate to Blanket Mine $1,406 ($839  2008), and Eersteling Gold Mine $324 ($314 - 2008) and are estimates of costs of rehabilitation at the end of the mine life. The obligation at Eersteling is accreted at a rate of 5% per annum whilst at Blanket the accretion is within a range of 1.7% - 5%.  The undiscounted obligation for the Blanket Mine is $1,869 ($1,280 - 2008). During the year the expected life of the Blanket Mine has been extended by one year.













18







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









5.

Shareholders Equity

(a) Share Capital



Authorized

An unlimited number of common shares

An unlimited number of preference shares.

Issued

|                                            |                  |        
|------------------------------------------- | ---------------- | -------
|                                            | Number of Shares | Amount 
|Common shares                               |                  | $      
|Balance - December 31 , 2006                | 457,981,021      | 190,626
|Warrants exercised (i)                      | 29,888,259       | 4,380  
|Balance - December 31 , 2007                | 487,869,280      | 195,006
|Issued pursuant to a private placement (ii) | 12,300,000       | 1,119  
|Balance - December 31 , 2008 and 2009       | 500,169,280      | 196,125



(i)

In April and May 2007, shareholders holding 29,888,259 warrants at $0.15 each exercised the warrants raising $4,380 after expenses.

(ii)

In February 2008 the Corporation, in a private placement, raised $1,119 after expenses from the sale of 12,300,000 units.  Each unit consists of one common share and one common share purchase warrant at $0.15 exercisable before February 21, 2009.  These warrants expired unexercised on February 21, 2009.



(b)

Stock Option Plans and Equity Based Compensation



The Corporation has established incentive stock option plans (the "Plans") for employees, officers, directors, consultants and other service providers. Under the current plan the maximum term of the options is 5 years.  Under the Plans the aggregate number of shares that may be issued will not exceed 10% of the number of the shares issued of the Corporation and, as at December 31, 2009, the Corporation has the following options outstanding:



|                  |                  |                  
|----------------- | ---------------- | -----------------
|Number of Options | Exercise Price-$ | Expiry Date      
|9,450,000         | 0.235            | April 24, 2012   
|210,000           | 0.260            | April 29, 2014   
|4,000,000         | 0.110            | February 15, 2015
|300,000           | 0.125            | May 11, 2016     
|1,300,000         | 0.1125           | May 31, 2012     
|1,000,000         | 0.155            | July 1, 2013     
|15,820,000        | 0.155            | Mar 18, 2013     
|500,000           | 0.10             | Mar 23, 2014     
|32,580,000        | 0.1706           |                  











19







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





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, 2006                 | 17,238,000        | 0.21                        
|Forfeited or expired                                     | (150,000)         | (0.115)                     
|Granted                                                  | 200,000           | 0.11                        
|Granted                                                  | 1,300,000         | 0.1125                      
|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           | 0.155                       
|Forfeited or expired                                     | (2,050,000)       | 0.187                       
|Options outstanding and exercisable at December 31, 2009 | 32,580,000        | 0.1706                      



The weighted average remaining contractual life of the outstanding options is 3.2 years (2008  4.1 years)



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. As of December 31, 2009 there are 17,436,928 stock options available to grant.



It was announced in a press release on September 4, 2009 that the Board has approved a proposal to reduce the exercise price of 32,580,000 share purchase options currently outstanding from exercise prices averaging approximately $0.1706 per share to $0.07 per share.  These share purchase options are in favour of directors, officers, and service providers.  This reduction recognises the fact that the existing options are all substantially out of the money due to the reduced trading price of Caledonias shares which, in common with most other publicly traded shares, has been adversely affected by the recent economic and market downturn.  The existing option arrangement no longer provides an incentive to directors, officers, and service providers and is the reason for this proposal.  The Toronto Stock Exchange rules require that options with reduced exercise prices cannot be exercised at the reduced prices until the reduction has been approved by the shareholders.  The reduction will be submitted to the shareholders for approval at the next general meeting of Caledonias shareholders.





During 2009, total equity based compensation expense of $49 was charged to expense and credited to contributed surplus (2008 - $862 and 2007 - $51). The weighted average grant date fair value of equity based compensation was $22 for the 500,000 fully vested options granted in 2009.



The fair value of compensation expenses noted above was estimated using the Black-Scholes Option Pricing Model with the following assumptions for the periods ended December 31, 2009, 2008 and 2007.















20







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





|                                |        |        |         
|------------------------------- | ------ | ------ | --------
|                                | 2009   | 2008   | 2007    
|Risk-free interest rate         | 2%     | 3%     | 3  4%  
|Expected dividend yield         | Nil    | Nil    | Nil     
|Expected stock price volatility | 58-60% | 55-62% | 60  65%
|Expected option life in years   | 5      | 5      | 3  5   



Option pricing models require the input of highly subjective assumptions including the expected price volatility.  Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Corporations stock options.



(c)

Warrants



There are no common share purchase warrants pursuant to private placements which are outstanding as of December 31, 2009:

The continuity of warrants issued and outstanding is as follows:



|                                     |                   
|------------------------------------ | ------------------
|                                     | Number of Warrants
|Outstanding December 31, 2006        | 85,115,885        
|Exercised                            | (29,888,259)      
|Expired                              | (39,790,000)      
|Outstanding December 31, 2007        | 15,437,626        
|Expired                              | (15,437,626)      
|Issued pursuant to private placement | 12,300,000        
|Outstanding December 31, 2008        | 12,300,000        
|Expired                              | (12,300,000)      
|Outstanding December 31, 2009        | -                 



Warrants expired unexercised on February 21, 2009.



(d)

Contributed Surplus



|                             |       |      
|---------------------------- | ----- | -----
|                             | 2009  | 2008 
|                             | $     | $    
|Balance at beginning of year | 1,902 | 1,040
|Equity based compensation    | 49    | 862  
|Balance at end of year       | 1,951 | 1,902



(e)

Accumulated Other Comprehensive Income



|                                   |           |          
|---------------------------------- | --------- | ---------
|                                   | 2009      | 2008     
|                                   | $         | $        
|Investments revalued to fair value | 50        | 3        
|Cumulative translation account     | (600)     | -        
|                                   | (550)     | 3        
|Deficit                            | (180,784) | (176,834)
|Balance at end of year             | (181,334) | (176,831 











21







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007



6.

Income Taxes

The following table reconciles the expected income tax expense at the Canadian statutory income tax rate to the amounts recognized in the consolidated statements of operations for continuing operations:



|                                                     |         |         |        
|---------------------------------------------------- | ------- | ------- | -------
|                                                     | 2009    | 2008    | 2007   
|Income tax rate                                      | 33.0%   | 33.5%   | 36.12% 
|                                                     | $       | $       | $      
|Income taxes (recovery) at statutory rate            | (961)   | (1,436) | (1,409)
|Tax rate difference                                  | 405     | 259     | 541    
|Foreign currency difference                          | 271     | 83      | 0      
|Permanent differences                                | 220     | 87      | 36     
|Interest at special rates subject to withholding tax | -       | -       | 5      
|Losses expired                                       | 1,192   | (576)   | 216    
|Change in tax rate                                   | 1,322   | 186     | 1,153  
|Change in valuation allowance                        | (1,590) | 1,397   | (537)  
|Income tax                                           | 859     | -       | 5      





The following table reflects future income tax assets and liabilities and are classified as current and non-current according to the classification of the related asset or liability for financial reporting.



|                                    |                                       |         |          |         
|----------------------------------- | ------------------------------------- | ------- | -------- | --------
|                                    |                                       | 2009    | 2008     | 2007    
|                                    |                                       | $       | $        | $       
|Future Tax Asset                    |                                       |         |          |         
|Current                             |                                       |         |          |         
|Zimbabwe                            |                                       |         |          |         
|                                    | Loss carried forward                  | 23      | -        | -       
|Total current future tax asset      | 23                                    | -       | -       
|                                    | Less: Future tax liability            | (23)    | -        | -       
|                                    |                                       | -       | -        |         
|Non-current                         |                                       |         |          |         
|Zimbabwe                            |                                       |         |          |         
|                                    | Loss carried forward                  | -       | -        | 38      
|                                    | Rehabilitation costs                  | 152     | 91       | 137     
|                                    | Other                                 | 33      | 507      | 71      
|South Africa                        |                                       |         |          |         
|                                    | Loss carried forward                  | 947     | 798      | 678     
|Canada                              |                                       |         |          |         
|                                    | Loss carried forward                  | 8,761   | 10,613   | 9,465   
|Other                               |                                       | 70      | 304      | 178     
|                                    | Non-current future tax assets         | 9,963   | 12,313   | 10,567  
|                                    | Less: valuation allowance             | (9,777) | (11,367) | (10,564)
|Total Non- current future tax asset | 186                                   | 946     | 3       
|                                    | Less: Future tax liability            | (186)   | (946)    | (3)     
|                                    |                                       | -       | -        | -       
|Future tax liability                |                                       |         |          |         
|Zimbabwe                            |                                       |         |          |         
|                                    | Capital assets and mineral properties | (1,068) | (597)    | (3)     
|Other                               |                                       | -       | (349)    | -       
|Total future tax liability          | (1,068)                               | (946)   | (3)     
|                                    | Less: Future tax assets               | 209     | 946      | 3       
|Net future tax liability            | 859                                   | -       | -       









22





---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





The Corporation has available tax losses for income tax purposes of approximately $35,630 (2008 - $36,985 and 2007 - $32,830) in Canada and South Africa which may be carried forward to reduce taxable income derived in future years.



The expiry of these losses is as follows:

|          |       
|--------- | ------
|Year      | Amount
|          | $     
|2029      | 1,630 
|2028      | 2,260 
|2027      | 3,054 
|2026      | 2,780 
|2015      | 1,863 
|2014      | 1,583 
|2010      | 18,984
|          |       
|No expiry | 3,476 
|          | 35,630



A valuation allowance has been provided as the potential income tax benefits of these carry-forward non-capital losses and deductible temporary differences and the realization thereof is not considered more likely than not.



The Corporation also has approximately $70,713 in capital losses which can be applied to reduce future capital gains.  The right to claim these capital losses is carried forward indefinitely but can only be claimed against capital gains. The Corporation also has the following expenses which are available to be applied against future income for income tax purposes:



|                                              |      
|--------------------------------------------- | -----
|Canadian exploration and development expenses | 7,560
|Foreign exploration and development expenses  | 1,811



For discontinued operations, the Corporations effective tax rate, which differs from the Canadian statutory income tax rate, may be reconciled as follows:



|                                         |      |       |      
|---------------------------------------- | ---- | ----- | -----
|                                         | 2009 | 2008  | 2007 
|                                         | $    | $     | $    
|Basic rate applied to pre-tax loss       | (59) | (219) | (256)
|Losses and other benefits not recognised | 59   | 219   | 256  
|                                         | -    | -     | -    





7.

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 fiscal years which amounted to 500,169,280 (2008 -498,450,650; 2007 - 477,930,290;).  Fully diluted income/(loss) per share have not been calculated as it would be anti-dilutive.   The fully diluted number of shares amounts to 500,129,280 (2008 - 499,217,712 and 2007 - 478,553,886). This is the same as the outstanding shares as all the options are out of the money.











23







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









8.

Other Expense (Income)



Other expense (income) is comprised of the following:

|                                                                                                               |       |      |     
|-------------------------------------------------------------------------------------------------------------- | ----- | ---- | ----
|                                                                                                               | 2009  | 2008 | 2007
|                                                                                                               | $     | $    | $   
|Adjustment to RBZ Gold Bond (Note 10)                                                                          | 2,502 | 526  | -   
|Reclassification adjustment for other than temporary decline in value of short term investments held for sale. | -     | 70   | -   
|Royalty paid to the Government of Zimbabwe                                                                     | 240   | -    | -   
|Other                                                                                                          | -     | (5)  | (17)
|                                                                                                               | 2,742 | 591  | (17)



9.

Statement of Cash Flows



Items not involving cash are as follows:

|                                                                      |       |       |     
|--------------------------------------------------------------------- | ----- | ----- | ----
|                                                                      | 2009  | 2008  | 2007
|                                                                      | $     | $     | $   
|Amortization                                                          | 436   | 397   | 18  
|Asset retirement obligation accretion                                 | 36    | 39    | 35  
|Equity based compensation expense                                     | 49    | 862   | 51  
|Blanket long term liability                                           | -     | (11)  | -   
|Write down of mineral properties                                      | 1,434 | 1,168 | 750 
|Reclassification adjustment for other than temporary decline in value | -     | 70    | -   
|Write down of Gold Bond                                               | 2,502 | -(1)  | -   
|Current year future tax charge                                        | 859   | -     | -   
|Interest accrued RBZ bond                                             | (280) | -     | -   
|Unrealised foreign exchange differences                               | (207) | (297) | 54  
|                                                                      | 4,829 | 2,228 | 908 

(1)

2008 fair value adjustment of $526 included in net changes in Accounts Receivable below.



The net changes in non-cash operating account balances for operations are as follows:



|                     |         |          |        
|-------------------- | ------- | -------- | -------
|                     | 2009    | 2008     | 2007   
|                     | $       | $        | $      
|Accounts payable     | 1,311   | (1,614)  | (1,832)
|Accounts receivable  | (1,550) | (1)(423) | (651)  
|Inventories          | (1,814) | 1,026    | 3,653  
|Prepaid expenses     | 132     | (10)     | 44     
|Assets held for sale | 4       | (28)     | 104    
|                     | (1,917) | (1,049)  | 1,318  



Supplemental cash flow Information:

|                              |      |       |     
|----------------------------- | ---- | ----- | ----
|                              | 2009 | 2008  | 2007
|                              | $    | $     | $   
|Interest paid                 | 95   | 103   | 485 
|Interest received             | (79) | (488) | (31)
|Withholding tax paid Zimbabwe | -    | -     | 5   











24





---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





10.      Accounts Receivable

In the monetary policy statement announced by the Governor of the Reserve Bank of Zimbabwe (RBZ) in February 2009, the debt owing by RBZ to Blanket Mine was converted into a Special Tradable Gold-Backed Foreign Exchange Bond, with a term of 12 months and an 8% interest rate.



The Bond plus interest is guaranteed by RBZ on maturity. The Corporation was unable to sell the Bond at an acceptable discount rate during 2009 and the RBZ has not redeemed the Bond on the maturity date of February 1, 2010 but has extended the maturity date until July 31, 2010. As a result of the uncertain redemption date of the Bond it has been classified as a long term asset in 2009.



Following further unsuccessful attempts to sell the Bond the Corporation has made a provision against the Bond value to record it at an estimated recoverable amount.  In arriving at the recoverable amount the Corporation has considered the likelihood of cash being available to the RBZ to redeem the Bond over a range of periods. The Corporation believes the Bond will be repaid in due course but the timing is uncertain at this time. In arriving at this recoverable amount the Corporation has estimated the weighted average probability of the Bond being redeemed over periods of up to 5 years and applied a discount factor of 43%.



|                             |      |        
|---------------------------- | ---- | -------
|                             | 2009 | (1)2008
|                             | $    | $      
|Estimated recoverable amount | 810  | 2,890  

(1) 2008 at fair value



11.

Inventory

Inventory is comprised of gold in circuit at Blanket and consumable stores utilised by Blanket Mine.







|                                  |  |  |  |  |  |  |  |  |  |  |  |  |       |      
|--------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  | ----- | -----
|Inventory items as at December 31 |  |  |  |  |  |  |  |  |  |  |  |  | 2009  | 2008 
|                                  |  |  |  |  |  |  |  |  |  |  |  |  | $     | $    
|Consumable stores                 |  |  |  |  |  |  |  |  |  |  |  |  | 2,092 | 1,059
|Gold in circuit                   |  |  |  |  |  |  |  |  |  |  |  |  | 497   | -    
|Total                             |  |  |  |  |  |  |  |  |  |  |  |  | 2,589 | 1,059











The Corporation has a provision for slow moving inventory of $724 (2008 - $700) related to its consumable stores at Blanket Mine.



The components of operating costs were as follows



|                                                      |       |       |      
|----------------------------------------------------- | ----- | ----- | -----
|                                                      | 2009  | 2008  | 2007 
|                                                      | $     | $     | $    
|Wages                                                 | 3,194 | 1,510 | 3,125
|Consumable materials (including amounts written down) | 3,222 | 2,527 | 5,311
|Asset retirement obligation                           | 28    | 19    | 36   
|Exploration                                           | 68    | -     | -    
|Administration and safety                             | 1,711 | 382   | 1,273
|Total                                                 | 8,223 | 4,438 | 9,745











25







---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





12.

Bank Overdraft



|               |      |     
|-------------- | ---- | ----
|               | 2009 | 2008
|               | $    | $   
|Bank Overdraft | 588  | -   



The bank overdraft facility of US$1.25 million bears interest at 6% above the 30 day LIBOR rate. The facility is unsecured and valid for a 180 day period which is renewable. The facility is repayable on demand.



13.

Related Party Transactions



The Corporation had the following related party transactions measured at the exchange amount:

|                                                                                                     |      |      |     
|---------------------------------------------------------------------------------------------------- | ---- | ---- | ----
|                                                                                                     | 2009 | 2008 | 2007
|                                                                                                     | $    | $    | $   
|Fees and allowances paid to a Corporation which provides the services of the Corporation's president | 558  | 635  | 560 
|Rent for office premises paid to a company owned by members of the Presidents family                | 50   | 43   | 46  
|Interest paid to directors on outstanding fees and expenses                                          | -    | 4    | -   
|Other fees paid to Directors                                                                         | 62   | 65   | 19  
|Legal fees paid to a law firm where a Director is a partner                                          | 53   | 117  | 85  
|Fees, allowances and interest paid to the Chairman of the Board                                      | 150  | 334  | 46  



The Corporation has entered into a management agreement with Epicure Overseas S.A. (Epicure), a Panamanian corporation, for management services provided by the president.  The Corporation is required to pay a base annual remuneration adjusted for inflation and bonuses set out in the agreement. In the event of a change of control of the Corporation, Epicure can terminate the agreement and receive a lump sum payment equal to 200% of the remuneration for the year in which the change occurs.



On January 31, 2005, the Corporation entered into an agreement (the Chairmans Agreement) with the Corporations Chairman for services as the non-executive Chairman of the board of directors of the Corporation.  The Chairmans Agreement provides for the payment of an annual fee and a fee for services provided by the Chairman.  The Chairmans Agreement provides that the fees will be reviewed annually by the Chairman and the Corporations compensation committee with the object that the parties will bona fide negotiate any changes in the fees.  The Chairmans Agreement was reviewed by the Chairman and the compensation committee for the 2009 year.



These related party transactions were in the normal course of operations and are recorded at the exchange amount.  The Corporation has the following related party balances:



|                                                                                   |      |     
|---------------------------------------------------------------------------------- | ---- | ----
|                                                                                   | 2009 | 2008
|Included in accounts payable                                                       | $    | $   
|- owing to a Corporation that provides the services of the Corporations President | -    | 85  
|- owing to  directors for unpaid salaries and directors fees                      | 172  | 220 













26





---

Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007



14.

Segmented Financial Information



The Corporation has been engaged directly or through subsidiaries in the production of and the exploration for precious metals in various geographical locations.

The Corporations operating segments have been identified based on geographic areas as follows:



For the year ended December 31, 2009

|                                                                          |           |          |              |         |        
|------------------------------------------------------------------------- | --------- | -------- | ------------ | ------- | -------
|                                                                          | Corporate | Zimbabwe | South Africa | Zambia  | Total  
|                                                                          | $         | $        | $            | $       | $      
|Revenue from sales                                                        | 3         | 11,556   | -            | -       | 11,559 
|Operating costs                                                           | -         | (7,374)  | (849)        | -       | (8,223)
|General and administrative                                                | (1,750)   | (221)    | (176)        | -       | (2,147)
|Interest income                                                           | 77        | 184      | 3            | -       | 264    
|Amortization                                                              | -         | (412)    | (24)         | -       | (436)  
|Foreign exchange gains/(loss)                                             | (14)      | (103)    | 390          | (25)    | 248    
|Write down of mineral property                                            | -         | -        | -            | (1,434) | (1,434)
|Other income (expense)                                                    | -         | (2,742)  | -            | -       | (2,742)
|Income (loss) for continuing operations                                   | (1,684)   | 888      | (656)        | (1,459) | (2,911)
|Discontinued operations (loss)                                            | -         | -        | (180)        | -       | (180)  
|Income tax expense                                                        | -         | (859)    | -            | -       | (859)  
|Net income (loss) for the year                                            | (1,684)   | 29       | (836)        | (1,459) | (3,950)
|Identifiable assets  continuing operations                               | 1,217     | 10,231   | 4,925        | 4,945   | 21,318 
|Identifiable assets  discontinued operations Capital and Current assets  | -         | -        | 772          | -       | 772    
|Expenditures on capital assets & mineral properties continuing operations | -         | 860      | 71           | 616     | 1,547  



For the year ended December 31, 2008

|                                                                          |           |          |              |         |        
|------------------------------------------------------------------------- | --------- | -------- | ------------ | ------- | -------
|                                                                          | Corporate | Zimbabwe | South Africa | Zambia  | Total  
|                                                                          | $         | $        | $            | $       | $      
|Revenue from sales                                                        | 12        | 7,684    | -            | -       | 7,696  
|Operating costs                                                           | -         | (3,855)  | (583)        | -       | (4,438)
|General and administrative                                                | (3,670)   | (73)     | (153)        | -       | (3,896)
|Interest income                                                           | 299       | 78       | 8            | -       | 385    
|Amortization                                                              | -         | (381)    | (16)         | -       | (397)  
|Foreign exchange gains/(loss)                                             | 237       | (1,899)  | (102)        | (112)   | (1,876)
|Write down of mineral property                                            | -         | -        | (124)        | (1,044) | (1,168)
|Other income (expense)                                                    | (70)      | (526)    | 5            | -       | (591)  
|Income (loss) for continuing operations                                   | (3,192)   | 1,028    | (965)        | (1,156) | (4,285)
|Discontinued operations (loss)                                            | -         | -        | (655)        | -       | (655)  
|Income tax expense                                                        | -         | -        | -            | -       | -      
|Net income (loss) for the year                                            | (3,192)   | 1,028    | (1,620)      | (1,156) | (4,940)
|Identifiable assets  continuing operations                               | 3,658     | 8,798    | 4,597        | 5,817   | 22,870 
|Identifiable assets  discontinued operations Capital and Current assets  | -         | -        | 787          | -       | 787    
|Expenditures on capital assets & mineral properties continuing operations | -         | 90       | 253          | 2,680   | 3,023  









27





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







For the year ended December 31, 2007

|                                                                          |           |          |              |        |        
|------------------------------------------------------------------------- | --------- | -------- | ------------ | ------ | -------
|                                                                          | Corporate | Zimbabwe | South Africa | Zambia | Total  
|                                                                          | $         | $        | $            | $      | $      
|Revenue from sales                                                        | 5         | 10,034   | -            | -      | 10,039 
|Operating costs                                                           | -         | (9,288)  | (457)        | -      | (9,745)
|General and administrative                                                | (1,697)   | (151)    | (275)        | -      | (2,123)
|Interest income (expense)                                                 | 5         | (316)    | 2            | -      | (309)  
|Amortization                                                              | -         | (4)      | (14)         | -      | (18)   
|Write off of mineral property                                             | (750)     | -        | -            | -      | (750)  
|Other income (expense) incl. foreign exchange gains/(loss)                | (6)       | (1,811)  | 786          | 36     | (995)  
|Income (loss) for continuing operations                                   | (2,443)   | (1,536)  | 42           | 36     | (3,901)
|Discontinued operations (loss)                                            |           |          | (709)        |        | (709)  
|Income tax expense                                                        |           | (5)      |              |        | (5)    
|Net income (loss) for the year                                            | (2,443)   | (1,541)  | (667)        | 36     | (4,615)
|Identifiable assets  continuing operations                               | 106       | 9,257    | 4,415        | 4,124  | 17,902 
|Identifiable assets  discontinued operations Capital and Current assets  | -         | -        | 11,590       | -      | 11,590 
|Expenditures on capital assets & mineral properties continuing operations | -         | 616      | 164          | 2,470  | 3,250  



15.

Contingent Liabilities



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 December 31, 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 when enacted, 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.



The Corporation and its subsidiaries are subject to various claims that arise in the normal course of business. Management believes that the aggregate contingent liability of the Corporation arising from these claims is immaterial and therefore no provision has been made.

16.

Comparative Figures



Comparative figures for 2008 have been restated due to an under accrual in 2008 of capitalised mineral property exploration costs and the respective liability. The under accrual occurred due to late invoicing by the contractor for work performed in November and December 2008. The effect was that mineral property was increased by $310, accounts receivable for VAT was increased by $49 and accounts payable was increased by $359.

In addition the prior period figures have been reclassified to conform to the current presentation.









28



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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









17.

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 fair value of the Corporations financial instruments approximates their carrying value unless otherwise noted. The types of risk exposure and the way in which such exposures are managed are as follows:



(a) 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.

As noted below, the Corporation has certain financial assets and liabilities denominated in foreign currencies. 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 exchange rates relative to the Canadian dollar. The values are the Canadian dollar equivalent of the respective asset or liability that is denominated in a currency other than the Canadian dollar.



|                    |            |          |            |         
|------------------- | ---------- | -------- | ---------- | --------
|                    | 2009       | 2008    
|C$000s             | US Dollars | SA  Rand | US Dollars | SA  Rand
|Cash                | 1,230      | 40       | 1          | 1,386   
|Bank overdraft      | 588        | -        | -          | -       
|Accounts receivable | 2,122      | 233      | 3,187      | 197     
|Accounts payable    | 1,658      | 689      | -          | 64      



The table below illustrates by how much a 5% change in the rate of exchange between the Canadian dollar and the currencies above will affect net income.

|                    |            |          |            |         
|------------------- | ---------- | -------- | ---------- | --------
|                    | 2009       | 2008    
|C$000s             | US Dollars | SA  Rand | US Dollars | SA  Rand
|Cash                | 59         | 2        | -          | 69      
|Bank overdraft      | 29         | -        | -          | -       
|Accounts receivable | 106        | 11       | 159        | 10      
|Accounts payable    | 83         | 33       | -          | 3       









29





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





(b) 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 apart from short term borrowings utilized in Zimbabwe.  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 high credit quality financial institutions.



Cash held in foreign banks is subject to the interest rates ruling in those particular countries and this can have an effect on the results of the Corporation due to higher interest rates being paid in African countries compared to Canada. Cash held in interest bearing accounts amounted to $1,622 ($3,451- 2008) and short term borrowings in Zimbabwe were $588 (Nil  2008). At December 31, 2009, with all other variables unchanged, a 1% change in interest rates would result in an increase of interest expense of $6 ($35 income  2008).

The interest payable by RBZ on the Bonds is subject to the same recovery risk as the principle amount. The estimated recoverable amount includes a discounted amount for interest receivable on the Bond.

Fluctuations in market interest rates have not had a significant impact on the Corporations results of operations.

(c) 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 Gold Bonds payable by the RBZ as the amount owing by the RBZ is no longer increasing as gold is no longer sold to the RBZ. Future credit exposure to RBZ is limited to the recovery of the value of the Gold Bonds.

Current gold sales are made to Rand Refineries in South Africa and the payment terms are stipulated in the service delivery contract and are adhered to in all instances.



(d) 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 its likely cash 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 anticipated 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.

Since the inception of dollarization in Zimbabwe certain insurance cover has been reinstated. The Zimbabwean operations are now covered for Public Liability risk and Comprehensive cover on all
motor vehicles. Further insurance cover is currently under review.







30







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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









(e) 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.

As Blanket has a license to export its gold to a refiner of its choice it is paid full value in USD for the gold sold.

18.       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 shareholders equity, comprising issued common shares, contributed surplus, accumulated deficit and accumulated other comprehensive income.

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, accommodate any asset retirement obligation and to pursue growth opportunities.

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



As at December 31, 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.



|                                               |                         |                        
|---------------------------------------------- | ----------------------- | -----------------------
|Shareholders Equity                          
|                                               | As at December 31, 2009 | As at December 31, 2008
|Issued common shares                           | 196,125                 | 196,125                
|Contributed surplus                            | 1,951                   | 1,902                  
|Accumulated  Other comprehensive income/(loss) | (550)                   | 3                      
|Deficit                                        | (180,784)               | (176,834)              
|Total                                          | 16,742                  | 21,196                 



The increase in accumulated other comprehensive loss is attributable to the adoption of the current rate method of translation of the Zimbabwean operations from US dollars into Canadian dollars as explained in Foreign Currency Translations policy. During 2009 $600 (Nil 2008) was charged to other comprehensive income as a result of the translation of Blanket.











31





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007



19.

Defined Contribution Plan



Under the terms of the Mining Industry Pension Fund (Fund) in Zimbabwe eligible employees contribute a fixed percentage of their eligible earnings to the Fund. Blanket makes a matching contribution plus an inflation levy as a fixed percentage of eligible earnings of these employees. The total contribution by Blanket for the year ended December 31, 2009 was $121.



20.

Subsequent Events



Zimbabwe Monetary Policy announcement.



In January 2010, the Governor of RBZ announced that the Special Tradable Gold-backed Foreign Exchange Bonds (Bond) that were created in February 2009 would not be repaid on maturity date of February 1, 2010 but would be rolled over until July 31, 2010.



As a consequence of this action and the lack of a market for the sale of the Bond an estimated recoverable amount has been calculated for the Bond due to the uncertainty of the eventual timing of redemption (see Note 10).



Zimbabwean Indigenization.



In 2008 the Zimbabwean parliament passed the Indigenization and Economic Empowerment Act 2007 (Act) that stipulated that 51% ownership of all companies had to reside in the hands of Indigenous

Zimbabwean citizens. In February 2010, Statutory Instrument 21 of 2010 was released which dealt with the regulations around the implementation of the Act. In terms of the regulations Blanket will have to submit an implementation plan which outlines how Blanket proposes to comply with the requirements of the Act within a 5 year period. The release of the Statutory Instrument has drawn substantial criticism and sector organisations are making representations to Government on the indigenisation issue.



Blanket will continue to monitor the situation and is consulting widely on this issue.





21.

Generally Accepted Accounting Principles in Canada and the United States



The Corporations accounting policies do not differ materially from accounting principles generally accepted in the United States ("US GAAP") except for the following:



(a)

Mineral Properties



US GAAP requires that expenditures on mineral properties with no proven reserves be reflected as expenses in the period incurred.



Comparative figures for 2008 have been restated due to an under accrual in 2008 of capitalized mineral property expenditure costs and the respective liability. The effect under US GAAP was that mineral property expenditure reflected as an expense was increased by $310, accounts receivable for VAT was increased by $49, accounts payable was increased by $359 and the net loss for 2008 was increased by $310. There was no effect on the loss per share amounts.













32







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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





(b)    Employee and Directors Stock Options



Effective January 1, 2003, the Corporation has, for US reporting purposes, prospectively applied the fair-value recognition provisions of Accounting Standards Codification Topic 718. Under Canadian GAAP, effective January 1, 2002 on a prospective basis, the Corporation adopted the CICA policy of accounting for stock based compensation. Prior to adoption no compensation expense on stock options granted to directors, officers and employees, was recorded. However, disclosure of the effects of accounting for the compensation expense, utilizing the fair value method estimated using the Black-Scholes Option Pricing Model, was disclosed as pro-forma information. For 2002, a compensation expense was shown reflecting the intrinsic value attributable to stock options granted to directors, officers and employees.



Under Canadian GAAP, effective January 1, 2003 on a prospective basis, the Corporation commenced the expensing of all stock based compensation for new stock option grants applying the fair value method estimated by using the Black-Scholes Option Pricing Model.



(c)

Warrants



In 2007 the expiry period of certain warrants was extended. Under US GAAP the fair value of the warrants extended are considered to be a benefit awarded to certain shareholders. This would be considered to be a deemed dividend to these shareholders. The fair value of the warrants was calculated using the Black-Scholes Option Pricing Model. The assumptions used in the calculation are: Risk free interest rate  3%; Expected dividend yield  nil; Expected stock volatility  62%; Expected warrant life in years  0.178.

Recently Issued United States Accounting Standards

Effective July 1, 2009, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) became the single official source of authoritative, non-governmental U.S. GAAP. The historical U.S. GAAP hierarchy was eliminated and the ASC became the only level of authoritative U.S. GAAP, other than guidance issued by the SEC. The Corporations accounting policies were not affected by the conversion to ASC.

Business Combinations

In April 2009, the FASB issued a pronouncement on what is now codified as ASC Topic 805, Business Combinations. This pronouncement issued authoritative guidance on accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies, which amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under previously issued guidance. The authoritative guidance requires that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. The new guidance is effective as of the beginning of an entitys fiscal year that begins after December 15, 2008, and was adopted by the Corporation on January 1, 2009. The adoption of this new guidance had no material impact on the Corporations financial position, results of operations or cash flows.

Financial instruments



33





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









In April 2009, the FASB issued a pronouncement on what is now codified as ASC Topic 825, Financial Instruments. This pronouncement issued new accounting guidance addressing the interim disclosures
about the fair value of financial instruments, which amended the previous disclosures regarding the fair value of financial instruments, and interim financial reporting. This new guidance requires disclosures
about the fair value of financial instruments in interim financial statements, in addition to the annual financial statements as already required. This new accounting guidance became effective for interim periods ending after June 15, 2009. The adoption of this new guidance had no material impact on the Corporations financial position, results of operations or cash flows.

Subsequent Events

In May 2009, the FASB issued a pronouncement on what is now codified as ASC Topic 855, Subsequent Events. This pronouncement issued authoritative guidance in accounting for subsequent events which establishes general standards of accounting for and disclosures of events that occur after balance sheet date but before financial statements are issued or are available to be issued.

Specifically, ASC Topic 855 provides:



?

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;



?

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and



?

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

This accounting guidance was effective for interim or fiscal periods ending after June 15, 2009 and was adopted by the Corporation during the quarter ended June 30, 2009. This guidance did not have a material impact on the Corporations financial position, results of operations, or cash flows.

The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

In June 2009, the FASB issued ASC Topic 105-10, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" which established the FASB Accounting Standards Codification (the Codification) as the single source of authoritative GAAP to be applied by nongovernmental entities. The Codification is a new structure which took existing accounting pronouncements and organized them by accounting topic. Relevant authoritative literature issued by the Securities and Exchange Commission (SEC) and select SEC staff interpretations and administrative literature was also included in the Codification. All other accounting guidance not included in the Codification is non-authoritative. The Codification was effective for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have an impact on the Corporations consolidated financial position, results of operations or cash flows.

Measuring Liabilities at Fair Value

OnAugust 28, 2009, the FASB issued Accounting Standards Update (ASU) 2009-05,Measuring Liabilities at Fair Value.TheASU provides guidance on how to measure the fair value of liabilities when observable market information is not available. If a quoted price in an active market for an identical liability is available it should be used to value the liability. In circumstances when a quotedprice in an active market for an identical liability is not available, the ASU requires that the fair value of the liability be measured using one or more of the following techniques:



34









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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007









·

A valuation technique that uses:



o

The quoted price of the identical liability when traded as an asset



o

Quoted prices for similar liabilities or similar liabilities when traded as assets



·

Another valuation technique that is consistent with the principles of ASC Topic 820, Fair Value Measurements and Disclosures, such as an income approach or a market approach.

When using the quoted price of an identical liability when traded as an asset, an entity:



·

Should  adjust for factors that are not applicable to the fair value of the asset price of the liability (e.g., the quoted price of the asset includes the effect of third-party credit guarantees)



·

Should not adjust the asset price for the effect of a restriction preventing the sale of the asset.

If a quoted price for an identical liability when traded as an asset in an active market is available, the asset price is considered to be a Level 1 fair value measurement for the liability, provided that no adjustment(s) to the quoted price of the asset is required.

The ASU is effective for the first reporting period (including interim periods) beginning after issuance. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Corporations financial position, results of operations, or cash flows

Fair Value Measurements and Disclosures

On November 1, 2009, the Corporation adopted authoritative guidance for fair value measurements which is now codified as ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This authoritative guidance addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The adoption of this guidance did not have a material impact on the Corporations financial position, results of operations, or cash flows.

Other recent accounting pronouncements

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force) and the United States Securities and Exchange Commission did not or are not believed to have a material impact on the Corporation's present or future consolidated financial position.



















35









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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007







The impact of the foregoing on the consolidated financial statements is as follows:



(a)

Statement of operations and comprehensive income



|                                                                                                     |         |           |        
|---------------------------------------------------------------------------------------------------- | ------- | --------- | -------
|                                                                                                     | 2009    | 2008      | 2007   
|                                                                                                     | $       | $         | $      
|                                                                                                     |         | (Restated |        
|                                                                                                     |         | Note 16)  |        
|Loss for continuing operations per Canadian GAAP                                                     | (3,770) | (4,285)   | (3,906)
|Mineral property expenditure with no proven reserves (expensed) or previously expensed under US GAAP | 774     | (2,188)   | (2,633)
|Net income (loss) from continuing operations                                                         | (2,996) | (6,473)   | (6,539)
|Loss from discontinued operations                                                                    | (180)   | (655)     | (709)  
|Net income (loss)                                                                                    | (3,176) | (7,128)   | (7,248)
|Deemed Dividend                                                                                      | -       | -         | (134)  
|Net income (loss) available for common shareholders                                                  | (3,176) | (7,128)   | (7,382)
|Net income (loss)                                                                                    | (3,176) | (7,128)   | (7,248)
|Other comprehensive (loss)/gain                                                                      | 47      | 60        | (88)   
|Translation loss at Blanket Mine                                                                     | (600)   | -         | -      
|Total comprehensive loss                                                                             | (3,729) | (7,068)   | (7,336)
|Basic and diluted income/(loss) per share continuing operations                                      | (0.006) | (0.013)   | (0.01) 
|Basic and diluted income/(loss) per share  discontinued operations                                   | (0.000) | (0.001)   | (0.00) 
|Basic and diluted income/(loss) per share for the year                                               | (0.006) | (0.014)   | (0.01) 

(b)

Balance Sheets



|                                                     |         |          
|---------------------------------------------------- | ------- | ---------
|                                                     | 2009    | 2008     
|                                                     | $       | $        
|                                                     |         | (Restated
|                                                     |         | Note 16) 
|Total assets per Canadian GAAP                       | 22,090  | 23,657   
|Mineral properties with no proven reserves expensed  | (9,399) | (10,173) 
|Total assets per US GAAP                             | 12,691  | 13,484   
|                                                     |         |          
|Total liabilities per Canadian and US GAAP           | 5,348   | 2,461    
|                                                     |         |          
|Shareholders equity                                 |         |          
|Shareholders equity per Canadian GAAP               | 16,742  | 21,196   
|Mineral properties with no proven reserves expensed  | (9,399) | (10,173) 
|Shareholders equity per US GAAP                     | 7,343   | 11,023   
|                                                     |         |          
|Total liabilities & shareholders equity per US GAAP | 12,691  | 13,484   











36





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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





(c)     Statement of Cash Flows



|                                                                          |         |           |        
|------------------------------------------------------------------------- | ------- | --------- | -------
|                                                                          | 2009    | 2008      | 2007   
|Cash provided by (used in)                                                | $       | $         | $      
|                                                                          |         | (Restated |        
|                                                                          |         | Note 16)  |        
|Operating activities for continuing operations per Canadian GAAP          | (858)   | (3,106)   | (1,680)
|Mineral properties expenditure by continuing operations                   | (660)   | (2,188)   | (2,633)
|Operating activities per US GAAP                                          | (1,518) | (5,294)   | (4,313)
|                                                                          |         |           |        
|Investment activities for continuing operations per Canadian GAAP         | (1,547) | 6,336     | (3,250)
|Mineral properties expenditure                                            | 660     | 2,188     | 2,633  
|Investment activities per US GAAP                                         | (887)   | 8,524     | (617)  
|                                                                          |         |           |        
|Financing Activities per Canadian and US GAAP                             | 588     | 1,106     | 4,393  
|                                                                          |         |           |        
|Effects of foreign currency translations on cash per Canadian and US GAAP | (35)    | (112)     | (7)    
|                                                                          |         |           |        
|Increase (decrease) in cash for continuing operations                     | (1,852) | 4,224     | (544)  
|                                                                          |         |           |        
|Cash flow from discontinued operations per Canadian and US GAAP           |         |           |        
|Operating activities                                                      | (179)   | (646)     | (680)  
|Investment activities                                                     | -       | -         | -      
|Financing activities                                                      | -       | -         | 6      
|Effects of foreign currency translations on cash                          | -       | -         | (4)    
|Decrease in cash from discontinued operations                             | (179)   | (646)     | (678)  
|                                                                          |         |           |        
|                                                                          |         |           |        
|Increase (decrease) in cash for the year                                  | (2,031) | 3,578     | (1,222)
|Cash and cash equivalents, beginning of year                              | 3,654   | 76        | 1,298  
|Cash and cash equivalents, end of year                                    | 1,623   | 3,654     | 76     
|                                                                          |         |           |        
|Cash and cash equivalents at end of year relate to:                       |         |           |        
|Continuing operations                                                     | 1,622   | 3,652     | 76     
|Discontinued operations                                                   | 1       | 2         | -      
|                                                                          | 1,623   | 3,654     | 76     











37









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Caledonia Mining Corporation

Summary of Significant Accounting Policies

(in thousands of Canadian Dollars)December 31, 2009, 2008 and 2007





























| |  | 
| |  | 





CALEDONIA MINING CORPORATION









38





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Notice of Annual General and Special

Meeting of Shareholders

to be held May 18, 2010







Proxy and Information Circular





[caledonia20fa03212011002.gif]















CALEDONIA MINING COMPANY



April 15, 2010

































39





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INFORMATION CIRCULAR



SOLICITATION OF PROXIES



This Management Proxy Circular is furnished in connection with the solicitation by and on behalf of the management of Caledonia Mining Company (the "Company") of proxies to be used at the Annual General and Special Meeting (the "Meeting") of Shareholders of the Company to be held on Tuesday, May 18, 2010 at 10.00 am local time, in Boardroom 44-01, 44th Floor, Scotia Plaza, 40 King Street West, Toronto, Ontario, Canadafor the purposes set forth in the accompanying notice of meeting.  It is expected that the solicitation will be primarily by mail but proxies may also be solicited personally or by telephone by employees or agents of the Company.  The cost of any such solicitation by management will be borne by the Company.



APPOINTMENT AND REVOCATION OF PROXIES



The persons named in the enclosed form of proxy are directors of the Company.  A shareholder desiring to appoint some other person to represent him at the Meeting may do so by inserting such person's name, which need not be a shareholder of the Company, in the blank space provided in the form of proxy and striking out the names of the persons specified or by completing another proper form of proxy.In all cases, the completed proxy is to be deposited at, or supplied to, the registered office of the Company or at the offices of Equity Transfer & Trust Company, Suite 400, 200 University Avenue, Toronto, Ontario, M5H 4H1 not later than 4:30 p.m. (Toronto, Canada local time) on Friday, May 14, 2010.



A shareholder giving a proxy has the right to revoke the proxy by instrument in writing executed by the shareholder or by the shareholder's attorney authorized in writing and deposited at the registered office of the Company at any time up to and including the last business day preceding the date of the Meeting, or any adjournment thereof, at which the proxy is to be used, or with the Chairman of the Meeting on the date of the Meeting, or any adjournment thereof, or in any other manner permitted by law.



EXERCISE OF DISCRETION BY PROXIES



The persons named in the enclosed form of proxy will vote the shares in respect of which they are appointed in accordance with the direction of the shareholders appointing them.  In the absence of such direction, such shares will be voted FOR  all of the matters referred to in the Notice of Meeting and the re-election of the existing Directors and the election of any new directors.



The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to any amendments or variations to matters identified in the notice of meeting and with respect to other matters which may properly come before the Meeting.  At the time of printing this management proxy circular, management of the Company knows of no such amendments, variations or other matters to come before the Meeting.









40





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VOTING SHARES AND PRINCIPAL HOLDERS THEREOF





On April 15, 2010, the Company had issued and outstanding 500,169,280 common shares, each carrying the right of one vote per share.  To the best of the knowledge of the directors and officers of the Company, no person beneficially owns, directly or indirectly, or exercises control or direction over, shares carrying more than 10% of the votes attached to all issued shares of the Company.



The Board of Directors of the Company has fixed the record date as April 12, 2010 for the purpose of determining who is entitled to receive Notice of Meeting.  Shareholders entitled to vote at the meeting will be the shareholders of record at  4:30 p.m. (Toronto, Ontario time) on May 14, 2010.  The failure of any shareholder to receive notice of the Meeting shall not deprive the shareholder of voting at the Meeting.



NON-REGISTERED SHAREHOLDERS



Only registered shareholders or duly appointed proxyholders are permitted to vote at the Meeting.  Most shareholders of the Company are non-registered shareholders because the shares they own are not registered in their names but are instead registered in the name of the brokerage firm, bank or trust company through which they purchased the shares.  More particularly, a person is not a registered shareholder in respect of shares which are held on behalf of that person (the Non-Registered Holder) but which are registered either: (a) in the name of an intermediary (an Intermediary) that the Non-Registered Holder deals with in respect of the shares (Intermediaries include, among others, banks, trust companies, securities dealers or brokers and trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans); or (b) in the name of a clearing agency (such as The Canadian Depository for Securities Limited [CDS]) of which the Intermediary is a participant.  In accordance with the requirements as set out in National Instrument 54-101 of the Canadian Securities Administrators, the Company has distributed copies of the Notice of Meeting, this Information Circular and the form of Proxy (collectively, the Meeting Materials) to the clearing agencies and Intermediaries for onward distribution to Non-Registered Holders.



Intermediaries are required to forward the Meeting Materials to Non-Registered Holders unless a Non-Registered Holder has waived the right to receive them.  Very often, Intermediaries will use service companies to forward the Meeting Materials to Non-Registered Holders.  Generally, Non-Registered Holders who have not waived the right to receive Meeting Materials will either:



(a)

be given a form of proxy which has already been signed by the Intermediary (typically by a facsimile, stamped signature), which is restricted as to the number of shares beneficially owned by the Non-Registered Holder but which is otherwise not completed.  Because the Intermediary has already signed the form of proxy, this form of proxy is not required to be signed by the Non-Registered Holder when submitting the proxy.  In this case, the Non-Registered Holder who wishes to submit a proxy should otherwise properly complete the form of proxy and deposit it with the Companys Registrar and Transfer Agent as provided above; or



(b)

more typically, be given a voting instruction form which is not signed by the Intermediary, and which, when properly completed and signed by the Non-Registered Holder and returned to the Intermediary or its service company, will constitute voting instructions (often called a proxy authorization form) which the Intermediary must follow.  Typically, the proxy authorization form will consist of a one page pre-printed form.  Sometimes, instead of the one page pre-printed form, the proxy authorization form will consist of a regular printed proxy form accompanied by a page of instructions, which contains a removable label containing a bar-code and other information.  In order for the
form of proxy to validly constitute a proxy authorization form, the Non-Registered Holder must remove the label from the instructions and affix it to the form of proxy, properly complete and sign the form of proxy and return it to the Intermediary or its service company in accordance with the instructions of the Intermediary or its service company.



41





---







In either case, the purpose of this procedure is to permit a Non-Registered Holder to direct the voting of the shares which they beneficially own.  Should a Non-Registered Holder who receives one of the above forms wish to vote at the Meeting in person, the Non-Registered Holder should strike out the names of the management proxyholders named in the form and insert the Non-Registered Holders name in the blank space provided.  In either case, Non-Registered Holders should carefully follow the instructions of their Intermediary, including those regarding when and where the proxy or proxy authorization form is to be delivered.



ELECTION OF DIRECTORS



All of the nominees are now members of the Board of Directors and have been since the dates indicated.  Management does not contemplate that any of the nominees will be unable to serve as a director but, if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy reserve the right to vote for another nominee in their discretion.  Each director elected will hold office until the next annual meeting or until he ceases to be a director.  The names of the persons who will be nominated at the meeting for election as directors are set out below.





|                                                                                               |                                                                                                                                                                                                  |                |                                                            
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | -----------------------------------------------------------
|Name, Office Held and
Municipality of Residence                                                | Principal Occupations during past 5 years                                                                                                                                                        | Director Since | Number of Shares
Beneficially Owned,
Controlled or Directed
|G. Rupert Pardoe, (1)(2)(3)(4)(5)
Non-executive Chairman
& Director
Johannesburg, South Africa | Business executive.
From 2001 to 2004 employed by ABSA Bank Limited of Johannesburg, South Africa as Group Executive Director and from 2003 to 2004 as Deputy Group Chief Executive.  Since 2004 | 2005           | Nil                                                        











42





---







|                                                                                                     |                                                                                                                                                                                                                                                                                                                              |      |        
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------
|Stefan E. Hayden,(3)(4)(5) President, Chief Executive Officer  & Director
Johannesburg, South Africa | President and Chief Executive Officer of the Company and Director of all Caledonias subsidiary companies.                                                                                                                                                                                                                   | 1996 | Nil    
|James Johnstone,
Director
Gibsons, British Columbia, Canada                                          | Retired.  Formerly Chief Operating Officer of the Company and Director of various subsidiary companies until September 30, 2006.                                                                                                                                                                                             | 1997 | Nil    
|F. Christopher Harvey, (1) Director, Oakville, Ontario, Canada                                       | Retired.  Until 31 December 2005 employed as Technical Director and Secretaryof the Company and Director of various subsidiary companies.                                                                                                                                                                                    | 1993 | 204,300
|Carl R. Jonsson,(2)(3)(5)
Director & Secretary, Vancouver, British Columbia, Canada                  | Principal of Tupper, Jonsson & Yeadon, Barristers & Solicitors.                                                                                                                                                                                                                                                              | 1992 | 59,469 
|Robert Babensee (1)(2)
Director
Toronto, Ontario, Canada                                             | Retired Chartered Accountant.  Formerly an assurance specialist in the Canadian accounting firm of BDO Dunwoody LLP (retired December 31, 2004).  Formerly the CFO of Golden China Resources a company whose shares were registered on the TSX Venture Exchange, whose business focus was the exploration for gold in China. | 2008 | Nil    
|Steven Curtis (5) VP Finance, Chief Financial Officer & Director                                     | Financial Director Avery Dennison SA (Pty) Ltd. and VP Finance and Chief Financial Officer and Director of Caledonia                                                                                                                                                                                                         | 2008 | Nil    



Notes:

(1) Member of Audit Committee, (2) Member of Compensation Committee, (3) Member of Corporate Governance Committee,

(4) Member of Nominating Committee, (5)Member of Disclosure Committee.



The information as to shares beneficially owned or controlled or directed, not being within the knowledge of the Company, has been furnished by the respective nominees individually.





43





---





In compliance with applicable disclosure requirements - C.R. Jonsson has been, within the past 10 years, a director and/or officer of three companies the shares of which were/are listed on the TSX Venture Exchange and its predecessor, in Canada, that were the subject of Cease Trade Orders issued by Provincial Securities Regulators having jurisdiction over them.  In the case of each company Mr. Jonsson held the positions incidental to his acting as the Solicitor for the companies:



-

Director and Secretary, August 1987 - August 2003, of Global CT & T Telecommunications Ltd.  Cease Trade Order was issued against it for failure to file and distribute financial statements - which has not been rescinded.



-

Director and Secretary of Global Net Entertainment Corp. until July 4, 2008.   Cease Trade Order was issued against it for failure to file and distribute financial statements - which was rescinded when the financial statements were filed.



-

Director until February 4, 2005 of TelcoPlus Enterprises Ltd.  Cease Trade Order was issued against it for failure to file and distribute financial statements - which was rescinded when the financial statements were filed.



At the present time the following Caledonia directors who are nominated for re-election are also directors of the following public issuers:





|                                                                                                                                                                                                                                                                      |                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
|Rupert Pardoe
-
none                                                                                                                                                                                                                                                  | Chris Harvey
-
none                                        
|Stefan Hayden
-
none                                                                                                                                                                                                                                                  | Jim Johnstone
-
none                                       
|Carl Jonsson
-
Bonterra Oil & Gas Ltd.
-
Comaplex Minerals Corp.
-
Comet Industries Ltd.
-
Acrex Ventures Ltd.
-
Dolly Varden Resources Ltd.
-
Alder Resources Ltd.
-
Pine Cliff Energy Ltd.
-             Alita Resources Ltd.
-             Astorius Resources Ltd. | Steven Curtis -
none

Robert Babensee -
Apollo Gold Company
|                                                                                                                                                                                                                                                                      |                                                            



APPOINTMENT OF AUDITORS



The shareholders will be asked to vote for the appointment of BDO Dunwoody Canada LLPas Auditors of the Company, to hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed,  at remuneration to be fixed by the Board of Directors.  Approval of the ordinary resolution requires the affirmative vote of a majority of the votes cast in respect thereof by holders of Common Shares represented at the meeting.



44





---









REDUCTION OF OPTION EXERCISE PRICES



The shareholders will be asked to approve the reduction of the exercise price of all of the Companys outstanding share purchase options to $0.07 per share.  The Company presently has share purchase options outstanding in favour of directors, officers and providers of service to the Company on 32,580,000 shares (being 6.51% of the issued shares of the Company) exercisable at prices between $0.10 per share and $0.26 per share - or at a weighted average exercise price of $0.1706 per share.   All of the options are fully vested and expire as of various dates between April 24, 2012 and March 11, 2014.  The terms of the options will not be amended except as to the reduction of the exercise prices to $0.07 per share.  The numbers of options and shares held by the Companys insiders are:



|                   |              |            
|------------------ | ------------ | -----------
|Insiders           | Options Held | Shares Held
|Stefan Hayden      | 10,175,000   | Nil        
|Rupert Pardoe      | 6,500,000    | Nil        
|Steve Curtis       | 3,000,000    | Nil        
|Christopher Harvey | 2,400,000    | 204,300    
|Jim Johnstone      | 2,400,000    | Nil        
|Robert Babensee    | 500,000      | Nil        
|Carl Jonsson       | 2,450,000    | 59,469     
|Mark Learmonth     | 1,000,000    | 120,000    
|Trevor Pearton     | 550,000      | Nil        
|TOTALS:            | 28,975,000   | 383,769    



It is recognized by the Companys Board that share purchase options are, in part, intended to be incentives to the Companys management and other option holders to advance the affairs of the Company so that the outstanding shares of the Company trade at prices that are hopefully higher than the option exercise prices.  However, it is also part of the Companys compensation policy to reward Management, Directors and service providers with options that have the potential to provide realizable compensation to them for their services.  It is considered by the Board that, to have option exercise prices which are too far out of the money makes the options seem potentially valueless - and therefore neither a realistically motivator of the persons holding the options nor to have the potential to provide them with realizable benefits.  It has therefore been concluded by the Board that it would be appropriate, and of benefit to the Company and its shareholders, to reduce the exercise prices of all of the outstanding options to $0.07 per share.



The proposed option exercise reduction has been submitted in principle to the Toronto Stock Exchange, and the Exchange has advised that it will require that the reduction be approved by the disinterested shareholders of the Company.  Therefore, in tabulating the votes with respect to this Resolution no votes will be counted which are cast by any director or officer of the Company or other optionee.



For the reasons discussed above shareholders are encouraged to vote in favour of this Resolution.



INTERESTS OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON



None of the directors or executive officers of the Company, no proposed  nominee for election as a director of the Company, none of the persons who have been directors or executive officers of the Company since the commencement of the Company's last completed financial year and no associate or affiliate of any of the foregoing persons has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting;  Provided that all of the Directors have direct personal interests in the proposed resolution to approve the reduction of the exercise prices of all of the Companys outstanding share purchase options.





45





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SHAREHOLDER RIGHTS PLAN



On April 10, 2008, the Company implemented a Shareholders Rights Plan (the Rights Plan), the terms and conditions of which are set out in the Shareholders Rights Plan Agreement (the Rights Agreement) dated April 10, 2008 with Equity Transfer Services Inc., as Rights Agent.  The Rights Plan was submitted to  and approved by  the general meeting of the shareholders held May 16, 2008.  The Rights Plan has a term of approximately three years and will remain in effect until the close of the first annual meeting of shareholders of the Company occurring following three years from May 10, 2008 (i.e. the annual meeting held in the Spring of 2011), unless extended by the shareholders.  The Rights Plan is similar to plans adopted by other Canadian public companies and approved by their shareholders.



The Rights Plan may be viewed on SEDAR at www.sedar.com.



REDUCTION OF QUORUM REQUIREMENTS



The Articles (By-Laws) of the Company provided, until May 2009, that to satisfy quorum requirements there had to be shareholder representation at a meeting by at least 10% of the issued shares.  By a Special Resolution passed at the General Meeting of the Shareholders held May 20, 2009 this was reduced to 5%.  The quorum requirement is therefore now that there be two members present in person or through proxy and that there be shareholder representation in person or by proxies of shareholders holding at least 5% of the issued shares of the Company.  As the Company has 500,169,280 shares issued the requirement for the forthcoming meeting will be that there be shareholder representation of at least 25,008,464 shares.



OTHER MATTERS TO BE ACTED UPON



The Company will consider and transact such other business as may properly come before the Meeting or any adjournment thereof. The Management of the Company knows of no other matters to come before the Meeting other than those referred to in the Notice of Meeting. Should any other matters properly come before the Meeting, the shares represented by the proxy solicited hereby will be voted on such matter in accordance with the best judgment of the persons voting by proxy.



REPORT ON EXECUTIVE COMPENSATION



Compensation of Named Executive Officers



The following table, presented in accordance with the requirements of Canadian National Instrument 51-102, sets forth all annual and long term compensation for services in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 2007, 2008 and 2009 in respect of the Companys named executive officers:  A named executive officer (NEO) means each of the following individuals:



(a)

The Chief Executive Officer;



(b)

the Chief Financial Officer;



(c)

each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was, individually, more than $150,000, as determined in accordance with subsection 1.3(6), for that financial year.





46





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Summary Compensation Table



|                                                              |                |                         |                              |                               |                                                  |                                |                                  |                               |                        
|------------------------------------------------------------- | -------------- | ----------------------- | ---------------------------- | ----------------------------- | ------------------------------------------------ | ------------------------------ | -------------------------------- | ----------------------------- | -----------------------
|Name
and
principal
position

(a)                              | Year




(b)   | Salary
($)



(c)       | Share-
based
awards
($)

(d) | Option-
based
awards
($)

(e) | Non-equity incentive
plan compensation
($)


(f) | Pension
value
($)


(g)        | All other
compensa-tion
($)

(h) | Total
compensa-
tion
($)

(i)
|                                                              |                |                         |                              |                               | Annual
incentive
plans
(f1)                      | Long-term
incentive
plans
(f2) |                                  |                               |                        
|Stefan Hayden(1)
Chief Executive
Officer                      | 2009
2008
2007 | 450,540
444,750
435,600 | -
-
-                        | -
-
-                         | -
-
-                                            | -
66,780
-
-                   | -
-
-                            | 107,833
89,148
81,242         | 558,373
600,678
516,842
|Steve Curtis(2)
Chief Financial
Officer                       | 2009
2008
2007 | 246,240
216,950
190,626 | -
-
-                        | -
-
-                         | -
-
-                                            | 7,779
122,000
-                | -
-
-                            | -
-
-                         | 254,019
338,950
190,626
|Rupert Pardoe(3)
Chairman of
the Board                        | 2009
2008
2007 | -
-
-                   | -
-
-                        | -
-
-                         | -
-
-                                            | -
-
-                          | -
-
-                            | 150,000
275,865
295,375       | 150,000
275,865
295,375
|Mark Learmonth
VP Business Development and Investor Relations | 2009           | 162,601                 | -                            | -                             | -                                                | -                              | -                                | -                             | 162,601                
|Trevor Pearton
VP Exploration                                 | 2009           | 161,141                 | -                            | -                             | -                                                | 6,203                          | -                                | -                             | 167,344                







(1)

Mr. S. E. Hayden is employed indirectly by the Company through a management and administrative agreement with a private Company.  The amounts shown are the amounts paid to the private Company.

(2)

Mr. Curtis was appointed Chief Financial Officer on April 3, 2006 and a Director June 1, 2008

(3)

Of the amount shown as paid to Mr. Pardoe in 2007, only $34,723 was paid in 2007 and the balance of $260,652 was paid in 2008.



Outstanding share-based awards and option-based awards



This table shows, for each NEO, for all awards outstanding at the end of the most recently completed financial year  December 31, 2009.



47





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|                 |                                                                |                                    |                                         |                                                          |                                                                    |                                                                              
|---------------- | -------------------------------------------------------------- | ---------------------------------- | --------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------------ | -----------------------------------------------------------------------------
|                 | Option-based Awards                                            | Share-based Awards                
|Name








(a) | Number of
securities
underlying
unexercised
options
(#)



(b) | Option
exercise
price
($)





(c) | Option
expiration
date






(d)        | Value of
unexercised
in-the-money
options
($)




(e)(1) | Number of
shares or
units of
shares that
have not
vested
(#)


(f) | Market or
payout
value of
share-based
awards
that have
not vested
($)

(g)(1)
|Stefan Hayden    | 4,000,000
6,000,000                                            | $0.235
0.155                       | April 24, 2012
Feb. 11, 2013            | nil
nil                                                  | -
-                                                                | -
-                                                                          
|Steve Curtis     | 300,000
400,000
2,300,000                                      | 0.13
0.1125
0.155                  | May 11, 2016
May 31, 2012
Feb. 12, 2013 | nil
nil
nil                                              | -
-
-                                                              | -
-
-                                                                        
|Rupert Pardoe    | 2,500,000
4,000,000                                            | 0.155
0.11                         | Feb. 12, 2013
Feb. 1, 2015              | nil
nil                                                  | -
-                                                                | -
-                                                                          
|Mark Learmonth   | 1,000,000                                                      | 0.155                              | Jul. 1, 2013                            | nil                                                      | -                                                                  | -                                                                            
|Trevor Pearton   | 150,000
400,000                                                | 0.26
0.155                         | Apr. 29, 2014
Feb. 12, 2013             | nil
nil                                                  | -
-                                                                | -
-                                                                          

(1) Values in column (e) are shown as nil as all of the options are exercisable at prices in excess of the prices at which the Companys shares traded on December 31, 2009.



Incentive plan awards  value vested or earned during the year



During the fiscal year ended December 31, 2009 no awards were granted to any of the NEOs.



Compensation Discussion and Analysis



The Company pays  and rewards  its NEOs in the amounts specifically detailed in the Tables above.  The following comments with respect to the remuneration of the NEOs are provided pursuant to the requirements of Canadian Securities National Instrument 51-102:





48





---





(a)

In providing the compensation, and structuring it with the various elements, the Companys objective is to reward the NEOs generously enough that they are sufficiently happy with their remuneration that they are keen to stay in the service of the Company and motivated to provide the highest quality services possible.



(b)

The compensation packages of the NEOs contain various elements, as follows:



(i)

Mr. Haydens compensation contains a number of elements:



A.

His compensation is provided through an agreement with a management services contract with a private company (management company), which contain requirements for the payment of the equivalent of a basic salary, an annual increase in the basic rate of pay based on increases in the annual cost of living, and bonuses for reaching certain specified benchmarks.  The benchmarks are the achievement of various defined elements of success with respect to progress in the Companys development of its mineral properties, securing financing for the Company and achieving the completion of certain agreements that would be of particular benefit to the Company.  For each benchmark achieved the management company is entitled to receive a bonus equal to 7.5% of the base remuneration paid for the year in which the benchmark is achieved.  The remuneration paid to the management company for 2008 included two benchmark bonuses of $33,390 each  total $66,780.   No benchmark bonuses were paid to the management company during 2009.  The agreement with the management company also provides for the payment to it of a monthly amount to compensate for the personal expenses incurred by Mr. Hayden in performing his services for the Company - in lieu of having to keep records and present invoices for the detailed expenses.  The monthly unvouchered expense allowance for 2009 was $7,720 (U.S.) and the amount is also increased annually by the annual increase in the cost of living;



B.

His remuneration also includes grants of share purchase options;



C.

Indirectly Mr. Hayden receives a further element of compensation in that the Company rents its Johannesburg office facilities from a private company, the shares of which are owned by members of Mr. Haydens family.



(ii)

The remuneration for Mr Curtis, Learmonth and Pearton consists of  a salary, discretionary bonus and share purchase options;



(iii)

Mr. Pardoes remuneration, being renegotiated annually, was agreed to be an all-in $150,000 for 2009.



(c)

While the NEOs have all been granted share purchase options they have consistently, over the past three years, been out of the money and have not
resulted in the NEOs receiving any benefits from the options.   Messrs. Hayden and Curtis were also paid the same per annum directors fees (currently $20,000 per annum) that are paid to all of the Directors.



49





---









(d)

The various elements of the compensation of the NEOs have been chosen to make the compensation packages competitive with what is offered by other comparable companies.  The actual amounts are settled by negotiations with the NEOs from time to time.



(e)

In settling the agreed amounts of the compensation payable to Mr. Curtis, and to Mr. Haydens management company, consideration was given to the fact that both of them work out of the Companys office in Johannesburg, South Africa with minimal office support personnel  with the result that it is expected that they will, on average, work substantially longer than what might be considered normal hours for executives, and perform a wider variety of services for the Company than might otherwise be expected from people holding their positions.



Director compensation table



This table shows all amounts of compensation paid or provided to the Directors  exclusive of the NEOs whose compensation is detailed in the Summary Compensation Table on page 5 - for the companys financial year ended December 31, 2009.



|                   |                        |                               |                                   |                                                 |                          |                                   |                  
|------------------ | ---------------------- | ----------------------------- | --------------------------------- | ----------------------------------------------- | ------------------------ | --------------------------------- | -----------------
|Name





(a)      | Fees
earned
($)



(b) | Share-
based
awards
($)


(c) | Option-
based
awards
($)


(d)(1) | Non-equity
incentive
plan
compensation
($)

(e) | Pension
value
($)



(f) | All other
compensation
($)



(g) | Total
($)




(h)
|James Johnstone    | 15,833                 | -                             | -                                 | -                                               | -                        | 51,979                            | 67,812           
|Christopher Harvey | 18,750                 | -                             | -                                 | -                                               | -                        | 62,619                            | 81,369           
|Carl R. Jonsson    | 15,833                 | -                             | -                                 | -                                               | -                        | - (2)                             | 15,833 (2)       
|Robert Babensee    | 18,750                 | -                             | -                                 | -                                               | -                        | 15,173                            | 33,923           



(1)

Options were outstanding in favour of all of the Directors listed above but all of them were granted during the previous years.  Also, all of them had exercise prices above the $0.065 at which the Companys shares traded on December 31, 2009.  The options were therefore all out of the money at that date and had no deemed value at that date.



(2)

Carl R. Jonsson is a principal of the Vancouver law firm of Tupper, Jonsson & Yeadon which acts as the Companys principal lawyers.  Mr. Jonssons services to the Company are
rendered through Tupper Jonsson & Yeadon and he, accordingly, indirectly shares in fees paid to that firm for services rendered.



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The Company does not have a long-term incentive plan, a pension plan or other form of defined benefit plan  other than its Stock Option Plan.



The Compensation Committee reviews the compensation paid to directors annually. Based on compensation paid to Directors at other companies comparable to Caledonia and on the additional risks and responsibilities assumed by the directors it recommends compensation paid to Caledonias directors.  From July 1, 2004 to June 30, 2009 the fees paid to Directors were $10,000 per year, an hourly amount for preparation and participating in telephone board meetings and a per diem fee for travel time to, and participating in, board meetings.  Since June 1, 2009 the fees have been changed to a flat $20,000 per year - plus reimbursement for out-of-pocket expenses incurred in relation to attendance at Board or Committee meetings. Additionally, members of the Audit Committee are paid a fee of $5,000 per annum.



Since June, 2003 the Company has maintained Directors and Officers liability insurance for directors and officers of the Company and its affiliates with coverage of $2,000,000 Canadian per occurrence and in the aggregate.



Termination of Employment, Change of Responsibilities and Employment Contracts



There are no service contracts between Caledonia and any of the Directors of Caledonia or its subsidiaries except for:



(a)(i)

a "Key Executive Severance Protection Plan" between Caledonia and. S.E. Hayden dating from 1996 and (ii) the indirect employment of Mr. S.E.Hayden through a management and administrative agreement.  The Severance Plan calls for severance payments to Mr. Hayden if his employment is terminated as a result of a change of control of Caledonia;



(b)

an agreement with Mr. Pardoe providing for his engagement as Chairman and for compensation for the services provided to Caledonia by him - the amount of the compensation to be negotiated and settled annually.



(c)

there are letters of appointment dated May 10, 2005 with Messrs. Harvey and Jonsson.  Caledonia has also entered into Indemnification Agreements with the Directors and Senior Officers.



(d)

a service agreement between Caledonia and Mr. Curtis dated April 1, 2008.



Composition of the Compensation Committee



The Company has a Compensation Committee (Committee) comprised of three directors.  All issues as to compensation of  the Officers are considered by the Committee, the members of which, during the fiscal year ended December 31, 2009, were G.R. Pardoe (Chairman), C. R. Jonsson  and  R. Babensee.  Mr. Pardoe abstained from voting on compensation matters pertaining
to himself   Mr. G.R. Pardoe was appointed  as a  member of the committee in March 2005 and, since that date, has provided the company with consulting services for which he has been compensated.   He has therefore been a service provider within the past three years  but is nevertheless considered independent.   Mr. Jonsson continues to provide the company with legal services and as a Director, Corporate Secretary and Committee member.   He has therefore been a service provider within the past three years and is not considered an independent director.



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PERFORMANCE GRAPH



The following graph and table compares the year-end value of the common shares of the Company with the TSX Composite Index for the last five years on the basis of cumulative total return.



Caledonia Shares vs TSX Composite at December 31, 2009 (assuming $100 of Caledonia shares were purchased on January 1, 2005:









Notwithstanding the fact that the value of the Companys shares has declined on the markets on which the shares trade, the compensation levels of the Companys NEOs have increased by amounts which are in excess of the inflation rates experienced in the countries in which the Company conducts its business activities and in which its shares trade.  The compensation of the Companys NEOs has never been determined in relation to the prices at which its shares have traded.



CORPORATE GOVERNANCE PRACTICE



The Company is subject to Canadian National Instrument 58-101 (NI 58-101) Disclosure of Corporate Governance Practices. This Instrument requires a company to include in its management information circular the disclosure required by Form 58-101F1.  The Company's
Statement of Corporate Governance Practices, which has been prepared by the Corporate Governance Committee follows:



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Mandate of the Board

The Board of Directors of the Company is responsible for the overall stewardship of the Company, and has full power and authority to manage and control the affairs and business of the Company.  The mandate of the Board of Directors is detailed in the Charter of the Board of Directors which can be viewed on the Companys website at www.caledoniamining.com.

Amongst other things, the Board is responsible for:



1.

supervising the officers of the Company in their management of the business and affairs of the Company;

2.

adoption of and managing the Company's strategic planning process;

3.

identifying and managing principal risks to the Company's business;

4.

succession planning including the appointment, training, monitoring and appraisal of senior officers of the Company;

5.

overseeing the administration of a policy for communications by the Company with shareholders, the investment

community, the media, governments and the general public;

6.

examination, through its Audit Committee, of the effectiveness of the companys internal control processes and management information systems.  The Board consults with the VP Finance and management of the Company to ensure the integrity of these systems;

7.

developing position descriptions and terms of reference for the Board, the President and Chief Executive Officer and the committees of the Board; and

8.

ensuring that Directors may hire outside advisors, at the expense of the company, in appropriate circumstances.

The Board holds regular meetings and additional meetings to address special items of business.  The frequency of meetings, as well as the nature of agenda items, changes depending upon the state of the Company's affairs and in light of opportunities or risks which the Company faces. On average the Board has met between five and six times per year during the past five years, including a board meeting at the time of the AGM in Toronto when all the directors are normally present in person.

As part of the Board's responsibility for the strategic planning process of the Company, the Board considers and, where appropriate, adopts the goals of the business that are proposed by Management and the strategies and policies within which the Company is managed.  Management is required to seek the approval of the Board for material deviations, financial or otherwise, from the approved business goals, strategies and policies of the Company.



Board Composition

The Board believes that the extensive knowledge of both the independent and the non-independent Directors of the Company's business is beneficial to the other directors and their participation as directors contributes to the effectiveness of the Board.  The Board further believes that the business knowledge and experience, particularly in the context of activities in Southern Africa, brought by Messrs. Hayden, Pardoe and Curtis is most valuable to the other directors and to the Company as a whole.





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Caledonias Board members consider that the Boards current composition is efficient and appropriate considering the extent of the Companys activities and the location of the properties on which most of its activities are conducted.  The Board has concluded that four of the seven directors, Messrs. Pardoe, Harvey, Johnstone and Babensee, are independent directors within the meaning of the NI 58-101 definitions.



The Company does not have a significant shareholder, defined  by the TSX as a shareholder with the ability to exercise a majority of votes for the election of directors.



Board Committees

The Board of Directors has five standing committees: the Audit Committee, the Compensation Committee, the Corporate Governance Committee, the Nominating Committee and the Disclosure Committee.



Audit Committee

The Audit Committee, comprised of Messrs. Pardoe, Harvey and Babensee  and is chaired by Mr. Pardoe.  The members of the Audit Committee, the internal accounting staff and the external auditors have unrestricted direct access to, and communication with, each other to assist them in carrying out their respective duties.  The Audit Committee is responsible for reviewing and making recommendations to the Board on:



1.

financial statements and the related reports of management and external auditors;

2.

accounting and financial reporting procedures and methods;

3.

internal audit procedures and reports, and matters relating to external auditors, including the appointment and terms of engagement of external auditors and their reports relating to accounting, financial and internal audit matters.



The Board has adopted a Charter of the Audit Committee which is attached as Appendix A..



Corporate Governance Committee

Attached as Appendix B is Form 58-101F1 - which is to provide certain Corporate Governance disclosure.



Additional Information

Additional information relating to the Company is on SEDAR at www.sedar.com and on the Companys website at www.caledoniamining.com   Financial information is provided in the Companys comparative financial statements prepared and audited to December 31, 2009 and in its annual MD&A dated March 15, 2010.



Copies of any of the documents which are described in the Information Circular as being available to be viewed on the Companys website.  They also can be obtained by contacting the Company at:



Suite 1201, 67 Yonge Street,

Toronto, Ontario, Canada M5E 1J8

Phone:

1-416-369-9835

email: Jonsson@securitieslaw.bc.ca





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BY ORDER OF THE BOARD OF DIRECTORS

DATED:  April 15, 2010

























































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APPENDIX A



CALEDONIA MINING CORPORATION



Charter of the Audit Committee of the Board of Directors

(As adopted November 9, 2006)



I.

Purpose



The purpose of the Audit Committee (the Committee) of the Board of Directors (the Board) of Caledonia Mining Corporation (Caledonia) is to assist the Board in its oversight of the:



-

integrity, adequacy and timeliness of Caledonia s financial reporting and disclosure practices;



-

processes for identifying the principal financial risks of Caledonia and the control systems in place to monitor them;



-

compliance with legal and regulatory requirements related to financial reporting; and



-

independence and performance of Caledonias independent external auditors (Auditors).



The Committee shall be constituted and perform its activities in compliance with all applicable governmental and securities laws, regulations and rules (Rules).



The Committees role is one of oversight. The financial statements are the responsibility of Management. The Auditors are responsible for performing an audit and expressing an opinion on the fair presentation of Caledonias financial statements in accordance with generally accepted accounting principles.



II.

Authority



1.

The Committee has the authority to conduct any investigation appropriate to its responsibilities, and it may require the Auditors as well as any officer of Caledonia, or Caledonias outside counsel, to attend a meeting of the Committee or to meet with any Members of the Committee (Members), or consultants to the Committee.



2.

The Committee shall have unrestricted access to Caledonias books and records.



3.

The Committee has authority to:



(a)

engage independent counsel and other advisors as it determines necessary to carry out its duties;



(b)

set and pay the compensation for any advisors engaged by the Audit Committee;  and





(c)

communicate directly with the internal and external auditors.





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III.

Composition and Meetings



1.

The Committee and its Members shall meet all applicable legal, regulatory and listing requirements;



2.

Members and the Chairperson shall be appointed by the Board and may be removed by the Board in its discretion. The Committee will be appointed annually at the first Board meeting following the annual general meeting; and in the absence of such appointment, and pending such appointment, the Committee shall continue to be comprised of its existing members;



3.

The Committee shall be comprised of three or more directors, one of whom shall serve as the Chairperson;



4.

Each member of the Committee shall satisfy the applicable laws and regulations, and the rules of any stock exchange or market upon which the shares of Caledonia are listed or proposed to be listed for trading (hereinafter generally called the Stock Exchange), and each member shall be independent as defined by the Rules and free from any relationship that, in the opinion of the Board, could reasonably be expected to interfere with the exercise of his or her independence from Management or the Auditors;



5.

All Members shall be, or promptly after appointment shall become, financially literate as defined by the Rules.



6.

The Committee shall meet, at the discretion of the Chairperson or a majority of the Members, as circumstances dictate or as may be required by applicable legal or listing requirements, and a majority of the Members shall constitute a quorum;



7.

If and whenever a vacancy shall exist, the remaining Members may exercise all of its powers and responsibilities so long as a quorum remains in office;



8.

Any matters to be determined by the Committee shall be decided by a majority of votes cast at a meeting of the Committee called for such purpose; actions of the Committee may be taken by an instrument or instruments in writing signed by all of the Members, and such actions shall be effective as though they had been decided by a majority of votes cast at a meeting of the Committee called for such purpose; in the case of a tie the Chairperson shall have a second or tie-breaking vote;



9.

The Committee shall maintain minutes of meetings and periodically report to the Board on significant results of the Committees activities;



10.

The Committee may invite such other persons to its meetings as it deems appropriate; and



11.

The Auditors will have direct access to the Committee on their own initiative.



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12.

The Chairperson of the Committee (Chairperson), or other Member so designated by the Committee may represent the Committee to the extent permitted by applicable legal and listing requirements.



13.

The Committee shall review and assess the adequacy of this Charter annually and submit any proposed revisions to the Board for approval.



IV.

Responsibilities



A.

With Respect to financial disclosure documents:



1.

The Committee shall review Caledonias interim unaudited and annual audited financial statements and report thereon to the Board prior to their being filed with the appropriate regulatory authorities or published or distributed. With respect to the financial statements, the Committee shall discuss significant issues regarding accounting principles, practices, and judgments of Management with Management and the Auditors as and when the Committee deems it appropriate to do so;



2.

The Committee shall review Managements Discussion and Analysis relating to annual and interim financial statements, and any other public disclosure documents that are required to be reviewed by the Committee under any applicable laws prior to them being filed with the appropriate regulatory authorities or published or distributed;



3.

The Committee shall review Managements earnings releases relating to annual and interim financial statements prior to them being filed with the appropriate regulatory authorities or published or distributed;



4.

The Committee shall review the post-audit or management letter containing the recommendations of the Auditors and Managements response and subsequent follow-up to any identified weaknesses;



5.

The Committee shall review the evaluation of internal controls by the Auditors, together with Managements response;



6.

The Committee shall meet no less frequently than annually separately with the Auditors and Caledonias Chief Financial Officer to review Caledonias accounting practices, internal controls and such other matters as the Committee or Chief Financial Officer deems appropriate;



7.

The Committee shall be directly responsible for overseeing the work of the Auditors engaged for the purpose of preparing or issuing an auditors report or performing other audit, review or attest services for Caledonia, including the resolution of disagreements between management and the Auditors regarding financial reporting;



8.

The Committee must pre-approve all non-audit services to be provided to Caledonia or its subsidiary entities by the Auditors;



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9.

The Committee must be satisfied that adequate procedures are in place for the review of Caledonias public disclosure of financial information extracted or derived from Caledonias financial statements, other than the public disclosure referred to in sub-clauses 1, 2 and 3 of Clause IV.A above, and must periodically assess the adequacy of those procedures;



10.

The Committee must establish procedures for:



(a)

the receipt, retention and treatment of complaints received by Caledonia regarding accounting, internal accounting controls, or auditing matters;  and



(b)

the confidential, anonymous submission by employees of Caledonia of concerns regarding questionable accounting or auditing matters.



11.

The Committee must review and approve Caledonias hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the issuer.



B.

With Respect to the Auditors



1.

The Auditors are ultimately accountable to the shareholders of Caledonia. The Board has the authority to nominate the Auditors to be proposed for shareholder approval in any proxy statement. The Board will set the compensation for the Auditors - but only after the Committee has given its recommendations as to their compensation;



2.

The Committee shall review the performance of the Auditors;



3.

The Auditors must report directly to the Committee;



4.

The Committee shall annually recommend to the Board the appointment or reappointment of the Auditors, or, as appropriate, the discharge or replacement of the Auditors when circumstances warrant;



5.

The Committee shall be responsible for ensuring that the Auditors submit to the Committee (on a periodic basis) a formal written statement delineating all relationships between the Auditors and Caledonia. The Committee is responsible for discussing with the Auditors any disclosed relationships or services that may impact the objectivity and independence of the Auditors and for recommending that the Board take appropriate action in response to the Auditors report to satisfy itself of the Auditors independence;



6.

The Committee shall review the Auditors audit plan, including scope, procedures and timing of the audit.





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C.

Other Committee Responsibilities



The Committee shall perform any other activities consistent with this Charter and any governing law or regulations as the Committee or the Board deems necessary or appropriate, including:



1.

Conducting or authorizing investigations into any matters that the Committee believes is within the scope of its responsibilities;



2.

Making enquiries of management and the Auditors to identify significant business, political, financial and control risks and exposures and to assess the steps management has taken to minimize such risks.



DATED:

November 9, 2006

































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APPENDIX B



FORM 58-101F1

CORPORATE GOVERNANCE DISCLOSURE





1.  Board of Directors

(a)
Disclose the identity of directors who are independentThe Company has determined that 4 of its 7 directors are independent, within the meaning of NI 58-101.  The following directors are independent:
-
Mr. Rupert Pardoe, Chairman of the Board
-
James Johnstone
-
Christopher Harvey
-
Robert Babensee(b)
Disclose the identity of directors who are not independent, and describe the basis for that determination.Stefan Hayden, Steven Curtis and Carl R. Jonsson are not independent within the meaning of NI 58-101.  Messrs. Hayden and Curtis are full-time paid officers and executives of the Company - and Mr.
Jonsson, in his capacity as the Companys lawyer, receives compensation for his services rendered.(c)
Disclose whether or not a majority of directors are independent, describe what the Board does to facilitate its exercise of independent judgment in carrying out its responsibilities.As per (a) and (b) above, 57% of the directors of the Company are independent, within the meaning of NI 58-101.(d)
If a director is presently a director of any other issuer that is a reporting issuer (or the equivalent) in a jurisdiction or a foreign jurisdiction, identify both the director and the other issuer.The following two directors only are directors of other reporting issuers, being:

Carl Jonsson:
-
Bonterra Oil & Gas Ltd. (Energy Ltd.?)
-
Comaplex Minerals Corp.
-
Comet Industries Ltd.
-
Acrex Ventures Ltd.
-
Dolly Varden Resources Inc.
-
Alder Resoursces Ltd.
-
Pine Cliff Energy Ltd.
-
Alita Resources Ltd.
-
Astorius Resources Ltd.

Robert Babensee:
-
Apollo Gold Corporation


















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(e)
Disclose whether or not the independent directors hold regularly schedules meetings at which non-independent directors and members of management are not in attendance.  If the independent directors hold such meetings, disclose the number of meetings held since the beginning of the issuers most recently completed financial year. If the independent directors do not hold such meetings, describe what the Board does to facilitate open and candid discussion among its independent directorsThe Company holds one regularly scheduled Board Meeting annually - held in conjunction with the AGM - and at least three regularly scheduled telephone conference Board Meetings each year.  The agendas of these meetings often include the holding of a meeting in camera which excludes participation by Messrs. Hayden and Curtis as the Directors representing management of the Company - but not Carl Jonsson although he is technically considered non-independent.  Open and candid discussion is encouraged at all meetings.  Meetings only include meetings of the independent directors if such a meeting is requested by an independent director. In 2009 there was a total of 6 meetings of the board of directors including the scheduled meetings mentioned above - and one meeting of the independent directors.(f)
Disclose whether or not the chair of the Board is an independent director. If the Board has a chair or lead director who is an independent director, disclose the identity of the independent chair or lead director, and describe his or her role and responsibilities. If the Board has neither a chair that is independent nor a lead director that is independent, describe what the Board does to provide leadership for its independent directorsMr. Rupert Pardoe is the Chairman of the Board and is independent within the meaning of NI 58-101.  Mr. Pardoe has held this position since 2005.  The Chairman of the Board has the responsibility of overseeing the efficient operation of the Board and its committees.(g)
Disclose the attendance record of each director for all Board meetings held since the beginning of the issuers most recently completed financial year.The Company held 6 Board meetings in 2009.  All of the Directors attended all of the meetings except that Rupert Pardoe did not attend one meeting.2.  Board Mandate


Disclose the text of the Boards written mandate.  If the Board does not have a written mandate, describe how the Board delineates its role and responsibilities.The Company has a written Charter of the Board of Directors.  It can be viewed on the Companys website at www.caledoniamining.com
















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3.  Position Descriptions

(a)     Disclose whether or not the Board has developed written position descriptions for the Chair and the Chair or each Board committee. If the Board has not developed written position descriptions for the Chair and/or the Chair of each Board committee, briefly describe how the Board delineates the role and responsibilities of each such positionThe Board has established position descriptions for the Chairman of the Board as well as for the Chairs of each committee.

The primary responsibility of the Chairs is to ensure that the Board and its committees are operating effectively and meet the objectives set in their respective charters.

Committee chairs report periodically to the Board - usually in Board meetings.  Chairs are expected to report in writing to the Board any matters they consider to be of importance.  The composition of the Committees can be found on the Companys website at www.caledoniamining.com in the Corporate Governance section.(b)
Disclose whether or not the Board and CEO have developed a written position description for the CEO.  If the Board and CEO have not developed such a position description, briefly describe how the Board delineates the role and responsibilities of the CEO.The Board has not established written position descriptions for the President and Chief Executive Officer of the Company.  Nevertheless they are expected to fulfill the responsibilities that normally go with those positions - which includes the following key responsibilities; set the strategic direction of the Company in conjunction with the Board and then execute the strategy;  provide leadership;  procure the necessary financing to enable the Company to continue its planned work programs and report on a regular basis to the Board and the Companys shareholders.4.  Orientation and Continuing Education

(a)
Briefly describe what measures the Board takes to orient new directors regarding

(i) the role of the Board, its committees and its directors, and





(ii) the nature and operation of issuers businessThe normal orientation for a new director includes meeting with the other directors and the senior management of the Company.  The goal is to provide a new director with a history of the Company and provide him/her with a briefing of the key strategies and issues that the Company is currently facing.  In addition, particularly if the director is new to the role of director, the orientation also includes a briefing of his/her responsibilities, regarding the legal responsibilities of being a director and an insider of the Company.  The orientation includes a discussion on how the Board and its committees function including the anticipated time commitments.  He/she is provided with the relevant documentation including the Companys corporate governance documents.
A new director is invited to meet the key members of management and to study the Companys material documents and recently published
materials.










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b)
Briefly describe what measures, if any, the Board takes to provide continuing education for its directors. If the Board does not provide continuing education, describe how the Board ensures that its directors maintain the skill and knowledge necessary to meet their obligations as directorsThe Company does not provide continuing education for its directors except if and when a director makes a request.  Other directors periodically discuss the performance of the directors on an informal basis.5.  Ethical Business Conduct

(a)
Disclose whether or not the Board has adopted a written code for the directors, officers and employees.  If the Board has adopted a written code:

(i)  disclose how a person or company may obtain a copy of the code;


(ii)  describe how the Board monitors compliance with its code, or if the Board does not monitor compliance, explain whether and how the Board satisfies itself regarding compliance with its code;  and

(iii)  provide a cross-reference to any material change report filed since the beginning of the issuers most recently completed financial year that pertains to any conduct of a director or executive officer that constitutes a departure from the code.

(b)
Describe any steps the Board takes to ensure directors exercise independent judgment in considering transactions and agreements in respect of which a director or executive officer has a material interest.

(c)
Describe any other steps the Board takes to encourage and promote a culture of ethical business conduct.The Board expects directors and Company employees to behave ethically at all times and has adopted a written Code of Ethics policy, which includes a whistleblower section.


A copy of the Companys Code of Business Conduct and Ethics, dated April 8, 2004, can be found on the Companys website at www.caledoniamining.com in the Corporate Governance Section

The Board does not formally monitor compliance with the Code.  Directors maintain an informal awareness of the Code and would normally be alert to any violation of the Code.  The Board does not have any formal established procedures to alert it to any violations to the Code.


There were no reported incidents relating to the Companys Code of Ethics/whistleblower policy in 2009 - nor at any time before or after 2009.


Directors are required to disclose any actual or potential conflict of interest situation.  As such, the director must excuse himself from any such discussions and refrain from voting on any such issues.  The Chair may also request that a director excuse himself or abstain from voting on an issue if he feels that there may be a conflict.

None specifically - except the general prevailing awareness by the Directors that they are expected to cause the Company to maintain ethical business conduct.












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6.  Nomination of directors

(a)
Describe the process by which the Board identifies new candidates for Board nomination.







(b)
Disclose whether or not the Board has a nominating committee composed entirely of independent directors.  If the Board does not have a nominating committee composed entirely of independent directors, describe what steps the Board takes to encourage an objective nomination process.

(c)
If the Board has a nominating committee, describe the responsibilities, powers and operation of the nominating committee.The Companys Nominating Committee consists of the Companys Chairman, Rupert Pardoe (an independent Director) and the President and CEO, Stefan Hayden (a non-independent Director).  The Nominating Committee undertakes no activities except if and when the Board determines that a new Director should or must be appointed.  However, all Directors recognize the value of having persons on the Board who can contribute - and all Directors therefore have an open mandate to stay alert to identifying persons who would be potentially valuable additions to the Board and to make recommendations in that regard to the Nominating Committee.




See above





See above7.  Compensation

(a)
Describe the process by which the Board determines the compensation for the issuers directors and officers


(b)
Disclose whether or not the Board has a compensation committee composed entirely of independent Directors.  If the Board does not have a compensation committee composed entirely of independent Directors, describe what steps the Board takes to ensure an objective process for determining such compensation.The Company has prepared the Compensation report Corporation Discussion and Analysis included in this Information Circular incorporating the new executive compensation disclosure requirements contained in the amendments to National Instrument 51-102 continuous disclosure obligations.

The Compensation Committee is comprised of Rupert Pardoe and Robert Babensee (who are independent Directors, and Carl Jonsson who is considered to be non-independent.  In considering the annual compensation payable to Mr. Pardoe he excuses himself from the deliberations of the Committee.  With respect to all other compensation generally it is considered by the full Board which has a majority of independent Directors.














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(c)
If the Board has a compensation committee, describe the responsibilities, powers and operation of the compensation committee.The principal responsibilities of the Compensation Committee are to review the compensation for the directors, the President and Chief Executive Officer, the Chairman, and the executive officers of the Company;  to monitor succession planning and to prepare the executive compensation report for disclosure to shareholders.(d)
If a compensation consultant or advisor has, at any time since the beginning of the issuers most recently completed financial year, been retained to assist in determining compensation for any of the issuers directors and officers, disclose the identity  of the consultant or advisor and briefly summarize the mandate for which they have been retained.  If the consultant or advisor has been retained to perform any other work for the issuer, state that fact and briefly describe the nature of the work.Neither the Company nor the Compensation Committee have at any time retained the services of a compensation consultant or advisor8.  Other Board Committees

If the Board has standing committees other than the audit, compensation and nominating committees, identify the committees and describe their function.(i)  The primary role of the Corporate Governance Committee is to develop and implement corporate governance principles and policies established by the Board and to ensure that these principles are regularly reviewed, updated and adhered to.

(ii)  The function of the Disclosure Committee is to maintain a current awareness of the disclosure requirements applicable to publicly traded companies and as required by the rules of the Toronto Stock Exchange and securities regulatory authorities having jurisdiction.  Then the Committee and its members are expected to ensure that the disclosures by the Company are in compliance with those requirements.9.  Assessments

Disclose whether or not the Board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution.  If assessments are regularly conducted, describe the process used for the assessments. If assessments are not regularly conducted, describe how the Board satisfies itself that the Board, its committees, and its individual directors are performing effectively.Neither the Board, the Committees or individual Directors are regularly assessed with respect to their effectiveness and contribution.  In the annual Board Meetings held in conjunction with the Annual General Meeting there was always discussion of the performance of the Board and the Committees and, to date, there has always been the unanimous consensus that the Board, its Committees and its individual Directors are performing effectively.






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CALEDONIA MINING CORPORATION







MINERAL PROPERTIES











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The following is a summary of Caledonias mineral properties and the capitalized costs as at the 31st December 2009  in Canadian dollars:



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NOTE:  The cost of acquisition of mineral properties and all related exploration and development expenditures, less recoveries, are capitalized and carried as an asset to be amortized against income if the property is brought into commercial production or charged to income if the property is, or is to be, abandoned or disposed of.  The South African mineral properties exclude the mineral properties of the Eersteling Gold Mines Limited as these assets are listed for sale.  The values listed for South Africa relate to the Rooipoort Project.

















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SUMMARY OF REPORT

ON THE NAMA PROPERTY IN ZAMBIA





Prepared by Applied Geology Services cc

on behalf of

Caledonia Mining Corporation

May 1, 2008



Qualified Persons who prepared the Report

-

David E.C.S. Grant



3 Summary

Caledonia Nama Limited (Caledonia (Nama)), a subsidiary of Caledonia Mining Corporation is the sole owner of a Retention Licence over 80650ha of ground in the Solwezi District of the Northwestern Province of Zambia in sub-Saharan Africa. The licence has been granted for a period of three years from February 2007 after which it must be converted to mining titles. It lies on the northwestern flank of the Zambian Copperbelt and has potential for high tonnage, low-grade cobalt-copper-nickel mineralisation referred to as the Nama Project. The area is underlain by strata of the Katanga Supergroup but paucity of outcrop and structural complexity has prevented accurate correlation of the stratigraphy intersected in the boreholes except that distinct mixtite units can be correlated with the lower Kundelungu Group. The mineralisation occurs in a deep weathered profile and is probably caused by the oxidation of primary disseminated cobalt-copper-nickel sulphides combined with supergene redistribution and precipitation, especially in the near surface environment. This has produced both flat lying and inclined resource bodies of mineralisation. Caledonia started operations in the area in 1994 and in the ensuing years acquired five Prospecting Licences and undertook an exploration program commencing with soil sampling supported by airborne geophysical surveys and concluded with a drilling campaign. The drilling amounted to 323 reverse circulation holes totalling 38,119 metres followed by five diamond drill holes totalling 1445m. This drilling is in addition to 25 diamond drill holes drilled by Roan Selection Trust, Zamanglo and JCI in the Nama area and on the flank of the Konkola dome and 23 auger holes drilled by Roan Selection Trust. In 2007, Caledonia embarked on a drilling program in the Nama Retention Licence area and some of this drilling was undertaken over the D Anomaly. This report presents an estimation of indicated and inferred resources based on the results of 38 boreholes drilled into the D anomaly in the northeast to east-central parts of the Retention Licence. This resource of the shallow dipping hematite-magnetite body. is summarised in the table below.



Follow-up drilling is required over the D Anomaly to upgrade the known resources and delineate their extensions. Further work is required on the correlation of the stratigraphy in the Nama area to establish the extent that the mixtite units correlated with the lower Kundelungu Group owe their presence in the A Anomaly area to structural disturbance.



Cautionary Note to U.S. Investors concerning estimates of Measured and Indicated Resources. This section uses the terms measured resources and  indicated resources. We advise U.S. investors that these terms are not recognised by the U.S. Securities and Exchange Commission. The estimation of measured resources and indicated resources involves greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves. U.S. investors are cautioned not to assume that mineral resources in these categories will be converted into reserves.

|                |           |         |           |       |        |       |       |       |      
|--------------- | --------- | ------- | --------- | ----- | ------ | ----- | ----- | ----- | -----
|                | Volume    | Density | Tonnage   | Co    | Cu     | Ni   
|                | m3        | Kg/m3   | tonnes    | %     | Tons   | %     | Tons  | %     | Tons 
|Indicated       |           |         |           |       |        |       |       |       |      
|Resource        |           |         |           |       |        |       |       |       |      
|D1 (iron oxide) | 2,627,688 | 3.5     | 9,196,906 | 0.165 | 15,170 | 0.067 | 6,160 | 0.050 | 4,600







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Cautionary Note to U.S. Investors concerning estimates of Measured and Indicated Resources. This section uses the term inferred resources. We advise U.S. investors that this term is not recognised by the U.S. Securities and Exchange Commission. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources. U.S. investors are cautioned not to assume that inferred mineral resources exist, are economically minable, or will be upgraded into measured or indicated mineral resources.





|                  |            |     |            |       |        |       |        |       |       
|----------------- | ---------- | --- | ---------- | ----- | ------ | ----- | ------ | ----- | ------
|Inferred          |            |     |            |       |        |       |        |       |       
|Resource          |            |     |            |       |        |       |        |       |       
|D1 (iron oxide)   | 4,092,188  | 3.5 | 14,322,656 | 0.138 | 19,770 | 0.054 | 7,730  | 0.051 | 7,300 
|D2 (peripheral)   | 2,747,875  | 3.5 | 9,617,563  | 0.041 | 3,940  | 0.019 | 1,830  | 0.017 | 1,630 
|Surface           |            |     |            |       |        |       |        |       |       
|D3 (elluvial)     | 2,692,375  | 2.7 | 7,269,413  | 0.055 | 4,000  | 0.028 | 2,040  | 0.013 | 950   
|D4 (elluvial)     | 6,761,563  | 2.7 | 18,256,219 | 0.035 | 6,390  | 0.017 | 3,100  | 0.013 | 2,370 
|D5 (elluvial)     | 1,943,125  | 2.7 | 5,246,438  | 0.038 | 1,990  | 0.031 | 1,630  | 0.022 | 1,150 
|Inferred Subtotal | 18,237,126 |     | 54,712,289 | 0.066 | 36,090 | 0.030 | 16,330 | 0.024 | 13,400



The iron oxide (D1 type) resource is tabled separately from the other resource types on account of its more compentent nature and mineralogy. The heamatite and magnetite comprising this body are enriched in cobalt and would require a different metallurgical process from that of the other D resource bodies.





The complete Report may be viewed on the Companys website.













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SUMMARY OF REPORT

ON THE NAMA PROPERTY IN ZAMBIA





Prepared by Applied Geology Services cc

on behalf of

Caledonia Mining Corporation

March 8, 2007



Qualified Persons who prepared the Report

-

Michael J. Haslett

-

David E.C.S. Grant

3.

Summary



Caledonia Nama Limited (Caledonia), a subsidiary of Caledonia Mining Corporation holds a Retention Licence over 80650 hectares of ground in the Solwezi District of the Northwestern Province of Zambia in sub-Saharan Africa. It lies on the northwestern flank of the Zambian Copperbelt and has potential for high tonnage, low-grade cobalt-copper-nickel mineralisation. The area is underlain by strata of the Katanga Supergroup but paucity of outcrop and structural complexity has prevented accurate correlation of the stratigraphy intersected in the boreholes except that distinct mixtite units can be correlated with the lower Kundelungu Group.



Caledonia started operations in the area in 1994 and in the ensuing years acquired five Prospecting Licences and undertook an exploration programme commencing with soil sampling supported by airborne geophysical surveys and concluded with a drilling campaign. The drilling amounted to 323 reverse circulation holes totalling 38,119 metres followed by five diamond drill holes totalling 1445m. This drilling is in addition to 25 diamond drill holes drilled by Roan Selection Trust, Zamanglo and JCI in the Nama area and on the flank of the Konkola dome and 23 auger holes drilled by Roan Selection Trust.



Exploration by Caledonia and its predecessors has identified 18 targets of which seven have been drilled to a greater or lesser extent. Most of the drilling activity has focussed on the A or Discovery Anomaly in the central-eastern parts of the Retention Licence area. This work has enabled declaration of an Indicated Resource as per the table below, to a depth of more than 210m below surface. The oxide mineralisation potentially extends below this depth. Other anomalies did not receive as much exploration attention but the data from one target should be re-examined for a resource declaration. Three anomalies require further investigation and the remaining 11 untested targets should be explored.



Initial bench and small bulk sample metallurgical testing has indicated that the oxide material can be upgraded into a concentrate by dense medium and magnetic separation and flotation techniques but this work should be repeated on material representative of the in situ grade of the resources. Further work is also required on the mineralogy of the material both in the near surface and deeper mineralisation to determine the mineral phases in which the cobalt, copper and nickel oxides reside. It is important to establish that the mineralogical and hence processing characteristics of the material are maintained into the deeper parts of the mineralisation.



|       |            |                 |        |       
|------ | ---------- | --------------- | ------ | ------
|Block  | Tons       | Grade (% metal)
|       |            | Cobalt          | Copper | Nickel
|1      | 9,139,000  | 0.0446          | 0.1028 | 0.0133
|2      | 11,366,000 | 0.0613          | 0.0288 | 0.0067
|3      | 4,305,000  | 0.0490          | 0.0730 | 0.0309
|4      | 18,846,000 | 0.0572          | 0.1463 | 0.0086
|Totals | 43,656,000 | 0.055           | 0.099  | 0.011 







The complete Report may be viewed on the Companys website.









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Summary of Independent Competent Persons Report

Of the

Nama Retention Licence

In

Northern Zambia



And held by

Caledonian Mining Limited



Effective Date: 1st May 2007



By

David Grant

Pr Sci. Nat., CGeol.

And

Michael Haslett

BSc, MRM



Summary

Caledonia Nama Limited (Caledonia), a subsidiary of Caledonia Mining Corporation holds a Retention Licence over 80650ha of ground in the Solwezi District of the Northwestern Province of Zambia in sub-Saharan Africa. It lies on the northwestern flank of the Zambian Copperbelt and has potential for high tonnage, low-grade cobalt-copper-nickel mineralisation. The area is underlain by strata of the Katanga Supergroup but paucity of outcrop and structural complexity has prevented accurate correlation of the stratigraphy intersected in the boreholes except that distinct mixtite units can be correlated with the lower Kundelungu Group.



Caledonia started operations in the area in 1994 and in the ensuing years acquired five Prospecting Licences and undertook an exploration programme commencing with soil sampling supported by airborne geophysical surveys and concluded with a drilling campaign. The drilling amounted to 323 reverse circulation holes totalling 38,119 metres followed by five diamond drill holes totalling 1445m. This drilling is in addition to 25 diamond drill holes drilled by Roan Selection Trust, Zamanglo and JCI in the Nama area and on the flank of the Konkola dome and 23 auger holes drilled by Roan Selection Trust.



Exploration by Caledonia and its predecessors has identified 18 targets of which seven have been drilled to a greater or lesser extent. Most of the drilling activity has focussed on the A or Discovery Anomaly in the central-eastern parts of the Retention Licence area. This work has enabled declaration of an Indicated Resource of 43.6Mt of oxide mineralisation with a grade of 0.055%Co and 0.099%Cu to a depth of more than 210m below surface. The oxide mineralisation potentially extends below this depth. Other anomalies did not receive as much exploration attention but the data from one target should be re-examined for a resource declaration. Three anomalies require further investigation and the remaining 11 untested targets should be explored.



Initial bench and small bulk sample metallurgical testing has indicated that the oxide material can be upgraded into a concentrate by dense medium and magnetic separation and flotation techniques but this work should be repeated on material representative of the in situ grade of the resources. Further work is also required on the mineralogy of the material both in the near surface and deeper mineralisation to determine the mineral phases in which the cobalt, copper and nickel oxides reside. It is important to establish that the mineralogical and hence processing characteristics of the material are maintained into the deeper parts of the mineralisation.



Cautionary Note to U.S. Investors concerning estimates of Measured and Indicated Resources. This section uses the terms measured resources and  indicated resources. We advise U.S. investors that these terms are not recognised by the U.S. Securities and Exchange Commission. The estimation of measured resources and indicated resources involves greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves. U.S. investors are cautioned not to assume that mineral resources in these categories will be converted into reserves.



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Table 1 Indicated Resources in the Discovery or A Anomaly



BlockTonsGrade (% metal)CobaltCopperNickel19,139,0000.04460.10280.0133211,366,0000.06130.02880.006734,305,0000.04900.07300.0309418,846,0000.05720.14630.0086Totals43,656,0000.0550.0990.011




The above information used to define the four resource blocks at the Discovery or A anomaly can be considered adequate to allow a confident interpretation of the geological framework and to reasonably assume the continuity of the mineralisation. They have thus been classified as an Indicated Resource the quantities of which have been set out Table 1 above.  Tonnages and grades estimated within each of the resource blocks were determined at a cut-off of 0.02% Co.



Table 2 Estimated Indicated Resources in Anomaly C



Resource blocks in Anomaly CAt 0.02% Co cut-offTonnes%Co%Cu%NiBlock C341,637,0000.05050.01730.0195Block C2 North526,0000.02450.01340.0126Block C2 South32,511,0000.03500.00530.0180Block C13,544,0000.02610.00290.0131Totals78,218,0000.0430.0120.019






Table 3 Combined Indicated Resources for Anomalies A and C



|        |                     |       |       |      
|------- | ------------------- | ----- | ----- | -----
|Anomaly | At 0.02% Co cut-off
|Tonnes  | %Co                 | %Cu   | %Ni  
|A       | 43,656,000          | 0.055 | 0.099 | 0.011
|C       | 78,218,000          | 0.043 | 0.012 | 0.019
|Total   |                     |       |       |      





The complete Report may be viewed on the Companys website.







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DEPLETED RESERVE AND AMORTIZATION CALCULATIONS WITH RESPECT

TO THE BLANKET MINE PROPERTY IN ZIMBABWE







Applied Geology Services cc, of South Africa, was commissioned by Caledonia Mining Corporation (Caledonia) to prepare an Independent Report (the Report) on the Blanket Gold Mine located near Gwanda in Zimbabwe.  On the 20th June 2006 Caledonia announced that it had acquired the Blanket Mine from Kinross Gold Corporation of Canada. This transaction, because it represented a significant addition to the assets of Caledonia, required the preparation and filing of an Independent Report on the Blanket Mine.



The Blanket Mine, which was discovered at the turn of the previous century, consists of underground mining and processing of several closely-spaced deposits defining a mineralised trend. Major infrastructure consists of underground workings, a processing plant and a tailings dam. To date the Mine has a recorded production of 1,004,000 oz of gold at an average grade of 4.79 g/t Au. Current reserves and resources are summarised in the table below:



The Report contains gold reserves figures for the Blanket Mine calculated as of December 31, 2006.



Since December 31, 2006, as a result of the Companys mining of the ore body, the known Reserves have been reduced or partially depleted.  Based on the Blanket Mine mining records, the Company has calculated that the figures for the annual reduction and the resultant reduced Reserve figures as at 31 December, 2009 were as shown in the table below.  The figures given below are for combined proven and probable reserves as the numbers for each category cannot be readily separately calculated.



When the reserve and resource figures were calculated in 2006 they were based on criteria which existed at that time - including a $500 per ounce gold price.  Since the calculations were done some, at least, of the criteria used in 2006 has changed including a major increase in the price of gold, an increase in production costs, the end of the hyper-inflation which existed in Zimbabwe in 2006, imposition of royalties in Zimbabwe and the alteration of the gold selling regulations by the Zimbabwean government to allow companies to sell their gold production at international prices.  While the Company is aware of the changes in the criteria it has not attempted to quantify the exact impact of each of the changes that has occurred.  Because  it is believed that most of the criteria changes would have a favourable impact it is also believed by Management that the depleted reserve and resource figures contained in the following Table will not be less than the amounts shown.  Also Management of the Blanket Mine has concluded that ongoing work, exploration and production operations have resulted in the establishment of at least some replacement of the reserves and resources.





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Reserves Reconciliation Table for Blanket Gold Mine



|                        |           |       |                |             |               |     
|----------------------- | --------- | ----- | -------------- | ----------- | ------------- | ----
|                        | Tonnes    | Grade | Gold Contained | Annual Prod | Remaining LoM
|                        | t         | g/t   | kg             | oz          | t ##          | Yr #
|Reserves as at Dec 2006 | 3,490,800 | 4.17  | 14,542         | 467,536     | 216,000       | 16.2
|2007 Production         | 100,082   | 3.58  | 358            | 11,519      |               |     
|Reserves as at Dec 2007 | 3,390,718 | 4.18  | 14,184         | 456,017     | 216,000       | 15.7
|2008 Production         | 81,688    | 3.33  | 272            | 8,746       |               |     
|Reserves as at Dec 2008 | 3,309,030 | 4.2   | 13,912         | 447,271     | 216,000       | 15.3
|2009 Production         | 94,714    | 4.00  | 379            | 12,181      |               |     
|Reserves as at Dec 2009 | 3,214,316 | 4.21  | 13,533         | 435,090     | 216,000       | 14.9



Notes:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|# -The remaining Life of Mine (LoM) in the Table above is calculated based on the planned production rates, i.e. the total Reserves tonnes divided by the target production tonnes for a year. If the actual production rates were used (unit-of-production method) then the LoM would have been between 30 and 40 years, reflecting the fact that the mine produced in 2007  2009 at rates substantially below the 600 tonnes/day planned production rate.  As the economic and operating conditions in Zimbabwe have been difficult, and since future increases in production are expected to exceed the planned production rates, it was deemed prudent to use remaining LoM figures shown in the Table as a reasonable and conservative estimate of the LoM for depreciation purposes.



## - Based on planned production, being the originally designated capacity of the mine- of 600 tonnes per day . See Note 3.1 below.



Amortization.

|                                                                   |        |           |          
|------------------------------------------------------------------ | ------ | --------- | ---------
|                                                                   | 2007   | 2008      | 2009     
|                                                                   |        | US$       | US$      
|Cost of Blanket Mine assets at year end                            | Note 2 | 3,706,317 | 3,761,784
|Amortization based on LoM  calculated on planned production rates | Note 3 | 241,933   | 252,790  
|Actual amortization on straight line method for Blanket Mine       |        | 244,424   | 243,601  
|Difference                                                         |        | 2,490     | (9,189)  
|As a % of net loss before tax                                      |        | 0.06%     | -0.19%   



Notes:

1.

The above amounts are for the only producing asset, Blanket  Mine  to demonstrate the effect of the different methods of calculation.   They are shown in USD whereas the Companys financial statements are presented in Canadian dollars.



2.

In 2007 Blanket was subject to hyper inflationary conditions in Zimbabwe and Blankets assets were valued in Zimbabwe dollars ( ZWD).There was no official exchange rate between the USD and ZWD. Translation of
the Blanket results was performed for Canadian GAAP purposes and the Old Mutual Implied Rate
(OMIR) was used as a reasonability check. This resulted in the ZWD amortization amounting to approximately $3,000.



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In 2008 a pro-forma USD value was established for the assets as Zimbabwe was then in an even worse hyper inflationary state. The USD value of the Zimbabwean assets was amortized over the LoM  on the straight line basis as production was negatively affected by numerous external factors, detailed below in note 3.



In 2009 Zimbabwe adopted the USD as an official currency and a complete asset revaluation (to fair value) exercise was carried out. Amortization was again provided on the LoM   the straight line basis as operations recommenced in April 2009 but were continually subjected to numerous interruptions detailed in note 3.2 below.



3.

The above Table demonstrates the LoM based on planned production rates. This more aggressive amortization policy was deemed appropriate for the following reasons:



1. The mine had a production capability of 600 tonnes per day which it had achieved regularly prior to 2006 when Caledonia acquired the mine.

2 Production from 2006 onwards was less than the planned (target) rate owing to various reasons, namely:



2.1  Continued work on the No 4 shaft expansion constrained production below the planned rate.

2.2   Frequent major power interruptions.

2.3  Lack of capital as the Zimbabwe Government paid for gold delivered to it in both ZWD and USD. The ZWD were worthless.

2.4  The USD portion of sale proceeds was frequently not paid by the Zimbabwean Government - and eventually in Oct 2008 Blanket ceased production as it was then owed USD3.2 million by the Zimbabwe Government which is still unpaid.

2.5   Inability to borrow capital  for development in Zimbabwe until middle 2009.



3.  Due to the above factors production rates were erratic and difficult to forecast. Using a unit of production basis for amortization when production was so erratic was deemed unrealistic since the mine plan was set up to operate at 600 tonnes per day and slower amortization based on actual rate of production would be inappropriate.



Had the difficulties referred to above not occurred, Blanket Mine would have operated at 600 tonnes per day and the asset would have been amortized accordingly.



The differences shown above are considered immaterial as they amount to less than 1% of the Mines reported net loss before tax.



Mr. David Grant, C. Geol, FGS, Pr. Sci. Nat., as an independent consultant, was the Independent Qualified Person for the Blanket Mine reserves calculations prepared as of December 31, 2006, as required by Canadian Securities National Instrument 43-101.



The Report, authorized by David Grant, dated July, 2006, can be viewed on the Companys website:  www.caledoniamining.com pursuant to the links Investors and Technical Reports - and on SEDAR at: www.sedar.com









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Mokopane, Limpopo Province,
South Africa



Summary of Qualified Persons Report

Rooipoort PGE



Prepared by RSG Global on behalf of: Caledonia Mining Corporation



Summary



Eersteling Gold Mining Company Ltd. (EGMC)  is a 100% owned subsidiary of Caledonia Mining Corporation and holds 100% of the Rooipoort Pt/Pd/Au/Ni/Cu project which is situated in the Limpopo Province, South Africa, some 250km north of Johannesburg and 5km south of the town of Mokopane (formerly Potgietersrus).  The Rooipoort Project incorporates two adjacent farms viz. Rooipoort 46KS (the whole farm) and Grasvally 293KR (Portions 9, 11, 13, 14 and 16) comprising a contiguous area of 3687.1948 hectares.  EGMC is the holder of the Prospecting Permit and Prospecting Right, issued by the South African Department of Minerals and Energy, to the Rooipoort Project area.

Acquisition of the properties comprising the Rooipoort Project area and the subsequent exploration programme were initiated as the area is underlain by approximately 7km of strike length of the Northern Lobe overlying the floor rocks.  The project area has limited exposure and had been poorly explored in the past, with published extrapolations of the Platreef southwards from Mokopane indicating possible Platreef sub-outcrop along the 7km strike close to the floor rocks.

The Rooipoort Project lies in the southern part of the Northern Lobe of the Bushveld Complex, the largest layered intrusion in the world and the worlds most important resource of platinum group metals.  Thirty kilometres along strike to the north of the Rooipoort Project is the Potgietersrus Platinums Ltd. opencast Pt/Pd/Au/Ni/Cu mine of Anglo Platinum Corporation Ltd. located on the Platreef.  The Platreef forms the lowermost unit of the Northern Lobe of the Bushveld Complex in that area which lies on a floor of Transvaal Supergroup rocks and Basement granites.  The Platreef is unique to the Northern Lobe. The type area of the Platreef extends in outcrop from Mokopane for some 35km to the north. It consists of an assemblage of feldspathic pyroxenites and pyroxenites hosting platinum group metals (PGMs), nickel and copper bearing sulphide mineralization.

Exploration by EGMC was undertaken in a phased manner commencing in mid-2003 with the acquisition of airborne geophysical (aeromagnetic) data followed by a soil geochemical survey and two phases of core drilling, culminating in September 2005 with 3D modelling and resource estimation (RSG Global).  The interpretation of the aeromagnetics coupled with soil geochemical data and geological extrapolation provided the basis for positioning of drillholes for the first phase of the core drilling programme.  The interpretation of this drilling programme of 23 drillholes totalling
7,470m of core and 4,886 assays is that the Platreef is not present however several mineralized zones within a 600m to 800m stratigraphic sequence were identified.



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The second phase of core drilling added 31 drillholes totalling 10,979.17m of core and 7,782 assays and allowed for definition of seven previously unidentified PGM and base metal (Ni & Cu) bearing sulphide mineralized zones, as well as the recognition of a stratigraphic sequence of this area.  A local stratigraphic terminology has been developed which does not correlate directly with the established stratigraphic terminology applied to the Bushveld Complex.  Potential correlation with the standard stratigraphy is presented in the context of previous work on the area of Grasvally and adjacent properties to the south of the project area.  The mineralized zones were essentially numbered upwards from the base of the enclosing unit with broader cut mineralization given the suffix S.

On the project area, a broad, shallow, north plunging synclinal structure is developed, separated by a northerly trending fault zone (the Grasvally Fault) from a westerly dipping unit.  Only mineralized material to the east of the Grasvally fault is considered in this interpretation, although it is clear that additional mineralized material exists to the west of this fault.  This represents upside potential to the resource calculated in this exercise.

The deposit is disrupted by several smaller-scale faults and intruded in the north by an easterly trending bifurcating dyke. The EGMC geological interpretations separate the resource into 3 main zones, the C & G block to the south of the dyke, the B block between the bifurcated limbs of the dyke and the A block to the north of the dyke.  Only mineralization in the Lower Units have been modelled in the A block.  RSG Global has treated all 3 blocks together, as they would have originally been continuous.

A mineral resource estimation was carried out by RSG Global on two of the seven defined mineralized zones viz. the M2 and L3, primarily due to the level of confidence in the lateral geological continuity of the selected zones.  RSG Global considers the mineral resource to be an Inferred Mineral Resource, primarily because of the sparse drill information.  Data quality and geological understanding are considered appropriate for this level of classification.

Metal contents and block tonnages were accumulated and formed the basis for reporting the resource as tabulated below.  Resource tabulations are based on a 0.5g/t Pt+Pd+Au (2PGE+Au) cut-off above 900m elevation, which correlates approximately to 200m depth, considered appropriate for an open pit.



Cautionary Note to U.S. Investors concerning estimates of Measured and Indicated Resources. This section uses the term inferred resources. We advise U.S. investors that this term is not recognised by the U.S. Securities and Exchange Commission. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources. U.S. investors are cautioned not to assume that inferred mineral resources exist, are economically minable, or will be upgraded into measured or indicated mineral resources.



Table 1_1
Inferred Resource
At 0.5g/t 2PGE+AuPGE+Au cut-off and 900m base (200m).  Inferred Resource
Apparent inconsistencies between grades, tonnage and contained metal may arrise from roundingAve Thick
(m)TonnesPt
(oz)Pd
(oz)Au
(oz)Ni
(tonnes)Cu
(tonnes)2PGE+
AuPGE+Au
(g/t)Pt
(g/t)Pd
(g/t)Au
(g/t)Ni
(%)Cu
(%)M21.812,791,000172,900340,30039,20025,30014,9001.340.420.830.100.200.12L31.35,337,000101,30088,3008,4008,0005,2001.150.590.510.050.150.10








The complete Report may be viewed on the Companys website.



















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Property and Claims Information



THE DATA PROVIDED BELOW FOR THE THREE PROPERTY AREAS IS CONSIDERED THE MATERIAL INFORMATION RELATING TO THE PROPERTIES AND CLAIMS. THE FULL TEXT OF THIS DATA AND INFORMATION IS AVAILABLE IN THE VARIOUS TECHNICAL REPORTS THAT ARE AVAILABLE ON THE COMPANY WEBSITEwww.caledoniamining.com



BLANKET GOLD MINE

a)

Nature of Ownership Interests

Blanket mines claimsarea is based on 2701 pegged claims.  An application made to the Ministry of Mines to convert the claims area into a mining lease was approved and its issue is awaited.

Blankets exploration properties are all pegged claims (see Table 14 g(i)) and held 100% by Blanket although some of the claims are subject to royalties.

b)

Salient Terms of Agreements, Royalties

·

1.5  2.0% NSR.Blanket owns the  claims totally.

Based on current mining law in Zimbabwe, Blankets Mining Lease is valid in perpetuity

Prospecting claims are renewable on an annual basis (Table 14 g(i)) by payment of a claim fee based on the area of the claim. The claims may also be maintained by carrying out exploration activities on the claims.  Royalties are payable on some of the claims (see Table 14 g(i)).

c)

Mineral Rights  Process of Acquisition

Mineral rights in Zimbabwe may be acquired by pegging claims or by purchasing claims. In the case of the purchase of an operating mine the mining lease/ claim is transferrable together with the related conditions.  Proposed changes to the Mining Law will require that indigenous persons hold a significant interest in mining companies.  Claims are held indefinitely so long as they are serviced in terms of work done or fees paid.

d)

The Claim/Right type and Conditions

Zimbabwe recognises both precious metal (gold) and base metal claims regardless of the nature of the deposit.  In the event of a gold mine being located on base metal claims, the claims can be converted to precious metal claims. The claims are awarded and monitored by the State.  A mining lease is awarded over existing claims on application by the mining company.

e)

Property details

See Table 14 g(i)

f)

Conditions of retention, Payments etc

See Table 14 g(i).  Claim fee payments are made by Blanket Gold Mine (responsible person  V. Naik).

g)

Property area  see Table 14 g(i)



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[caledonia20fa03212011004.gif]







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ROOIPOORT PLATINUM PROJECT

a)

Nature of Ownership Interests

Caledonia holds via its 100% subsidiary Maid O the Mist, five Prospecting Rights in the Rooipoort area (see Table 14 g (ii)).

b)

Salient Terms of Agreements, Royalties

The Prospecting Rights are valid for a period of 5 years and the expiry dates are listed in the above table.  The right may be extended for a further 2 years on application, and thereafter the right would have to converted into a Retention Right for a further 5 years.

Exploration fees are calculated on the area of the Prospecting Right and are payable annually on the anniversary date.  The rights are subject only to royalties as enacted by the State.

c)

Mineral Rights  Process of Acquisition

All mineral rights in South Africa are vested in the State.  In terms of the Minerals and Petroleum Resources Development Act governing the administration of the minerals industry in South Africa, companies may apply to the Department of Mineral Resources for Prospecting Rights over areas in which they are interested and for the specific minerals that they are interested in.  On the basis that there are no overlaps in terms of area and minerals and subject to various environmental and landowner concerns, prospecting rights are issued for a period of 5 years renewable for a further 2 years.

d)

The Claim/Right type and Conditions

Exploration in the Rooipoort area is confined the Prospecting Rights (see Table 14 g (ii)).

e)

Property details

See Table 14 g (ii)

f)

Conditions of retention, Payments etc.

See Table 14 g (ii).  Prospecting  fee payments are made annually by Maid O the Mist (responsible person  A. Lawson).

g)

Property area  see Table 14 g (ii)



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NAMA COBALT/COPPER PROJECT

a)

Nature of Ownership Interests

Caledonias 100% subsidiary, Caledonia Nama Ltd owns four contiguous Mining Licences in the Copperbelt Province of Zambia.

b)

Salient Terms of Agreements, Royalties

The Mining Licences were issued in 2008 and are valid for a period of 25 years and thereafter are renewable for a further period of 25 years.  The retention of the Licences is subject to the development of mining activities on the licences taking into account realistic estimates of economic conditions relating to the development of such mining ventures.  The Licences are subject to no royalties other than that which the State may impose.

c)

Mineral Rights  Process of Acquisition

Mineral rights in Zambia are vested in the State.  The normal process of acquisition is to apply for a Prospecting Licence which is normally issued for a period of three years at which stage at least half the area must be dropped when an application is made to extend the Licence period.  Following a further two year period the prospecting company is required to relinquish a further portion of the property on application for a mining licence.

d)

The Claim/Right type and Conditions

Caledonia holds a Mining Licence over the Nama area.  The right is secured by the development of mining activities on  the licence area, subject to the State and Local Council requirements particularly in terms of environmental and local developments issues.

e)

Property details

See Table 14 g (iii)

f)

Conditions of retention, Payments etc.

See Table 14 g (iii).  A once off payment was made on issue of the Mining Licence. No ongoing or annual fees are payable.  When land is demarcated for mine development, this will result in a purchase consideration to the local council.

g)

Property area  see Table 14 g (iii)



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