|(Mark One) |                                                                                     | OMB APPROVAL                                                                                                    
|---------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------
|           | UNITED STATES
      SECURITIES AND  EXCHANGE COMMISSION
      WASHINGTON, D.C.20549 | OMB Number:   3235-028
      Expires January 31, 2008
      Estimated average burden hours per response.. 2631.0





FORM 20-F



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

OR



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

For the fiscal year ended  December 31, 2005

OR



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

OR



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

Date of event requiring this shell company report.



For the transition period from

_______________to_________________



Commission file number __0-13345_______________________________



Caledonia Mining Corporation
___________________________________________________

(Exact name of Registrant as specified in its charter)



________________________________________________________________________________

(Translation of Registrants name in English)



Ontario, Canada________________________________________________________________

(Jurisdiction of incorporation or organization)



Unit #9 2145 Dunwin Drive, Mississauga, Ontario, Canada, L5L 4L9____________________

(Address of principal executive offices)

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



Title of each class

Name of each exchange on which registered



_____________Nil_____________

______________Nil______________________



__________________________

____________________________________



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



____________Common Shares without par value._____________________________________________________

(Title of Class)

________________________________________________________________________________________________

(Title of Class)

SEC 1852 (12-05)

Persons who respond to the collection of information contained in this form are
not required to respond unless the form displays a currently valid OMB
control number.









---

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



___Nil____________________________________________________________________________________________

(Title of Class)



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

__370,715,136 Common Shares______________________



__As of December 31, 2005__________________________

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



Yes  [X] No

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  [X] No

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 1934from 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.

[X]Yes   No



Indicate by check mark which financial statement item the registrant has elected to follow.

[X] Item 17         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  [X] No

(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:

Caledonia Mining Corporation was created on February 5, 1992 following the amalgamation of its three predecessor companies, namely Golden North Resource Corporation, Thorco Resources Inc. and Doelcam Mining Corporation.  For accounting purposes, the Amalgamation was treated as a purchase acquisition by Doelcam Mining Corporation of the other two predecessor companies.



NOTE:

That all reference to monies herein are to Canadian dollars unless otherwise specifically indicated.























---



PART 1



1.

IDENTITY of DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



Directors and senior management

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



Advisers

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



Auditors

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



However, the information required above can readily be determined from the 2005 Annual Report of the respondent on pages 49 and 50.





2.

OFFER STATISTICS AND TIMETABLE



Offer Statistics

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



Method and expected 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 2001 to 2005 in Canadian Generally Accepted Accounting Principles.



Table 3 A (i)shows the applicable selected financial data for the 5-year period 2001 to 2005 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 last six months ending February 2006.

















---









Table 3A - Selected Financial Information - Canadian Generally Accepted Accounting Principles

|                                                           |         |         |          |         |        
|---------------------------------------------------------- | ------- | ------- | -------- | ------- | -------
|                                                           | 2005    | 2004    | 2003(1)  | 2002(1) | 2001(1)
|Financial - $ Thousands Cdn except per share amounts       |         |         |          |         |        
|Revenue from Operations                                    | 2,642   | 841     | 646      | 27      | 124    
|Gross Profit (Loss)                                        | (5,275) | (5,610) | (2,984)  | (118)   | (143)  
|Expenses (General, Administration, Interest, Amortization) | 4,257   | 2,959   | 1,841    | 1,585   | 1,130  
|Net Income (Loss) for the Year                             | (9,680) | (9,979) | (14,496) | (4,446) | (1,096)
|Cash                                                       | 1,076   | 6,470   | 4,179    | 1,864   | 90     
|Current Assets                                             | 2,264   | 7,481   | 4,573    | 2,094   | 184    
|Total Assets                                               | 22,338  | 23,666  | 19,530   | 24,969  | 25,183 
|Current Liabilities                                        | 2,589   | 1,062   | 790      | 1,336   | 2,701  
|Long Term Liabilities                                      | 377     | 423     | 1,089    | 1,073   | 1,499  
|Working Capital (Deficiency)                               | (325)   | 6,419   | 3,783    | 758     | (2,517)
|Shareholders Equity                                       | 19,372  | 22,181  | 17,651   | 22,560  | 20,983 
|Total Capital Expenditures (including Mineral Properties)  | 5,284   | 3,813   | 2,279    | 613     | 23     
|Expenditures on Mineral Properties                         | 2,583   | 2,298   | 2,042    | 624     | 23     
|Financing Raised                                           | 6,785   | 14,314  | 9,511    | 5,174   | 1,078  
|Dividends Declared                                         | -       | -       | -        | -       | -      
|Share Information                                         



|                                    |        |        |         |        |      
|----------------------------------- | ------ | ------ | ------- | ------ | -----
|Market Capitalization ($ Thousands) | 42,632 | 39,145 | 105,955 | 86,836 | 9,086

|                               |         |         |         |         |        
|------------------------------ | ------- | ------- | ------- | ------- | -------
|Shares Outstanding (Thousands) | 370,715 | 301,112 | 252,274 | 211,795 | 165,202
|Warrants & Options (Thousands) | 34,748  | 52,342  | 27,348  | 28,055  | 19,566 
|Earnings (Loss) per Share      | (0.031) | (0.034) | (0.062) | (0.023) | (0.008)





(1)

Restated for the adoption of the Asset Retirement Obligations change in accounting policy.







---



Table 3A (i) - Selected Financial Information - United States Generally Accepted Accounting Principles



|                                                                 |          |          |         |         |        
|---------------------------------------------------------------- | -------- | -------- | ------- | ------- | -------
|                                                                 | 2005     | 2004     | 2003    | 2002    | 2001   
|Revenue from Operations                                          | 2,642    | 841      | 646     | 27      | 124    
|Gross Profit (Loss)                                              | (7,315)  | (7,078)  | (3,662) | (727)   | (149)  
|Expenses (General and Administration, Interest and Amortization) | 4,257    | 2,959    | 1,841   | 1,585   | 1,130  
|Net Income (Loss)                                                | (11,720) | (10,385) | (4,985) | (3,795) | (1,202)
|Total Comprehensive Loss                                         | (11,738) | (10,421) | (4,985) | (3,795) | (1,202)
|Cash                                                             | 1,076    | 6,470    | 4,179   | 1,864   | 90     
|Current Assets                                                   | 2,264    | 7,481    | 4,573   | 2,094   | 184    
|Total Assets                                                     | 17,591   | 20,977   | 17,283  | 13,439  | 11,342 
|Current Liabilities                                              | 2,589    | 1,062    | 790     | 1,336   | 2,701  
|Long Term Liabilities                                            | 377      | 423      | 1,089   | 1,280   | 1,813  
|Working Capital (Deficiency)                                     | (325)    | 6,419    | 3,783   | 758     | (2,517)
|Shareholders Equity (Deficiency)                                | 14,625   | 19,492   | 15,404  | 10,823  | 6,828  
|Total Capital Expenditures (including Mineral Properties)        | 3,244    | 2,345    | 1,601   | (11)    | -      
|Expenditures on Mineral Properties                               | 543      | 830      | 1,365   | -       | -      
|Financing Raised                                                 | 6,785    | 14,314   | 9,442   | 5,174   | 1,078  
|Deemed Dividends                                                 | 171      | -        | -       | -       | -      
|Share Information                                                |          |          |         |         |        
|Market Capitalization ($ Thousands)                              | 42,632   | 39,145   | 105,955 | 86,836  | 9,088  
|Shares Outstanding (Thousands)                                   | 370,715  | 301,112  | 252,274 | 211,795 | 165,202
|Warrants & Options (Thousands)                                   | 34,748   | 52,342   | 27,348  | 28,055  | 19,566 
|Basic and Diluted Net Income (Loss) per Share                    | (0.038)  | (0.036)  | (0.022) | (0.020) | (0.008)





Table 3A (ii) - Summary of Exchange Rates for the 5-year Period - 2001 to 2005

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.



|                                 |        |        |        |        |       
|-------------------------------- | ------ | ------ | ------ | ------ | ------
|Exchange Rate                    | 2005   | 2004   | 2003   | 2002   | 2001  
|Rate at the End of the Period(1) | 1.1630 | 1.2020 | 1.2965 | 1.5591 | 1.5775
|Average Rate (2)                 | 1.2114 | 1.3000 | 1.4015 | 1.5703 | 1.5490
|High Rate (1)                    | 1.2585 | 1.3957 | 1.5777 | 1.6033 | 1.5955
|Low Rate (1)                     | 1.1630 | 1.1759 | 1.2839 | 1.5276 | 1.4991



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 September 2005 to February 2006 are as follows:



|        | Sept. 2005 | Oct. 2005 | Nov. 2005 | Dec. 2005 | Jan. 2006 | Feb. 2006
|------- | ---------- | --------- | --------- | --------- | --------- | ---------
|Closing | 1.1627     | 1.1812    | 1.1669    | 1.1630    | 1.1390    | 1.1366   
|Average | 1.1774     | 1.1777    | 1.1809    | 1.1613    | 1.1567    | 1.1489   
|Hi      | 1.1963     | 1.1895    | 1.1974    | 1.1754    | 1.1794    | 1.1614   
|Low     | 1.1588     | 1.1629    | 1.1642    | 1.1427    | 1.1372    | 1.1352   



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



C.

Reason for the offer and use of proceeds

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



D.

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 section D 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



The exploration, and development of, and the production from mineral deposits is potentially subject to a number of political, economic and other risks.  Exploration, development and production activities are potentially 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, such as comprehensive health care for HIV/AIDS infected employees and families;

·

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, possibly which the foreign company must subsidize;

·

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;

·

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



Such risks could potentially arise in any country in which Caledonia operates; however the risks are regarded as greater in South Africa and Zambia.  In South Africa, the Black Economic Empowerment Legislation and a number of economic and social issues may result in an increased perceived political and economic risk weighting of operating in that country.



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, 2005, the consolidated accumulated deficit was $161.6 million. 68.5% of the accumulated loss relates to capital asset and mineral property write-downs, 6.8% is due to discontinued operations prior to 1998, and the balance of 24.7% relates to operational and administration activity.  Operational activity is defined as gross profit from mining operations less expenses such as amortization, general and administration, interest on debt and other miscellaneous expenses.



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.  In 1997, Caledonia reduced the carrying value of its investment in the two South African gold mines by recording a write-down of $44.9 million. This reduction was made in response to a decline in the average price of gold per ounce from about US$364 in 1996 to US$327 in 1997 and the placing of the two mines onto "care and maintenance".  Similarly in 1998 and 1999, these assets were further reduced by $10.6 million and $2.4 million respectively when the gold price fell to about US$ 250 per oz. In 2004, the mineral property of Eersteling Gold Mine was written down by $223,000 to $0.  Similarly in 2004, the Eersteling plant and equipment was written down from $1.596 million to $0.887 million at the year end. There were no write-downs in 2005.



During 2003, the Rand price of gold held steady at between R82,000 and R88,000 per kilogram despite a slow but gradual increase in the price of gold to about US $415 per ounce at the 2003 year end from a price of $347 per ounce at the beginning of 2003. As the gold price recovers to acceptable levels and the South African mines recommence production, a substantial portion of the write-down could be recovered as earnings.  However, there is no assurance the Rand price of gold will be sustainable.  During 2004, despite the gold price in US dollars increasing to a high of $458, the price of gold in South African Rand at the end of the year declined by about 9.5% over that at the end of 2003. The Rand appreciated by 14.8% against the US$ over the 2004 year whilst the US$ gold price increased by about 6.6% over the year. This trend reversed during 2005 as the South African Rand weakened by 12.2% against the United States dollar which, coupled with the 23.8% increase in the US$ gold price, resulted in a 38.9% increase in the Rand gold price per ounce over the year.



In 2002, the carrying value of Caledonias Kadola exploration property in Zambia, amounting to $2.6 million was written down to $1 as no exploration funding was available for this project at that time. In 2003, the carrying value of the Nama group exploration property in Zambia, $9,534,000, was written down to $1 due to lack of significant exploration activity on the property during the year and despite there being strong interest shown on purchasing a cobalt concentrate from Nama by potential end-users.  In 2004, development work was re-started on the Nama cobalt project due to increases in the prices of base metals and the continuing strength of the price of cobalt. During



---



2005 discussions were held with a number of cobalt end-users regarding a joint venture agreement at Nama, a letter of intent has been signed with one of these and discussions are continuing with a number of other end-users



At the end of 2005, Eersteling Gold Mining Company Limited spent an amount of $3.324 million on exploration of its Rooipoort Platinum Project, which reported a NI 43-101 Resource estimate in December 2005, and the Roodepoort Gold Project and had been capitalized under Canadian GAAP in the books of the Corporation. Of the above $3.324 million, $1.653 was spent in 2005, $1.151 was spent in 2004 and the balance was spent in 2003.



In general, mining companies react to changing commodity prices by searching for new methods of operating to either increase the volume of production from existing ore reserves or reduce operating costs.  Caledonia is continuously searching for new production methods and operating cost efficiencies in an attempt to mitigate the effects of lower commodity prices on operating profits. However, there is no guarantee that Caledonia will be successful in its efforts.  Caledonia at its Barbrook mine recommenced gold production in the 2nd quarter of 2003 and introduced the relatively new technology of Resin leaching to increase its gold recovery and enhance economics. In late 2003 and during 2004 Caledonia introduced additional new flotation equipment and concentrate oxidation technology at Barbrook to further improve the gold recovery and production economics. In late 2005 in light of additional mining flexibility providing the opportunity to increase production the Barbrook metallurgical plant was expanded to a design capacity of 15,000 tonnes per month, and this expansion was completed and commissioned in January 2006. Caledonia is further evaluating alternative metallurgical processes to determine whether further improvements in recoveries and mine economics can be attained.



Need for Additional Funds



The expected increase in gold production at Caledonias Barbrook mine should, depending on the Rand price of gold received, generate positive cash flow in 2006.  However, if funds fall short of requirements, Caledonia will undertake financing options such as private placements with private investors, and, if this is still insufficient for its needs, will investigate either project joint ventures or project or bank funding.   The funds raised by the 2005 financing have been and will be mainly used by Caledonia on its exploration, development and production activities such as:

·

at Barbrook by developing vertical shaft access to ore resources below the 10 level and by lateral development to the east along strike; providing continuity of the mining operations; and possibly making further capital additions to the Barbrook metallurgical plant, such as a Biox® circuit ;

·

by further drilling at Caledonias Rooipoort Platinum Project;

·

by the purchase of additional exploration property adjacent to Caledonias Rooipoort Platinum Project;

·

drilling of Caledonias Rooipoort project once the Prospecting permit has been issued;

·

by further  bulk sampling and concentration testwork on Caledonias Nama Cobalt/Copper Project in Zambia;

·

by further exploration and drilling at the Roodepoort gold project of Eersteling;

·

by possible drilling of target exploration areas at Eersteling gold mine; and

·

by further drilling/bulk sampling and processing of material from the Goedgevonden Diamond project.



The Mulonga Plains Joint Venture with the BHP-Billiton Entity is subject to joint venture agreements and is fully funded by the joint venture partner through to commercial production. Similarly, the Kikerk Lake joint venture with Ashton Mining (Canada) Limited is fully funded by Ashton. Caledonia continues to actively review the benefits, to Caledonia and its shareholders, of seeking joint venture partners for most, if not all of its exploration properties.



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.  During Caledonias limited operating history and the continuous shortage of funding between 1997 and mid 2002, most of the key responsibilities within Caledonia have been assigned to a small number of individuals. With recommencement of production at the Barbrook mine and the expansion of other Southern African projects, various consultants and staff have been engaged to assist with the increased technical and administrative workload.  In late 2003 and early 2004 additions were made to the corporate staff at senior levels to strengthen the





---



management and operations team in South Africa and to address some of the succession planning needs of Caledonia



Additional senior staff will be recruited during 2006 to replace Mr Harvey who retired from his position as Technical Director in December 2005, but continues as a director, and Mr Johnstone, Chief Operating Officer, who has given notice of his retirement effective October 1, 2006.



To follow on from the previously disclosed appointments, Mr. Mike Tombs was appointed Vice President Finance and Chief Financial Officer at mid 2004, and Mr. Roland Fasel of Geneva, Switzerland was appointed to the Board of Directors in August 2004. 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.



Absence of Dividends



The Company has never paid or declared or paid cash dividends on Common Stock.



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



The purpose of this standard is to provide information about the companys business operations, the products it makes or the services it provides, and the factors that affect the business. The standard also is intended to provide information regarding the adequacy and suitability of the companys properties, plants and equipment, as well as its plans for future increases or decreases in such capacity.



A.

History and Development of Caledonia



Caledonia Mining Corporation ("Caledonia") was incorporated, effective February 05, 1992, by the amalgamation pursuant to the laws of the Province of British Columbia, Canada of two "public" companies and one "private" company.  The two public companies were Golden North Resource Corporation ("Golden North"), a British Columbia company and Thorco Resources Inc. ("Thorco"), an Ontario company.  The private company was Doelcam Mining Corporation ("Doelcam"), an Ontario company.  Such three companies being herein variously referred to as the "Amalgamating Companies".



One of the Amalgamating Companies, Golden North was itself created, effective October 1, 1986 by the amalgamation, pursuant to the laws of the Province of British Columbia, Canada, of two "public" British Columbia companies named Golden North Resource Corporation ("Golden North") and Good Hope Resources Ltd. ("Good Hope") - such two companies being herein variously referred to as the "Predecessor Companies".  Predecessor Corporation Golden North was itself created by an amalgamation, which became effective on August 30, 1984, of three companies incorporated in the Province of British Columbia, Canada, named Grove Explorations Ltd., Rosmac Resources Ltd. and N.W.P. Resources Ltd.



The amalgamation of companies under the British Columbia Corporation Act is in effect a merger of the Amalgamating Companies into a single new corporate entity, which replaces the original Amalgamating Companies.  As a result



---



of the amalgamation, Caledonia became possessed of all the assets and assumed responsibility for all of the liabilities, of the Amalgamating Companies.



As a result of the amalgamation, all of the issued and outstanding shares of the Amalgamating Companies were exchanged for fully paid and non-assessable common shares in the capital of Caledonia.  As a result of the share exchange Caledonia issued a total of 10,632,567 common shares to the shareholders of the Amalgamating Companies.  The share exchange was on the following basis:



-  0.71672 shares of Caledonia for one share of Golden North;

-  0.19426 shares of Caledonia for one share of Thorco;

-  0.70810 shares of Caledonia for one share of Doelcam



The shares of Golden North and Thorco were, prior to the amalgamation, listed on the Toronto Stock Exchange in Toronto Ontario, Canada.  Additionally, up to 1991, Golden North was listed on the Vancouver Stock Exchange in Vancouver British Columbia, Canada and was also quoted on NASDAQ in the U.S.A.  Following the amalgamation, the shares of Caledonia were listed for trading on the Toronto Stock Exchange and quoted on the NASDAQ small caps market.  In October 1995, Caledonia was elevated to the NASDAQ National Market from the small caps market.



In March 1995, Caledonia decided to de-register as a Corporation registered under the laws of the Province of British Columbia, and simultaneously, was registered as a Canadian Corporation under the provisions of the Canadian Business Corporations Act(CBCA).



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



Head Office - Canada

Africa Office - South Africa

Caledonia Mining Corporation

Greenstone Management Services

Suite 9, 2145, Dunwin Drive,

24, 9th Street, Lower Houghton

Mississauga, L5L 4L9

Johannesburg, Gauteng, 2198

Ontario, Canada

South Africa

(1) 905 607 7543

(27) 11 447 2499



The above principal Canadian and South African office addresses are the same as those given in the 2003 and the 2004 Form 20F.



In 1997, the NASDAQ stock market 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 the NASDAQ Stock Market, Inc. 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.



On April 6, 2000, the Board of Directors of Caledonia approved a letter of intent dated April 4, 2000 whereby Caledonia disposed of its investment in Filon Sur S.A. ("Filon Sur") and Fynegold Exploration Limited ("Fynegold").  In relation to the above transaction, reference is made to note 5 (b) of Caledonias financial statements contained in the 2000 Annual Report, which information was incorporated therein by reference in the 2000 Form 20F.



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 party has continued work on the Mulonga Plain properties in 2004 and 2005 in its search for diamondiferous kimberlite pipes and has planned further exploration work for the 2006 exploration season.

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%.



---



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 have signed a 3-way joint venture exploration agreement in early 2002 and the operator of the joint venture has completed an approximate $1.5 million winter and summer exploration program in 2002 a further $600,000 program in 2003 and a $340,000 exploration program in 2004. Cost of exploration at Kikerk Lake in 2005 totalled $530,000. At the date of this report, the operator had not set a cost of its 2006 program of exploration expenditure.



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 could have increased its interest to 50% by spending a further $4,000,000 in the same 4-year period.  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.  Talks were held with another potential joint venture partner in 2002 but without any agreement being reached.  In late 2003 talks were held with a smelting company in Zambia regarding the sale of concentrates from Nama as smelter feed. Further discussions with the Zambian Smelter and other cobalt end-users were held in 2004.  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. The tests continued into the 1st quarter of 2005.  A letter of intent has been signed with one potential end-user for the long term supply of concentrate equivalent to 2,000 tonnes of Cobalt per annum. Long terms supply discussions are ongoing with a number of large end users of Cobalt



Caledonia has not been involved in any significant reorganization, mergers, receiverships or bankruptcies. In January 2002, Caledonias management service agreement with the Filon Sur Gold Mine in Southern Spain was effectively terminated due to the placing of Filon Sur into liquidation by its major shareholder.



In 2002, the Corporationraised about $ 4.2 million equity financing (net of fees) from private placements and a convertible debenture and about $1.5 million from the exercise of warrants. In early 2003, Caledonia raised approximately $1.2 million from equity financing (net of fees) from the portion of the private placement carried over from December 2002, about $1.2 million from the exercise of warrants and about $0.037 million from the exercise of share options. A second private placement in August 2003 raised a further $4.6 million (net of fees). For details of these equity financings and the sale of the warrants please refer to Note 4 of the Financial Statements on pages 31 and 32 of the 2003 Annual Report that are incorporated herein by reference or in Note 5 b (1), (3), (4) and (5) of the 2004 Annual Report that is incorporated herein by reference.



In 2004, a private placement and exercise of warrants raised $14.3 million net of financing costs. For details of this financing please refer to Note 4 b (6) of the Financial Statements on page 34 of the 2004 Annual Report that is incorporated herein by reference.



In 2005, two private placements and exercise of warrants raised $6.6 million net of financing costs. For details of this financing please refer to Note 5 (b) (4), (5) and (6) of the Financial Statements on page 37 of the 2005 Annual Report that is incorporated as Exhibit 14a herein by reference.



A full description of Caledonia's involvement in its various subsidiaries is given in section - 4 (B).  From time to time Caledonia receives mineral property and business proposals from third parties for review as potential investment opportunities.  The Board of Directors or the officers of Caledonia reviews and evaluates those opportunities of merit and interest to Caledonia.  In 2002, Caledonia decided to proceed with exploration of the Rooipoort property in South Africa following the review procedure outlined above.





---



With the imminent potential of improved political conditions in other Southern African countries, Caledonia is reviewing mining opportunities in certain of these countries.  These activities are and will be undertaken through joint ventures or direct exploration expenditures.



B.

Business Overview



Mining and Exploration Properties:



(1)

Filon Sur gold mine



Until June 30 2000, Caledonia owned a 99.5% interest in the Filon Sur gold mine located at Tharsis in the Province of Huelva in the Andalusia area of southern Spain.  The Filon Sur mine had the right to mine, reclaim and process all gossans and morrongo ores from the 10,000 acre Tharsis and La Zarza lands and mining concessions, historic mining districts located on the world famous Iberian pyrite belt.



The operation at the mine in early 2001 and the latter part of the year was severely affected by wet weather that affected all of the feed sources to the plant and reduced production significantly.  Despite various efforts to reduce costs and increase production, operating losses were made throughout the year - especially from August 2001 onwards.  Despite seeking respite from the critical cash flow shortage by repeatedly attempting to obtain Government funding for the depressed Spanish mining industry, the mine was considered to be no longer a viable on-going operation and was accordingly placed into liquidation at a shareholders meeting in January 2002.  This effectively terminated Caledonias management services contract with the mine. Because there was no free cash from the mine in 2001 no fees were paid to Caledonia for management services during that period.





(2)

Barbrook gold mine



The 100% owned Barbrook gold mine is located near the town of Barberton in the Mpumalanga province of the Republic of South Africa. Pretoria and Johannesburg are approximately 375 km to the west. Barberton is the natural and historic center of the gold mining district in the Mpumalanga province.  The town has a history of mining dating back more than 100 years. The present property, which covers an area of 10,625 acres and extends for a distance of about 28 km along strike, represents a consolidation of about 20 old mines.



The Barbrook gold deposits occur in the Barberton Greenstone belt, the host for the other gold deposits in the area. The belt is of Achaean age and includes some of the oldest volcanic and sedimentary rocks in South Africa.  The belt trends southwest to the northeast and has been intruded and deformed by various granite plutons at the margins. The Barbrook property covers two steeply dipping banded iron formations oriented in an east-west direction.  These two shear zones, called the Zwartkoppie and Barbrook Lines are the host to the Barbrook gold deposits.



During 1997, prior to the suspension of activities, the mine was operating at a rate of



---



17,000 tonnes per month and the process plant was operating at about 20,000 tonnes per month of underground ore.  The plant has, in the past, processed oxide ore at rates in excess of 30,000 tonnes per month. Through 2000, operations remained suspended at Barbrook due to the continuing low gold price.  The underground mine was operated on a very small-scale basis in early-mid 2001 to generate cash flow to enable the plant and the mine to be re-started.  This operation was terminated in September 2001 due to uneconomic operation at the low production rate. The mine was returned to a care and maintenance basis. Reference is made to page7 of the 2005 Annual Report for information on the reserves and resources, which information is incorporated herein by reference.



Barbrook was re-started in January 2002, again mining a low-tonnage, high grade payshoot to provide cash flow to commence rehabilitation of the Mine planned to re-start processing at a rate of 6,000 tonnes per month and to pilot test the new process technology for gold recovery developed by Caledonia. However, due to poor economic returns on the low tonnage, high-grade ore, operations were suspended in April 2002. A full geological and mining re-evaluation was carried out on the Taylors orebody from May 2002, which has led to the rehabilitation of the mine and plant and the resumption of operations in the 2nd quarter of 2003. Information on the production of Barbrook in 2004 is shown on Page 10 of the 2004 Annual Report that is incorporated herein by reference. The characteristics of the Taylors ore fed to the plant in 2003 and 2004 were not as expected, or as used in earlier test work, and recoveries have been below projections.  The ore was much more refractory with considerably more arsenopyritic ore than expected, although these ores are of higher grade than the pyritic ore zones tested previously.

A number of alternative metallurgical circuits have been tested and circuit improvements have been identified.  In late 2003 and during 2004 Caledonia introduced new flotation equipment, organic carbon separation systems and concentrate oxidation technology at Barbrook to improve the gold recovery and therefore the production economics. Commissioning and modifying these circuit changes was completed in early 2005.  In late 2005, following the evaluation of dense-media-separation, ultra-fine milling and whole-plant Biox® metallurgical processes Barbrook undertook an expansion of the metallurgical plant to a design capacity of 15,000 tpm. This expansion incorporates ultra-fine-milling which was successfully tested on a pilot plant scale in mid 2005. Further information on the detailed work carried out in the Barbrook metallurgical plant is shown on pages 10, 11 and 12 of the 2004 Annual Report that is incorporated herein by reference and pages 10 and 11 of the 2005 Annual Report that is incorporated herein by reference





In 2005, following the delineation of additional ore immediately west of the Taylors it was decided to develop mining operations on the upper levels of Taylors and easterly along strike towards the Crescent area and on the Zwartkoppies line in order to provide additional ore to the expanded metallurgical plant. Development of a shaft system to access Taylors (on the Barbrook line below the 10 level was reviewed and a vertical shaft selected.  Minor changes were required to the shaft work started in 2004.  In October 2005 shaft development was temporarily deferred to allow Barbrooks resources to be concentrate on the plant expansion.  A suitable hoist has been purchased and will be installed and commissioned during 2006.  Further information on exploration and mining at Barbrook is shown on pages 6, 7, 10 and 12 of the 2005 Annual Report that is incorporated herein by reference.





(3)

Eersteling gold mine



The 100% owned Eersteling gold mine, is located 36 kilometers from the town of Polokwane (Pietersburg) in the rolling terrain of the Northern Province of the Republic of South Africa.  Pretoria and Johannesburg are 250 km and 300 km, respectively, to the south.



The first gold discovered in South Africa was on a farm named "Eersteling" which was located near the village of Marabastad, 30 km southeast of Pietersburg.  Mining started in May 1874 and continued until the second Anglo-Boer War (1899 - 1902) when the mine was shut down. The mining rights of the fragmented mining and exploration properties were consolidated. On July 16 1987, Eersteling Gold Mining Company Limited was formed and was listed on the Johannesburg Stock Exchange.



The Eersteling Mine property has an area of 47,000 acres (19,000 hectares), extends for a distance of about 25 km and is located in the Pietersburg Greenstone belt which is of Achaean age and which consists of an upper and lower sequence.  The upper sequence is mainly conglomerate, grit and sandstone. The lower sequence is undifferentiated mafic and ultramafic volcanic rocks and intrusives, with banded iron formation and chert.  The feature that most dominates gold mineralization in the area is the Willemse shear.  During 2003 and 2004 operations remained suspended at
Eersteling.



---





A full geological review of the Eersteling property, including the mine plans and other technical data, was commenced in October 2004.  The resources at Eersteling were evaluated and a development program prioritized.   Fieldwork in 2005 focussed on mapping and re-sampling known mineralized reef structures.   Details of this program are contained in page 13 of the 2005 Annual Report, which is incorporated herein by reference.



Platinum/Base-metals Properties:

In 2002, Eersteling obtained the Rooipoort platinum prospect from Anglo American Platinum Corporation (Amplats). The property is about 30 km south-west of the Eersteling metallurgical plant and is located in an area that is presently undergoing a surge in platinum group metal exploration.



Following upon the successful 2003/2004 drilling, a further 342 hectares of prospecting rights were purchased in the Grasvally area contiguous to the southern boundary of Rooipoort.



To date Caledonia has drilled a total of 18,450 meters in 54 holes on the Rooipoort/Grasvally platinum exploration project.  This drilling covers the full 6km strike length that makes up the project area.



At the end of 2004, flotation amenability test work was performed at the SGS Lakefield laboratories in Johannesburg, South Africa on mineralized composite samples from 5 lithological units prepared from the diamond drill-hole cores to verify the flotation amenability of the ore. The tests included milling and basic flotation to produce a flotation concentrate. The tests indicated that from each of the 5 mineralized zones, a re-cleaner flotation concentrate of low mass recovery can be produced that contains medium to high recovery of the platinum, palladium, gold, copper and nickel. This initial test work indicates that a simple metallurgical process route could process a flotation concentrate from a high-tonnage lower grade feed ore from an open-pit ore source.



In September 2005, an independent resource estimate was calculated and incorporated into a NI 43-101 report by RSG Global of Australia.  The results of this estimate are:

|                                                                        |                |            |         |      |      |      |      |     
|----------------------------------------------------------------------- | -------------- | ---------- | ------- | ---- | ---- | ---- | ---- | ----
|Inferred Resource [At 0.5g/t 2PGE+Au and 900m base (200m below surface)
|Zone                                                                    | Ave
true
width | Tonnes     | 2PGE+Au | Pt   | Pd   | Au   | Ni   | Cu  
|                                                                        | (m)            |            |         | g/t  | %   
|M2                                                                      | 1.8            | 12,791,200 | 1.34    | 0.42 | 0.83 | 0.10 | 0.20 | 0.12
|L3                                                                      | 1.3            | 5,337,154  | 1.15    | 0.59 | 0.51 | 0.05 | 0.15 | 0.10





.













The resource estimate is the work of Dr. Julian Verbeek supported by Mr. Ken Lomberg, both of RSG Global



In March 2006 Caledonia concluded an agreement on behalf of Eersteling to acquire 100% interest in prospecting rights on properties immediately adjacent to the Western and Southern boundaries of Rooipoort/Grasvally from Falconbridge Ventures of Africa (Pty) (Falconbridge).  This acquisition provides an extensive new target area of PGE mineralisation, which Caledonia will explore once the transfer of prospecting rights has been completed.



Gold Exploration Properties: In 2003, Eersteling identified a near-surface gold exploration prospect (Roodepoort). In 2004, Eersteling tested this Roodepoort gold property, located 22 km north east of the Eersteling mine area and 8 km east of the Zandrivier mine area. Roodepoort is situated on an area of historical gold mining and an unusual gold-bearing albitite intrusive (a hydrothermally altered granodiorite). A diamond drill program, consisting of three angled (-45o) core holes, was completed during September 2004.  Although some results are interesting, the best intersections are 100m deep and are not reflected in the results from the other holes drilled.  These intersections are believed to correspond to the down dip extension of a number of old workings to the east whose workings extended to the 30m level. Caledonia has on a further review of the drill core, concluded that the potential for an open-pit operation, based on reported gold mineralization





---



in the albitite, as previously envisaged requires further exploration.  Additionally the potential also exists for narrower higher-grade vein mineralization on this property that will require further evaluation as a source of ore for the Eersteling metallurgical plant.



Reference is made to page7 and 8 respectivelyof the 2005 Annual Report for information on the resources of Barbrook and Eersteling and on pages 12 and 13 for a description of the Roodepoort gold and the Rooipoort/Grasvally platinum prospects, which information is incorporated herein by reference.



Because of the poor liquidity of trading (minorities holding 3.6% of the shares) and the high costs of maintaining Eersteling Gold Mining Company Limited (Eersteling) as a listed company, Caledonia redeemed the minority shareholders and subsequently delisted Eersteling from the Johannesburg Stock Exchange (JSE) in mid-2004.



(4)

General Comments



Caledonias activities are centered in Southern and Central Africa and in Northern Canada.  Generally, in the gold mining industry the work is not seasonable 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. For example, at the present time Caledonias subsidiary, Barbrook Mines Ltd, has negotiated a license agreement with Biomin Technologies SA of Switzerland to allow Biomins BIOX® process and has purchased specialized equipment such as the Kemix/Anglo American leach pump-cells, the G-Cell cleaner flotation cells, the Aachen high-efficiency oxygen dispersers and the Deswik ultra-fine mill that are currently used at the Barbrook Gold Mine.  Additional details of the BIOX® process are given on page 11 of the 2004 Annual Report which is incorporated herein by reference.



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.





(5)

Exploration and Development properties



As in 2003 and 2004, Caledonia continued to focus its efforts in 2005 on those exploration properties with the greatest potential in Africa and in Northern Canada.In 2001, Caledonia obtained interests in the Konkola West property in Northern Zambia and the Pruissen and the Vier-en-Twintig Rivier properties in the Limpopo Province of South Africa. In 2002, Caledonia obtained a 100% interest in the Rooipoort platinum prospect, also in the Limpopo Province of South Africa.  Due to their lower prospectivity than Caledonias other exploration properties, the option agreements at the Pruissen and Vier-en-Twintig properties were dropped in 2002.  In 2003, Caledonia added the Lukulu license area in Western Zambia to the Mulonga Plain Joint Venture lands. In late 2003 and early 2004 Caledonia increased its property holdings adjacent to its Rooipoort platinum project in South Africa in the Grasvally area more fully described in clause 3 above.



Reference is made to pages 4, 5 and 6 of the 2001 Annual Report which was incorporated into the 2001 Form 20F and pages 4 to 8 inclusive of the 2002 Annual Report for historic information on Caledonias exploration and development properties which information is incorporated herein by reference. Further information on the more current exploration and project development is shown on pages 12 to 17 of the 2005 Annual Report which information is incorporated herein by reference.



---



(C)

Organizational Structure - Significant Companies



AFRICA:



Zambia:



Caledonia Mining Corporation owns 100% of the shares of the following Zambian registered and incorporated companies:



- Caledonia Mining (Zambia) Limited

- Caledonia Western Limited

- Caledonia Nama Limited

- Caledonia Kadola Limited



These companies are collectively known as "Caledonia Zambia" throughout this Form 20 F. However, on the joint venture on the Mulonga Plain properties, the other parties have now obtained a 60% interest after spending in excess of US$ 3,500,000. The joint venture parties have now spent in excess of US$ 5.5 million on the Mulonga Plain joint venture property. In August 2005, these properties, that are the sole assets of Caledonia Western, were transferred to Mulonga Mining Limited, a new Zambian company in which Caledonia holds a 40% interest.



South Africa:



Caledonia Mining Corporation owns the following interests in South African registered and incorporated companies:



- 100% of Eersteling Gold Mining Company Limited, a company which was delisted from the Johannesburg Stock Exchange in mid 2004 when Caledonia redeemed the minority shareholders

-  100% of Barbrook Mines Limited - a private South African registered company.

-  100% of Greenstone Management Services Limited- a private South African registered company

-  100% of Fintona Investments (Proprietary) Ltd - a private South African registered company, and

-  100% of Maid OMist (Proprietary) Limited - a private South African registered company







(D)       Property, Plant and Equipment



The only producing area of involvement of Caledonia in 2001 was the Filon Sur Gold Mine in Spain.  The mine produced a gold and silver product containing high amounts of copper.  This product was sold to a refiner for further processing and the sale of precious metals. Caledonia sold Filon Sur on June 30, 2000.  From this date, Caledonia managed Filon Sur for a fee equivalent to 30% of the excess cash flow from the mine.  In 2000, the fee received from Filon Sur was $109,000 but in 2001, due to the severe cash flow problems, there was no management service fees received from Filon Sur. The mine has been more fully described earlier in section 4.B.1 and, as stated previously, was placed into Liquidation in January 2002 by its major shareholder.



Caledonia owns two gold assets in South Africa that were placed on care and maintenance in 1997. These are the Eersteling gold mine in Limpopo Province and the Barbrook gold mine in the Mpumalanga Province. These mines have previously been discussed in sections 4.B.2 and 4.B.3.  Both of the mines and plants produced a dore bar product, which was sold to a South African refining company.  Generally the gold content of the dore was in excess of 90% with silver and copper making up the other 10%.  As discussed earlier, the Barbrook mine was rehabilitated in 2002 and early 2003 and re-commenced limited gold production during the second half of 2003, production continued through 2004 and 2005. The Eersteling mine may be re-habilitated in the future, dependant on exploration results from the survey and sampling programs and if a sustainable economic Rand price of gold prevails.





---



Reserve and resource estimates for the Barbrook Gold Mine and a resource estimate for the Eersteling Gold Mine are available on pages 7 and 8 of the 2005 Annual Report which information is incorporated herein by reference.  The Barbrook reserve and resource estimates were certified by Mr. David Grant, C.Geol., FGS, Pr.Sci.Nat., an independent consultant and Independent Qualified Person as required by National Instrument 43-101 of the Canadian Securities Administrators.  The resource estimate for the Eersteling Gold Mine is a historic resource estimate and is qualified as such on page 9 of the 2005 Annual Report which information is incorporated herein by reference. A resource estimate for the Rooipoort/Grasvally platinum exploration project is given in Section 4 B (3) to this Form 20F.



Production results for the Barbrook Mine in 2005 are available on page 10 of the 2005 Annual Report which information is incorporated herein by reference.



4A

UNRESOLVED STAFF COMMENTS

Not required as the company is not an accelerated filer or a well known seasoned issuer.





5

OPERATING AND FINANCIAL REVIEW AND PROSPECTS



A

Operating Results



A discussion on the Operations for 2005 is shown on pages 10 to 12 of the 2005 Annual Report of  Caledonia under section "Management Discussion and Analysis  Operational Review which are incorporated herein by reference. Discussions on the   Financial Results and Liquidity are shown on pages 18, 19 and 20 of the 2005 Annual Report, which are incorporated herein by reference.



Reference is made to pages 45 to 48 of the 2005 Annual Report GAAP reconciliation (Note 15) for the impact of the difference between Canadian and U.S. accounting principles - the Public Accounting Oversight Board (United States) on the operations of Caledonia, which are incorporated herein by reference.



The most critical accounting policies for Caledonia under Canadian and US GAAP are:



1.

Measurement Uncertainties



Preparation of the financial statements in conformity with GAAP 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 mineral resources, future cash flows associated with capital assets and mineral properties.  Managements calculation of mineral resources and cash flows are based upon engineering and geological estimates and financial estimates including gold prices and operating costs. The amount ultimately recovered could be materially different than the estimated values.



2.

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.  Barbrook re-commenced commercial operations during 2003 and, as such, has been presented as a producing asset in these financial statements.



---



Non-Producing Assets

Non-producing assets are recorded at cost less write downs.  At the time of commercial production, the assets are reclassified as producing. During non-producing periods, no amortisation is recorded.



3.

Mineral Properties



Producing Properties

When and if properties are placed in production, the applicable capitalized costs are amortized using the unit-of-production method as described above. Barbrook re-commenced commercial operations during 2003 and, as such, has been presented as a producing asset in these financial statements.



Non-Producing Properties

Costs relating to the acquisition, exploration and development of non-producing resource properties, which are held by Caledonia, 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 Caledonia 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.



However US GAAP requires that mineral properties with no proven resources be reflected as expenses in the period incurred.



Caledonia had three major capital expenditure programs for the year 2005 that included the Rooipoort platinum exploration project, the Roodepoort/Eersteling mine gold exploration projects and the previously discussed plant expansion and commissioning of its Barbrook mine.  The major capital expenditure commitments for the year 2006 are the commissioning of the metallurgical plant expansion at its Barbrook Mine that requires capital expenditure of about US$0.5. It is planned to carry out further drilling on the Rooipoort/Grasvally platinum group metals property to evaluate recently identified exploration targets, drill gold exploration targets on the Eersteling mine property and additional bulk sampling and pilot-plant test at the Nama cobalt/copper property in Zambia.



B

Liquidity and Capital Resources



A discussion on the Liquidity and Capital Resources for 2005 and its comparison to 2004 is given in the 2005 Annual Report of Caledonia under the section "Management Discussion and Analysis  Liquidity and Capital Resources and Uses of Liquidity. These are shown on pages 18 and 19 of the 2005 Annual Report, which section is incorporated herein by reference.



Reference is also made to the Section 3 D above, titled Risk Factors for further information concerning liquidity and capital resources.



Reference is made to the Comments by Auditors for U.S. Readers on Canada-US Reporting Conflict which is shown on page 26 of the 2005 Annual Report and which is incorporated here by reference.



---





The cash flows from operations and investing activities has varied between 2002, 2003, 2004 and 2005.  Cash is invested in an interest-bearing money market fund.  In 2002, financing by private placement and exercise of warrants raised $5.2 million, net of fees. This allowed repayment of loans in an amount of S1.0 million by a combination of $0.4 million in cash and the issuance of shares. In 2003, financing by private placements and the exercise of warrants and share options raised $9.459 million net of fees and in 2004, financing by private placements and the exercise of warrants raised $14.314 million net of fees. In 2005 financing by private placements and exercise of warrants raised $6.6 million net of fees. An additional $1.475 million net of fees was raised in the first quarter of 2006 from additional tranches of the December 2005 placement.  These transactions are discussed in more detail later in this section.



Following previous cost curtailment programs and a significant reduction of expenditures on mineral and capital properties to conserve cash resources, the company requires about $1.4 to 2.0 million annually to maintain Caledonia as a reporting issuer in North America and maintain its assets. Cash flow from operations has been affected in 2002 by the uneconomic operations at Filon Sur that resulted in zero fees received from the management services contract. Filon Sur was placed into liquidation by its major shareholder in January 2002. In 1999, 2000 and 2001 certain officers and directors of Caledonia deferred a significant portion of salaries. The combination of deferral of salaries, short-term loans and equity financing kept Caledonia in operation over this period. In 2002, equity financing and exercise of warrants enabled the company to maintain its operation.



In 2003, cash to continue operations was obtained by the issuance of share capital from private placements and from the exercise of warrants or share options. Due to unexpected metallurgical recoveries the positive cash flow from the restart of Caledonias Barbrook gold mine did not materialize. In the 1st quarter of 2003, an amount of about $2.39 million, net of financing costs was raised from the portion of the private placement financing carried over from December 2002, the exercise of warrants and share options. A further $4.6 million (net of costs) was raised by private placement in August 2003. In April 2004, the company raised a net amount of $14.3 million from private placements and from the exercise of warrants. In June 2005, Caledonia raised $3.03 million, net of costs, from private placements in conjunction with listing on the London Stock Exchanges AIM market. A further $3.56 million, net of costs, was raised in 2005 from exercise of warrants and from a private placement.  In the 1st quarter of 2006, an amount of $1.48 million, net of financing costs was raised from the portion of the private placement financing carried over from December 2005, The funds raised by the 2005/6 financing will mainly be used on activities which will allow Caledonia to complete the expansion and commissioning of the plant expansion and make capital additions to the Barbrook mine, for drilling the Eersteling gold and the Rooipoort and Grasvally platinum projects in South Africa and additional  sampling of material from  Caledonias Nama copper/cobalt project in Zambia and for general corporate purposes. Should additional funding be required it is likely that the company will raise further funds by private placement financings with arms-length subscribers, as has been its practice in recent years.





C

Research and Development, Patents and Licenses, New Technology, etc.



Except for minor expenditures, $10,000 in 1999 and a similar amount in 2001, Caledonia has carried out no work on research and development over the past 5 years.  In 1999, a small amount was spent on research of three flotation concentrates from Caledonias Barbrook Gold Mine by the EMR Microwave Technology Corporation to develop the potential of a new processing route to recover gold from the three refractory concentrates.  The preliminary results from the tests were inconclusive and it was decided to suspend further tests until the microwave technology process was more industrially developed.  Generally, the R & D work by Caledonia is limited to the development of more efficient metal extraction procedures.In 2001, development work was carried out on a sample of ore from the Taylors section of the Barbrook Mine at the Mintek Laboratory in South Africa.  A bulk flotation concentrate was produced from the ore and tested for oxidation and gold recovery procedures. These tests were carried out to try to attain a relatively inexpensive oxidation of the refractory minerals present and a higher gold recovery using the resin-in-leach process rather than the carbon-in-leach" previously used at Barbrook. The oxidation test work proved to be inconclusive but the resin-in-leach process tested, incorporating kerosene or diesel addition to blind the carbonaceous material in the Barbrook ore that are highly
preg-





---





robbing, gave consistently higher gold recoveries in the leach process. The resin-in-leach process was included in the metallurgical plant at Barbrook. Management also decided that the Anglo American Corporation/Kemixs pump cell technology would be incorporated into the new resin-in-leach circuit. The metallurgical circuit has included flash flotation and the Knelson gravity concentration technology in the gold milling circuit to aim to increase early gold recovery and reduce gold lock up in the primary mill. The metallurgical circuit also includes two G-cell flotation cleaner cells that are designed to increase the gold grades reporting to the regrind and leach circuits and two Aachen reactors which provide high-intensity oxidation and should result in higher gold recovery for the Taylors ore. During 2004, Caledonias subsidiary, Barbrook Mines Ltd, negotiated a license agreement with Biomin Technologies SA of Switzerland to allow Biomins BIOX® process   to be used at the Barbrook Gold Mine. Additional details of this process are given on page 11 of the 2004 Annual Report which is incorporated herein by reference.  The 2005 metallurgical plant expansion at Barbrook incorporated much of the technology used earlier including flash flotation, a larger Aachen oxidation reactor, a Deswik ultra-fine mill and larger cells in the resin-in-leach circuit.



D

Trend Information



Following the closure of the Filon Sur gold mine in January 2002, Caledonia has not had any involvement in producing operations until 2003. The Barbrook gold mine was restarted in the 2nd quarter of 2003. The possible re-commencement of the Eersteling gold mine will depend on the price of gold, the Rand / US$ exchange rate and the results of the Eersteling exploration program, all of which have been discussed previously in this report. Caledonia will continue to raise finance from time to time as needed to continue in business until its operations are self funding. Until this self-financing is achieved it is likely that the practice used in previous years of entering into private placements with arms-length subscribers will continue. Similarly, as in the past, to minimize its own cash expenditures on its portfolio of exploration properties, Caledonia will continue, where possible and desirable to joint venture certain of its properties to major mining companies.



E.

Off-balance sheet arrangements



The company has no off-balance sheet arrangements.





F.

Tabular Disclosure of Contractual Obligations



The company does not have any significant long-term contractual obligations or commercial commitments other than its responsibilities pursuant to two joint venture agreements. The company has minor obligations in respect of licence fees for its exploration and mining properties some of which are paid by Caledonias joint venture partners.



6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



A

Directors and Senior Management



A list of the directors and the officers of Caledonia is given on page 49 of the 2005 Annual Report that is incorporated by reference.  A brief profile of each of the Directors and the senior management is given below:



Stefan E. Hayden, 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, Vice President Operations and Chief Operating Officer



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 is 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 and of Fynegold Exploration Limited (UK).



Christopher Harvey, LRIC, HNC (Chem.), Director, Company Secretary and Technical 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 from old gold tailings and the investigation and development of a copper/cobalt flow sheet. 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.



Jeff Smith, B.Sc.  Vice President Exploration

A geologist with over 30 years experience in the international mining industry.  Mr. Smith worked as a mine geologist for Consolidated Murchison in South Africa and Turkey before moving to JCI's head office. With JCI he was responsible for various exploration and evaluation projects in southern Africa and Europe and managed a joint venture lead project. Mr. Smith worked for Caledonia as an independent consultant for a number of years, initially drawing on his wide knowledge of the Iberian pyrite belt and then on a worldwide basis. He joined Caledonia as Vice President - Exploration in November 1996.   He presently works for Caledonia on a consulting basis and operates a consulting service covering the Iberian Peninsula and Europe.



---



Mike D. Tombs,M.B.A., F.C.M.A. Vice-President Finance and Chief Financial Officer



Mr. Tombs holds an MBA degree from Heriot-Watt University, Edinburgh, Scotland, and is a member of the Chartered Institute of Management Accountants.  He was involved in the manufacturing industry in the United Kingdom before moving to South Africa where he joined the mining division of Anglovaal. At Anglovaal he held a number of senior financial management positions, culminating in his appointment as General Manager: Finance and Administration of Avgold, the groups focused gold mining and exploration company.  After a period running his own company consulting to both mining and non-mining operations in Southern and East Africa Mr. Tombs joined Caledonia in March 2004 as Financial Manager: Africa.  Mr. Tombs will be based in Caledonias Johannesburg office.



Ian Forrest - Non- executive Director



Mr. Forrest is an accountant by profession and has wide experience as an executive in the resource industry.  He has been a director of Caledonia since inception in February 1992 and prior to that date he was a director of one of the predecessor companies for many years. He is a member of the board of directors of Mengold Resources Inc. (Montreal, Canada), Georex S.A. (Paris, France), Desire Petroleum plc (London, AIM, UK), Polymet Mining Corp (Toronto, Canada and OTCBB), Viatrade plc (London, OFEX, UK) and Belmore Resources plc (Ireland).  Mr. Forrest is based in Geneva, Switzerland.





Carl Jonsson - Non- executive Director and legal adviser to Caledonia



Mr. Jonsson is a lawyer by profession and has been associated with the resource industry for over 30 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 the predecessor companies, Golden North Resources Inc. for many years.  Mr. Jonsson is resident in Vancouver, British Columbia, Canada and is a principal of the law firm Tupper, Jonsson and Yeadon.  Mr. Jonsson sits on the board of directors of several companies in Canada, including, Acrex Ventures, Altima Resources Ltd., Bonterra Energy Income Trust, Comet Industries Ltd., Dolly Varden Resources Inc., Earthworks Industries Inc.  (Secretary only), Novitas Energy Ltd, TelcoPlus Enterprises Ltd. and Comaplex Minerals Corporation.



Roland G. Fasel -Non- executive Director



Mr. Fasel is a qualified accountant and is a director of several public companies in Switzerland.  He is currently Director of Progesco Geneve SA (Progesco) a public accounting firm.  Prior to joining Progesco Mr. Fasel spent many years in senior positions with the European divisions of the AMF Group until their reorganization.  M. Fasel is based in Geneva, Switzerland.



Rupert Pardoe  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 the Corporation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.



---





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.



Family Relationships:



There are no known family relationships between the officers, key employees and directors.





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 and senior management is given under the "Summary Compensation Table" on page 4 of the 2006 Management Proxy Circular to the shareholder that is incorporated herein by reference.  This table lists the compensation to the three executive directors and to Messers. Poad, Du Plessis and Tombs.  As stated in the notes to the table, in view of the cash situation of Caledonia, senior management deferred receiving a part of their salaries in 1999, 2000 and 2001.  No compensation was deferred in 2002 or 2003. Some deferred compensation was paid during 2003 and 2004. In addition to the compensation listed in the Summary Compensation Table Mr Jonsson received $17,015 in payment of legal services provided to the Corporation, Mr Pardoe was paid $274,800 in consulting fees for 2005.At December 31, 2005 there was $ 48,520 in deferred directors compensation owing to Messrs Fasel, Forrest and Jonsson.



There was a $ 5,000 fee paid to each of the directors annually until 2003. This was increased to $10,000 annually in June 2004 with the fee for 2004 being calculated pro-rata as $7,500. Mr. Fasel who was appointed at mid-year received $5000 for 2004. The adverse cash situation from 1999 to 2001 caused each of the directors to defer receiving this fee since 1998. However during 2003, the deferred directors fees owing to all directors, and amounting to $20,000 each, were paid out in full. There were no stock options awarded to senior management or the directors in 1999, 2000 and 2001. In 2002, a total of 10,000,000 stock options were granted to the directors of Caledonia. The exercise price of the options was $0.235 and the options expire in April 2012. A total of 225,000 options were granted to officers of Caledonia at $0.35 and expiring in June 2012. Mr. J. du Plessis, the General Manager - South Africa, was granted 500,000 share options with an exercise price of $0.28 and an expiry date of November 03, 2013 when he joined the company in 2003. Mr. du Plessis left the companys employ in April 2005 and his options were cancelled. In April 2004, 1,010,000 stock options were granted to an officer and senior management of Caledonia with an exercise price of $0.26 and an expiry date of April 29th 2014.  Mr. Roland Fasel was granted 200,000 stock options with an exercise price of $0.26 and an expiry date of August 2014 on his appointment to the Board of Directors.  An amount of 50,000 of these options vested effective as of the date of his appointment, the remainder will vest in lots of 50,000 on the first, second and third anniversaries of his appointment.  Mr. Pardoe, the Chairman of the Corporation was granted 4,000,000 stock options on his appointment as a director and chairman in February 2005 with an exercise price of $0.11 and expiring in February 2015. An amount of 2,000,000 options were granted in February and the remaining 2,000,000 options will be vested in February 2006. The total share options granted to the senior management, in 2005 and prior years are given in the table "Summary Compensation Table" on page 4 of the 2006 Management Proxy Circular to the shareholder that is incorporated herein by reference.



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. Furthermore, the "Election of Directors" is discussed on pages 1 and 2 of the 2006 Management Proxy Circular that is incorporated herein by reference.  The Table on page2 of the 2006 Management Proxy Circular provides the term of office for each director.  In addition, the shareholdings of those directors named on the table hold about 0.021% collectively of the total shares of Caledonia outstanding at December 31, 2005.  Officers of Caledonia who are not directors do not own any shares as at December 31, 2005.



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 two of its directors - namely Mr. S. Hayden and Mr. F. C. Harvey dating from 1996, (ii) the indirect employment of Caledonias president and CEO through a management and administrative agreement and (iii) an employment contract with a director, Mr. J. Johnstone.  The Severance Plan calls for severance payments to these executives if employment is terminated as a result of a change of control of Caledonia.  Mr. Johnstones employment contract with Caledonia has a termination clause whereby Mr. Johnstone is paid a severance payment of one year of salary in the event of his termination due to change of control or without cause. 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 and Corporate Governance committees are given in the 2006 Management Proxy Circular on pages 6 to 10 which are incorporated herein by reference.

The following directors are members of the following committees:



AUDIT
	COMPENSATION
	NOMINATING
	GOVERNANCEMr. C. Jonsson
	Mr. C. Jonsson
	Mr. R. Pardoe
	Mr. R. PardoeMr. R. Fasel
	Mr. R. Pardoe
	Mr. R. Fasel
	Mr. I. ForrestMr. I. Forrest
	Mr. I. Forrest
	
	Mr. C. JonssonMr. S. Hayden
	
	Mr. S. Hayden




Prior to Mr. Fasels appointment to the Board of Directors and to the Audit committee in August 2004, Mr. Hayden was a member of the Audit committee.



Terms of reference of the Audit Committee and the Compensation Committee are given in the Charter of the Audit Committee and the Charter of the Compensation Committee respectively. The Charter of the Compensation Committee is attached to the 2006 Management Proxy Circular attached as Appendix C which is incorporated herein by reference. The Charter of the Audit Committee is available on the companys website at www.caledoniamining.com or on request from the Corporations offices listed in Section 4A of this report.





D

Employees



The average, approximate number of employees, their categories and geographic location for each of the last 3 years are summarized in the table below:





---







Geographic Location and Number of Employees:





Employee Location etc
	2003
	2004
	2005Total EmployeesCanada (Head Office)
	3
	3
	3South Africa (Head Office)
	9
	9
	9South Africa (Mine Security and Operationsand Exploration)
	250
	315
	496Zambia (Head Office and Security)
	8
	8
	8Total Employees at All Locations
	270
	335
	516


Management and Administration:



Employee Location etc.Canada (Head Office)
	3
	3
	3South Africa (Head Office)
	5
	6
	6South Africa (Exploration and Operations)
	7
	7
	9Zambia (Head Office and Security)
	2
	2
	2Total Management andAdministration
	17
	18
	20






E

Share Ownership



As of the date of the 2006 Management Proxy Circular (March 16th, 2006) the individual share ownership of each of the directors of Caledonia is depicted in the Table on page 2 of the Management Proxy Circular that is incorporated herein by reference. The combined total share ownership of Caledonias directors, senior management and officers is less than 1% of the total issued common shares.



Caledonia has established "Incentive Stock Option Plans" (the "Plans") that have been approved and accepted by the Toronto Stock Exchange (TSX) and Caledonias shareholders  the 1995 Plan and the 1996 Plan.  Another Plan was amended in 2001 and this amended Plan was approved by a majority of shareholders at the Special and Annual General Meeting of the shareholders held on the 29th June 2001.  However, the three Plans that were approved by the shareholders for the years 1999 to 2001 were never registered with the TSX. Due to financial constraints in 1999 to 2001, Caledonia decided not to implement these plans and in September 2001 requested the TSX to withdraw all requests to register these plans as no options had been issued under the plans at that time. The TSX agreed to this request and the plans were cancelled. In 2002 a new Plan was prepared, the 2002 Plan, and approval was sought and obtained from the Shareholders at the 2002 Annual General and Special Meeting held on the 21st June 2002. Details of the new Share Option plan was reported in the 2002 Management Information Circular to the shareholders, that was incorporated therein by reference in the Form 20F 2001. In 2004 another Plan was prepared, the 2004 Plan, and approval was sought and obtained from the Shareholders at the 2004 Annual General and Special Meeting held on the 21st June 2004. Details of the 2004 stock option plan are given on pages 10 and 11 of the 2004 Management Information Circular to the shareholders, that was incorporated by reference in the Form 20F 2004.



---







SHARE OPTION REGISTER LISTING OF OPTIONS OUTSTANDING as of December
31st 2005



Option Price
	Option Expiry
	OptionsName
	Plan
	Cdn. $
	Date
	O/SForrest, W.I.L.
	1996 Plan
	0.33
	Feb. 09, 2008
	66,000Forrest, W.I.L.
	2002 Plan
	0.235
	Apr. 24, 2012
	500,000Forrest, TOTAL
	All Plans
	
	
	566,000Harvey, F.C.
	1996 Plan
	0.33
	Feb. 09, 2008
	135,000Harvey, F.C.
	2002 Plan
	0.235
	Apr. 24, 201
	2,000,000Harvey TOTAL
	All Plans
	
	
	2,135,000Hayden, S.
	1996 Plan
	0.33
	Feb. 09, 2008
	175,000Hayden, S.
	2002 Plan
	0.235
	Apr. 24, 2012
	4,000,000Hayden, TOTAL
	All Plans
	
	
	4,175,000Johnstone, J.
	1996 Plan
	0.33
	Feb. 09, 2008
	135,000Johnstone, J.
	2002 Plan
	0.235
	Apr. 24, 2012
	2,000,000Johnstone, TOTAL
	All Plans
	
	
	2,135,000Jonsson, C.R.
	1996 Plan
	0.33
	Feb. 09, 2008
	66,000Jonsson, C.R.
	2002 Plan
	0.235
	Apr. 24, 2012
	1,450,000Jonsson, TOTAL
	All Plans
	
	
	1,516,000Poad, S.W.
	1996 Plan
	0.33
	Feb. 09, 2008
	80,000Poad, S W.
	2002 Plan
	0.345
	June 02, 2012
	150,000Poad, S.W.
	2002 Plan
	0.26
	Apr.29, 2014
	200,000Poad, TOTAL
	All Plans
	
	
	430,000Smith, J.
	1996 Plan
	0.33
	Feb. 09, 2008
	80,000Smith, J
	2002 Plan
	0.345
	June 02, 2012
	75,000Smith, TOTAL
	All Plans
	
	
	155,000Fasel, R
	1995 Plan
	0.26
	Aug. 15, 2014
	200,000*Fasel, TOTAL
	All Plans
	
	
	200,000*Tombs, MD
	2002 Plan
	0.26
	Apr. 29, 2014
	100,000Tombs, TOTAL
	All Plans
	
	
	100,000Pardoe, R
	2004 Plan
	0.11
	Feb. 15, 2015
	4,000,000**Pardoe, TOTAL
	All Plans
	
	
	4,000,000**Blaine, J.
	2002 Plan
	0.26
	Apr.29, 2014
	200,000Blaine, TOTAL
	All Plans
	
	
	200,000Lawson, A
	1995 Plan
	0.26
	Apr. 29, 2014
	60,000Lawson, TOTAL
	All Plans
	
	
	60,000Pearton, T
	1995 Plan
	0.26
	Apr. 29, 2014
	150,000Pearton, TOTAL
	All Plans
	
	
	150,000






---





Notes to the above Table:

The price of the options granted under the 1995 Plan were those, which had been re-priced and reduced in number granted, and which were approved by the shareholders of Caledonia at the 1998 Annual General Meeting.  The price of the Options granted under the 1996 Plan were those at the close of trading on the Toronto Stock Exchange on the day prior to the granting thereof.  The price of the Options granted under the 2002 Plan were those at the close of trading on the Toronto Stock Exchange on the day prior to the granting thereof.  Share options granted pursuant to the 2002 Plan above were approved at the Annual Meeting of Shareholders held on June 21, 2002. The 2002 Plan was discussed in the 2002 Management Proxy circular which was incorporated by reference in the 2001 Form 20 F.



The 2004 Plan was discussed in the 2004 Management Proxy circular which was incorporated by reference in the 2003 Form 20 F.



In 2003, an officer of Caledonia exercised 56,475 options priced at $0.50 and 50,000 options priced at $0.235 were exercised by a director of Caledonia. The balance of the $0.50 share options allocated, in total 1,175,625 options, expired on the 28th of April 2003 without exercising.



·

* An amount of 50,000 or 25% of the stock options awarded to Mr. Fasel vested on his appointment as Director in August 2004. An amount of 50,000 stock options will vest on each of the first, second and third anniversaries of his appointment.

·

** In February 2005 4,000,000 stock options were awarded to Mr. Pardoe on his appointment as a Director.  Of these, 500,000 stock options vested immediately, the remainder vest in quarterly tranches each of 500,000 options commencing on June 30, 2005.



7

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



Significant shareholders

To the best of Caledonia's knowledge, as of February 28, 2006 there is 1 known shareholder and 2 depository trusts that beneficially own, directly or indirectly, or exercise control or direction over more than 5% of the voting shares of Caledonia.  As at February 28, 2006 Caledonia had 386,152,762 shares outstanding and the known shareholders and depository trusts holding more than 5% of the shares of Caledonia are given in the table below:



Name of ShareholderNumber of Shares Held% of Shares IssuedCDS & Co. NCI Accounts205,301,45159.26%CEDE and Co.78,150,49924.95 %Suborad S.A.22,725,0005.88%




The only shares issued by Caledonia are common shares.  Although Caledonia has an unlimited number of preferential shares available for issue, none of these have yet been issued. Caledonias major shareholders have the same voting rights as the other shareholders of Caledonia.



To the best of the knowledge of Caledonia, the portion of the common shares of Caledonia is held in the following geographic locations:



Geographic AreaNumber of Shares HeldPercentage of Shares IssuedUSA (Host country)89,957,94423.3%Canada206,493,40953.5%








---



Geographic AreaNumber of Shares HeldPercentage of Shares IssuedEurope25,185,8516.5%Other64,515,58116.7%






There are 1,294 record holders listed by Equity Transfer Services Inc. in Toronto, Canada that includes the two large depository trusts - CEDE & Co. and CDS & Co.



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.



B

Related party transactions



Until June 30, 2004, Caledonia has paid a company that employs Caledonias President and CEO, a fee of $180,000 per annum in terms of the management and administration services agreement. This agreement, which has not changed for several years was renegotiated in 2004 such that the fee for the period July to December 2004 would increase equivalent to $270,000 per annum and then in January 2005 to $360,000 per annum. During 2005, a travel and entertainment allowance of $80,672 was also paid out.



Caledonia pays Doelcam Inc. on a per diem rate for financial and administration services. Caledonias Controller is a major shareholder in Doelcam Inc.  Caledonia leases office premises in South Africa from a company of which the family of Caledonias President and CEO are shareholders. During 2005, Caledonia paid consulting fees to the Chairman of the Board and legal fees to a Director. Note 11, on page 39 of the 2005 Audited Financial Statements fully details the related party transactions, and forms part of the 2005 Annual Report that is herein incorporated by reference.



C

Interests of experts and counsel



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





8

FINANCIAL INFORMATION



A

Consolidated Statements and Other Financial Information



Attached as Exhibit 14a is the 2005 Annual Report of Caledonia, which reports include the audited financial statements of Caledonia and which are incorporated herein by reference. Note 15 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 2005 consolidated financial statements have been audited by BDO Dunwoody LLP and comprise the following:



Auditors report

Balance sheet

Income statement (Statement of Operations)

Statement of deficit

Statement of cash flows

Summary of significant accounting policies

Notes to the financial statements



---







Note 5 of the 2005 financial statements  Share Capital which is incorporated herein by reference, shows the changes, in share capital since 31st December 2002.



The 2005 financial statements cover the period from 2003 to 2005 and thus cover the requirements for the Form 20F disclosure.



Export sales are not a significant portion of the sales volume.



Caledonia has no significant ongoing legal or arbitration proceedings at the 31st December 2005. 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. However, in April 2001, Caledonia initiated civil legal proceedings against Mr. Gert Jordaan the principal of Spring Hills Trading to recover damages resulting from its non-fulfillment of its obligations in respect of its agreement with Caledonia for the purchase of a 49% interest in the Barbrook and Eersteling mines in South Africa. Mr. Jordaan has been declared insolvent and Caledonia, Barbrook and Eersteling have received a portion of the monies owed to them from the Liquidator of Jordaan's estate



The Company has never paid or declared cash dividends on Common Stock.



9

THE OFFER AND LISTING

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

Stock Exchange20012002200320042005TORONTOHigh$0.09$0.50$0.61$0.465$0.18Low$0.03$0.05$0.22$0.12$0.10Volume22,309,68780,447,74699,233,13356,933,98261,213,974NASDAQ (US$)High$0.06$0.281$0.39$0.37$0.15Low$0.02$0.04$0.16$0.10$0.08Volume74,714,400271,403,969440,810,918210,251,339105,151,100LONDON
(UK pence)High----6.25pLow----4.50pVolume----856,154






---







(b)

2 Year Market Trading Record by Quarter  2003, 2004 and 1st Quarter 2005 (January and February)

Stock ExchangeLondon AIMTSENASDAQShare PriceHighLowHighLowHighLow2004 - 1st Qtr.--$0.470$0.320$0.37$0.25- 2nd Qtr.--$0.350$0.205$0.27$0.15- 3rd Qtr.--$0.235$0.170$0.18$0.13- 4th Qtr.--$0.225$0.120$0.18$0.102005 - 1st Qtr.--$0.1650$0.100$0.14$0.08- 2nd Qtr6.25p4.50p$0.180$0.100$0.15$0.08- 3rd Qtr6.25p6.00p$0.155$0.105$0.13$0.09- 4th Qtr6.25p5.50p$0.135$0.100$0.12$0.082006  1st Qtr to      Feb. 28th7.25p5.50p$0.190$0.105$0.16$0.09








(c)

6 Month Market Trading Record by Month  September 2005 to February 2006



Stock ExchangeLondon AIMTSE

TSENASDAQ

TSEShare PriceHighLowHighLowHighLowSeptember 2005
200200520056.25p6.00p$0.155$0.105
$0.11$0.13$0.09October 20056.25p5.75p$0.135$0.105$0.12$0.09November 20055.75p
5.75p5.50p
5.5p$0.120$0.100$0.10$0.08December 20055.50p
5.5p5.50p
5.5p$0.135$0.105$0.12$0.09January 20067.25p
7.25p5.50p
5.5p$0.190$0.105$0.16$0.09February 20067.25p7.00p$0.165$0.125$0.15$0.11






---



B

Plan of distribution



Not required, as this is an annual report under the Securities Act.





C

Markets



Please refer to section 9A of this Form 20F for details of Caledonias trading history on the Toronto Stock Exchange and the NASDAQ OTCBB exchange. The Corporation was listed on the London Stock Exchanges Alternative Investment Market (AIM) under the symbol CMCL on June 27, 2005. Please refer to section 9A of this Form 20f for details of Caledonias trading history on AIM .





D

Selling Shareholders



Not required as this is an annual report under the Securities Act.



E

Dilution



Not required as this is an annual report under the Securities Act.



F

Expenses of the issue



Not required as this is an annual report under the Securities Act.





10

ADDITIONAL INFORMATION



A

Share capital



Not required as this is an annual report under the Securities Act.







B

Memorandum and articles of association



The memorandum and articles of association of Caledonia have previously been provided. At a Special Meeting of the Shareholders held on January 18th 1999, the shareholders approved a resolution amending the articles of Caledonia by creating a class of preference shares of Caledonia. Such preference shares could be issued in series and the directors of Caledonia were authorized to divide such class into series and to fix the number in each series and the rights, privileges, restrictions and conditions thereof.



C

Material contracts



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



D

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.



E

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; provided 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.





F

Dividends and paying agents



Not required as this is an annual report under the Securities Act.



G

Statement by experts



Not required as this is an annual report under the Securities Act.



H

Documents on display



The documents referred to in this report are either attached as Exhibits to this report or can be viewed at the Canadian Head Office of Caledonia whose address is given in section 4 of this report.



I

Subsidiary information



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







11

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.



12

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



Not required as this is an annual report under the Securities Act.







PART 2



13

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.





---



14

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.



15

CONTROLS AND PROCEDURES



(a)

Evaluation of disclosure controls and procedures.

The Companys chief executive officer and chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in 17 CFR 240.13a-15(e) or 240.15d-14(c) under the Exchange Act), as of the year end of December 31, 2005.  Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms.



(b)

Managements annual report on internal control over financial reporting



Not yet required as the Registrant is a Foreign Private Issuer.



(c)

Attestation Report of registered public accounting firm



Not yet required as the Registrant is a Foreign Private Issuer.





(d)

Changes in internal controls over financial reporting. There were no significant changes in our 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 affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting.





16

(RESERVED)



16A

Audit Committee Financial Expert

(a)

The registrants board of directors has determined that the registrant has at least two audit  committee financial experts serving on its audit committee.



(b)

The audit committee financial experts serving on the audit committee are Mr. W.I.L. Forrest and Mr. R. Fasel who are independent directors under the NASDAQ rules.



16B

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 with the Commission 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.  This Code of Ethics was filed as Exhibit 1 with the Form 20F 2003 and is incorporated herein by reference.



(c)

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





---





(d)

The text of this code of ethics is available on request, without charge, by contacting the company at  either of the principal offices listed in part 4A of this report or by e-mail to info@caledoniamining.com



16C

Audit Fees

(a)

(a)

For 2004 Caledonias audit fees were approximately $145,000. The audit fees for 2005 are estimated to be about $165,000.

(b)

Nil.

(c)

Nil.

(d)

Nil.

(e)

(e)

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.

(f)

Not applicable



16D

Exemptions from the Listing Standards for Audit Committees



Not applicable.



16E

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  as defined in §240.10b-18(a)(3), of shares or other units of any class of the issuers equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act (15 U.S.C. 781).







PART 3



17.

FINANCIAL STATEMENTS



The audited consolidated financial statements and related notes of Caledonia at December 31, 2005, 2004 and 2003 are set forth in the Registrant's 2005 Annual Report that is incorporated herein as Exhibit 14a by reference.





18.

FINANCIAL STATEMENTS



The registrant has elected to provide financial statements pursuant to Item 17 that include as Note 15 the differences between Canadian and US GAAP's.





19.         EXHIBITS



The following Financial Statements and Exhibits 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, 2005 Annual Report.

14.b

Caledonia Mining Corporation, 2006 Management Proxy Circular.

14.c

Schedules.

14.d

Mineral Properties.

14.e

Summary of Independent Qualified Persons Report  Barbrook Mines Limited.













SIGNATURE



The Registrant 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 registration statement [Annual Report] on its behalf.



DATED at Mississauga, Ontario, Canada, on the 31st day of March 2006.



CALEDONIA MINING CORPORATION





Per:

(Signed)  J. Johnstone

Chief Operating Officer & Director







---























EXHIBIT #12







CALEDONIA MINING CORPORATION







302 CERTIFICATIONS



























---





CERTIFICATIONS



I, Stefan E. Hayden, certify that:





1.

I have reviewed this annual report on Form 20-F of Caledonia Mining Corporation.



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 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.

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



c.

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:     March 31st  2006

(signed) S.E. Hayden



President and CEO













---



CERTIFICATIONS



I  Michael D. Tombs certify that:





1.

I have reviewed this annual report on Form 20-F of Caledonia Mining Corporation.



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 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.

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



c.

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:     March 31st 2006

(signed) M.D. Tombs



Vice- President Finance and CFO









---































EXHIBIT #13







CALEDONIA MINING CORPORATION





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





































---





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, 2005 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.







By:

(signed)S. E. Hayden

Stefan E. Hayden, President and Chief Executive Officer

Caledonia Mining Corporation



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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), that I, Michael Tombs, 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 Caledonia.





By:   (signed)M.D. Tombs

Michael D. Tombs, Vice President Finance and Chief Financial Officer

Caledonia Mining Corporation



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



---















































EXHIBIT #14a





CALEDONIA MINING CORPORATION





2005 ANNUAL REPORT







---









|                                      
|--------------------------------------
|2005
      OBJECTIVES and ACHIEVEMENTS



|                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2005
      Objectives                                                                                                                                                                                                                                                                     | Achievements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|§
      Return
      Barbrook Gold Mine in South Africa to economic gold production.                                                                                                                                                                                                      | Almost
      200% increase in gold production compared to 2004, from 1,693 ounces to
      4,951 ounces and tonnes milled increased from 26,592 to 66,365. Commenced
      capital projects to expand the mine and plant throughput to 15,000 tpm.                                                                                                                                                                                                                                                                                                                                                                                       
|§
      Continue
      developing additional reserves and resources at Barbrook Gold Mine.                                                                                                                                                                                                | Development
      during the year was focused on opening up the ore bodies for mining and on
      the development of additional ore reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|§
      Obtain
      the Prospecting Rights for the Grasvally portions of the Rooipoort
      Platinum Exploration Project.                                                                                                                                                               | Obtained
      the Prospecting Rights for Grasvally.  Drilling program completed
      with 4,207 metres drilled during the year on Grasvally.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|§
      Complete
      the feasibility studies of installing a Biox® bacterial leach and/or
      ultra-fine milling and/or Dense Media Separation circuit at Barbrook Gold
      Mine and commence construction.                                                                         | Biox®
      testwork was completed. Updated Biox® operating costs have been
      determined. The test results will enable a final Biox® plant design to be
      completed. The design will be tailored to the current plant expansion,
      however the decision to proceed with Biox® will be postponed until the
      plant expansion has been assessed. Ultra fine-milling testwork has been
      completed and shows a significant reduction in gold residue losses from
      the plant.  There is also a potential saving in the milling cost.
      Ultra fine-milling is included in the 15,000 tpm plant expansion circuit.
|§
      Identify
      the platinum resource on the Rooipoort and Grasvally properties which form
      the Rooipoort Platinum Exploration Project in South Africa.                                                                                                                       | An
      independent resource estimate was calculated and incorporated into a NI
      43-101 report by RSG Global of Australia. The results are given on page 12
      of this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|§
      From
      the existing exploration information and the recently completed high
      resolution airborne Geophysics and Soil Chemical Programs, identify and
      drill possible extensions to the known ore zones on the Eersteling and
      Zandrivier Mining Licence areas. | Follow-up
      aeromagnetic survey and gold-in-soil results together with compilation of
      previous work has highlighted the near surface gold potential along 12km
      of known gold bearing structures in the Eersteling area. Similar
      compilation in the Zandrivier area has identified a number of potential
      target structures for similar work.                                                                                                                                                                                                                                                                  
|§
      Confirm
      the feasibility of producing an economic cobalt concentrate from the Nama
      property in Zambia. Construct a pilot plant at Nama to produce a cobalt
      concentrate for testing.                                                                              | Further
      testwork by Mintek continued. Reinterpretation of the airborne geophysical
      data was commenced and completed during the year. A number of as yet
      untested areas have been identified for follow-up.                                                                                                                                                                                                                                                                                                                                                                                                             
|§
      Conclude
      an agreement with a cobalt end producer to purchase cobalt concentrate
      produced at Nama or possibly form a strategic alliance to achieve this
      objective.                                                                                               | Signed
      Letter of Intent with a Refinery and they have commenced preliminary
      testwork.  An amendment to the existing Environmental Brief to allow
      pilot plant operations has been approved by the Environmental Council of
      Zambia.                                                                                                                                                                                                                                                                                                                                                                                
|§
      Seek
      a joint-venture partner to commence an exploration program at the Kadola
      copper/cobalt and the Eureka copper/gold properties in Zambia.                                                                                                                          | Discussion
      ongoing with various interested parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|§
      Expand
      the Board of Directors to address ongoing Corporate Governance
      requirements.                                                                                                                                                                                   | Rupert
      Pardoe joined the Board as non-executive Chairman and the various Board
      Committees were restructured accordingly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



---













|                                                                                                                                                                                             |                                                                                                    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------
|2005
      Objectives                                                                                                                                                                        | Achievements                                                                                       
|§
      Implement
      succession plans for senior executive and operational staff.                                                                                                         | Succession
      plan developed and being considered.                                              
|§
      Strengthen
      the Investor Relations and Public Relations functions.                                                                                                              | Appointed
      BuckBias as Caledonia's IR and PR consultants for all markets.                     
|§
      List
      Caledonia on the London Stock Exchange Alternative Investment Market with
      an issue of new shares to support the activities required to meet these
      objectives. | Caledonia
      successfully listed on AIM on June 27 with an issue of 34,888,888 new
      shares.



|                     
|---------------------
|2006
      OBJECTIVES

§

Optimise
gold production at Barbrook Mine in South Africa to treat at least 15,000 tpm.

§

Continue
developing additional reserves/resources at Barbrook Mine.

§

Complete
metallurgical studies to confirm viability of economic gold recovery from
Daylight & Victory ores at Barbrook Mine.

§

Improve
safety awareness at Barbrook Mine and further develop necessary programs to
ensure a safe operation.

§

Further
explore the polymetallic resource on the farms Rooipoort and Grasvally which
form the Rooipoort PGE/Ni/Cu Exploration Project in South Africa.

§

Increase
the land holdings around the Rooipoort Exploration Project area.

§

Drill
identified extensions to the known ore zones on the Eersteling and Zandrivier
Mining Licence areas.

§

Continue
with efforts to conclude an agreement with a cobalt end producer to purchase
cobalt concentrate produced at Nama and/or form strategic alliances to achieve
this objective.

§

Seek
a joint-venture partner to commence an exploration program at the Kadola
copper/cobalt and the Eureka copper/gold properties in Zambia.

§

Pursue
possible acquisitions and/or strategic partnerships to expand Caledonia's
portfolio of properties in Southern Africa.

§

Expand
the Board of Directors to address ongoing Corporate Governance requirements.

§

Implement
succession plans for senior executive and operational staff.

§

Strengthen
the Investor Relations and Public Relations functions within Caledonia.

§

Conclude
necessary agreements to satisfy the South African Black Economic Empowerment
("BEE") requirements.

§

Arrange
necessary financing to support the activities required to meet these objectives.





2





---









PERFORMANCE
        HIGHLIGHTS


|                                                                                   | 2005    | 2004    | 2003(1)  | 2002(1)       | 2001(1)      
|---------------------------------------------------------------------------------- | ------- | ------- | -------- | ------------- | -------------
|Financial - C$ 000's                                                               |        
|Revenue
      from Sales                                                           | 2,642   | 841     | 646      | 27            | 124          
|Gross
      Profit (Loss)                                                          | (5,275) | (5,610) | (2,984)  | (118)         | (143)        
|Expenses
      (General and Administration,       Interest
      and Amortization) | 4,405   | 2,959   | 1,841    | 1,585         | 1,130        
|Net
      Income (Loss) - before Write-Downs                                       | (9,528) | (8,917) | (4,737)  | (1,856)       | (1,096)      
|Net
      Income (Loss) - after Write-Downs                                        | (9,680) | (9,979) | (14,496) | (4,446)       | (1,096       
|Cash                                                                               | 1,076   | 6,470   | 4,179    | 1,864         | 90           
|Current
      Assets                                                               | 2,264   | 7,481   | 4,573    | 2,094         | 184          
|Assets                                                                             | 22,338  | 23,666  | 19,530   | 24,969        | 25,183       
|Current
      Liabilities                                                          | 2,589   | 1,062   | 790      | 1,336         | 2,701        
|Long
      Term Liabilities                                                        | 377     | 423     | 1,089    | 1,073         | 1,499        
|Working
      Capital (Deficiency)                                                 | (325)   | 6,419   | 3,783    | 758           | (2,517)      
|Shareholders'
      Equity                                                         | 19,372  | 22,181  | 17,651   | 22,560        | 20,983       
|Total
      Capital Expenditures including Mineral Properties                      | 5,284   | 3,813   | 2,279    | 613           | 23           
|Expenditures
      on Mineral Properties                                           | 2,583   | 2,298   | 2,042    | 624           | 23           
|Financing
      Raised                                                             | 6,588   | 14,314  | 9,511    | 5,174         | 1,078        
|Share
      Information                                                            |        
|Market
      Capitalization ($ Thousands)                                          | 42,632  | 39,145  | 105,955  | 86,836        | 9,086        
|Shares
      Outstanding (Thousands)                                               | 370,715 | 301,112 | 252,274  | 211,795       | 165,202      
|Warrants
      & Options (Thousands)                                               | 34,748  | 52,342  | 27,348   | 28,055        | 19,566       
|Earnings
      (Loss) per Share                                                    | (0.03)  | (0.03)  | (0.06)   | (
      0.02) | (
      0.01)
|TSE
      Share Price High                                                         | 0.18    | 0.465   | 0.610    | 0.44          | 0.09         
|TSE
      Share Price Low                                                          | 0.10    | 0.12    | 0.215    | 0.060         | 0.04         
|TSE
      Share Volume (Thousands)                                                 | 61,214  | 56,934  | 99,233   | 81,234        | 22,310       
|NASDAQ
      Share Price High (US$)                                                | 0.15    | 0.37    | 0.39     | 0.281         | 0.06         
|NASDAQ
      Share Price Low (US$)                                                 | 0.08    | 0.10    | 0.16     | 0.040         | 0.02         
|NASDAQ
      Share Volume (Thousands)                                              | 105,151 | 210,251 | 440,811  | 271,404       | 74,714       
|AIM
      Share Price High (pence)                                                 | 6.25    | -       | -        | -             | -            
|AIM
      Share Price Low (pence)                                                  | 4.50    | -       | -        | -             | -            
|AIM
      Share Volume (Thousands)                                                 | 856     | -       | -        | -             | -            
|Operating
      Results(1)                                                         |        
|Gold
      Production (Ounces)                                                     | 4,951   | 1,693   | 1,187    | 52            | 114          
|Silver
      Production (Ounces)                                                   | 264     | 66      | 42       | 4             | -            
|Average
      Cost per Ounce Gold (US $) Sold                                      | 1,241   | 2,310   | 3,129    | -             | -            
|Average
      Revenue per Ounce Gold (US $) Sold                                   | 441     | 415     | 402      | -             | -            
|Year
      End Gold Resource (Thousand Ounces)                                     | 2,478   | 2,459   | 2,478    | 2,489         | 2,930        

(1)

Restated
for the adoption of the Asset Retirement Obligations change in accounting policy



3





---













Letter
to Shareholders



2005 has been another
challenging and exciting year for Caledonia as we work towards increasing the
mining and milling rates at Barbrook Gold Mine and returning the mine to
profitable gold production and consolidate work on our exciting Nama
Cobalt/Copper Deposit in Zambia.  While the macro-economic environment in
South Africa continues to be favourable, the overall outlook for commodity
prices is positive but a stronger South African Rand has had a negative impact
on the profitability of the South African mining industry as a whole.





Work at Barbrook Gold
Mine in South Africa continued to focus on optimizing the metallurgical
circuits.  By mid year, after considering the development of the additional
mining resources and the extended mining areas, it was decided that the mineral
resources would support a larger plant on a sustainable basis. The metallurgical
plant expansion to treat 15,000 tonnes per month was designed and constructed
during the second half of the year. The plant expansion was commissioned in
January 2006 as soon as the holiday season was over.  This plant expansion
incorporates the re-commissioning of the existing 1300kw Allis Chalmers mill,
the installation of an expanded flash flotation, carbon cleaning circuits,
ultra-fine grinding circuit and RIL circuits.  Underground the work of
proving up additional reserves and resources to establish a sustainable and
profitable production base and a more flexible mining area is continuing.  Following
these enhancements, we remain confident that we will be able to return Barbrook
to economic gold production during 2006 despite the benefits of a strong gold
price being offset by a strong rand.



Exploration
work continued throughout the year at the Rooipoort and Grasvally properties of
the Rooipoort PGE/Ni/Cu Exploration Project, south of Mokopane and 54 holes
totalling 18,450 meters were drilled. RSG Global completed an independent NI
43-101 compliant resource calculation and declared an inferred resource of 18
million tonnes, containing an estimated 428,586 oz Pd, 274,193 oz Pt, 33,313
tonnes Ni, 20,114 tonnes Cu. Additional exploration is planned to follow up on
additional targets within the property.



Caledonia subscribes to
the Black Economic Empowerment ("BEE") legislation, which was introduced to
reverse previous discriminatory practices in South Africa, and is actively
seeking suitable BEE partners for its South African operations in the strong
conviction that, in the long term, this approach will add significant value for
Caledonia shareholders. Significant progress was made during 2005, however no
agreements were concluded. We hope to update shareholders on progress in this
regard during the course of 2006.



Our exciting cobalt
project Nama, in northern Zambia, has made steady progress. Nama could be one of
the largest primary cobalt deposits in the world. Negotiations with large
potential end-users continue and Caledonia expects to enter into long term
supply contracts during 2006.



At the Mulonga Plain
Diamond Project in Zambia and the Kikerk Lake Diamond Venture in Northern
Canada, our joint venture partners have continued their obligations to fund the
exploration programs. Both projects were drilled during the year. Results of
these programs are provided later in this report. Caledonia's interest in
Mulonga Plain remains 40% and 17.5% at Kikerk Lake.



Caledonia continues to
believe the gold price will maintain its upward trend in the near term. The US$
gold price has continued to rise, reaching in excess of US$530 per ounce in
December 2005. Caledonia management believes that gold bullion and gold shares
remain in a long-term bull market. To maximise the benefit of the current strong
price, Caledonia has decided to remain unhedged. It should be noted that the
South African Rand gold price has increased compared to 2004. As Barbrook's
operating costs are in Rand this increase enhances the project economics.



Turning to the
financial performance of the company, Caledonia continues to be debt-free having
raised $6.6 million from private placements and exercise of warrants. During
2005, the company suffered a loss of $9.9 million which included an operating
loss of $5.3 million. $5.3 million was invested in capital assets and mineral
properties, mainly in South Africa. Net cash available at year end totalled
$879,000.



4





---













In
June 2005, Caledonia listed the company's shares on the Alternative Investment
Market in London, England with the symbol "CMCL" in conjunction with a
financing. The Board believes this listing will introduce Caledonia to the
London and European based institutional investors, offer Caledonia greater
market exposure and analyst research coverage, and further broaden the
shareholder base, ultimately benefiting all shareholders.



This year, the company
will continue to focus on implementing succession plans for senior executive and
operational staff, as well as expand the Board of Directors to address ongoing
Corporate Governance requirements.



The future for
Caledonia shareholders is promising as the company is uniquely positioned during
2006 to expand and develop its gold production, its cobalt/copper project, its
nickel/platinum exploration project and its diamond projects. The further
strengthening of its Board of Directors should also show benefits in ensuring
that the company meets its Corporate Governance and Strategic objectives.



At the end of 2005
Chris Harvey retired from Caledonia. He has however agreed to continue to make
himself available to serve as a director. In addition, he will continue to
provide technical consulting services to the Company as required, so his vast
expertise and knowledge will not be lost to the Group. I'm sure my fellow
directors will join me in thanking Chris sincerely for his enormous contribution
to Caledonia over the past decade, and wishing him and Eileen every happiness
for the future.



Finally, my thanks go
to Caledonia's management, directors, staff, joint venture partners, and
particularly to our shareholders for supporting Caledonia during the challenges
and opportunities of another year.  The management and directors look
forward to your continued confidence as we work diligently towards the objective
of building Caledonia into a significant diversified international mining
company.





On behalf of the Board
of Directors,







(Signed)



S.
E. Hayden                                                                                 Johannesburg,
18th March 2006

President
and Chief Executive Officer



5





---











CALEDONIA
MINING CORPORATION

March
18, 2005

Management's
Discussion and Analysis



This discussion and
analysis of the consolidated operating results and financial condition of
Caledonia Mining Corporation (the "Company", "Caledonia") for the fiscal
years ended December 31, 2005, December 31, 2004 and December 31, 2003 should be
read in conjunction with the Consolidated Financial Statements and the Annual
Information Form and Press Releases issued by the company, all of which are
available from the System for Electronic Data Analysis and Retrieval at www.sedar.com
or from the Company website at www.caledoniamining.com.
The Consolidated Financial Statements and related notes have been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP").



Caledonia was formed in
February 1992 and is listed on the Toronto Stock Exchange as "CAL", on
NASDAQ-OTCBB as "CALVF", and on London's AIM as "CMCL".



VISION
        AND STRATEGY




Caledonia is an
exploration, development and mining company with a producing gold operation in
South Africa and a diversified exploration portfolio of projects in Canada,
South Africa and Zambia, some of which are joint ventures. Caledonia's
objective is to develop the asset base into a significant diversified
international mining company through profitable gold production and successful
exploration activity, focused primarily on Southern Africa.



Caledonia's business
model is to identify and acquire properties or projects early in the development
cycle, which have the potential to become low cost operations, and then add
value by developing the asset, either as an operator or through a joint venture
agreement.  The possibility of divestiture in whole or part will be
considered at different points in time on the valuation curve and will be
governed by the benefit to shareholders.  Where appropriate, Caledonia will
seek strategic alliances with well-managed exploration or operating companies
through existing or new joint ventures.



The Company has a
strong management team and Board of Directors with diverse expertise in gold
production, mineral exploration, mine development, finance and marketing.



With the expectation of
continuing improvements in commodity prices over the long term, Caledonia is
following the strategy of diversification through its current exploration
activities for diamonds, gold, platinum group metals and base metals. With the
potential of improved political conditions in many Southern African countries,
Caledonia is reviewing mining opportunities in these countries.



CORE
        BUSINESSES




GOLD
MINING

Barbrook
Mines Limited



The 100% owned Barbrook
Mines Limited ("Barbrook") is located near the historic gold-mining town of
Barberton in the Mpumalanga province of the Republic of South Africa,
approximately 375 km east of Pretoria and Johannesburg.  Barberton has a
history of gold mining dating back more than 100 years. The Barbrook property,
which covers an area of 10,625 acres and extends for a distance of about 28 km
along strike, represents a consolidation of approximately twenty previously
worked gold mines.



The Barbrook gold
deposits occur in the Barberton Greenstone belt, the host for the other gold
deposits in the area. The belt is of Archean age and includes some of the oldest
volcanic and sedimentary rocks in the World.  The belt trends southwest to
the northeast and has been intruded and deformed by various granite plutons
along the margins. The Barbrook property covers two steeply-dipping, banded iron
formation units trending in an east-west direction.  These two shear zones,
called the Zwartkoppie and Barbrook lines, are the host to the Barbrook gold
deposits.  The gold mineralization at Barbrook is complex, the gold is



6





---











generally
extremely fine-grained, associated with refractory minerals such as pyrite,
pyrrhotite and arsenopyrite, and contains significant concentrations of
"preg-robbing" amorphous carbon.



Mining at Barbrook is
from underground using an open-stope, sub-level benching method.  Broken
ore is trammed to the surface crushing area along the main 10 Level haulage way.
 At present all workings are on or between 6 Level and the main 10 Level
haulage.  A vertical shaft is currently planned on the French Bob's ore
zone to access the ore blocks below 10 Level. The hoist room and associated
accesses on 10 Level have been developed and sinking is expected to commence
during the second quarter of 2006.



Barbrook Mine gold
reserves and resources are as follows:



|                                                                                                                                                                                                            |                                                                                                                       |                                                                                             |                                                                                                               
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------
|GOLD
      RESERVES & RESOURCES (Undiluted) - as at December 31, 2005                                                                                                                                      
|                                                                                                                                                                                                            |                                                                                                                       |                                                                                             |                                                                                                               
|Category                                                                                                                                                                                                    | Tonnes *                                                                                                              | Gold Grade
      grams/tonne **                                                             | Gold
      Ounces **                                                                                          
|RESERVES
      Proven
      Probable
      Total
      
      RESOURCES
      Measured
      Indicated
      Total
      
      Inferred
      
      
      * 1 Tonne=1,000
      kilograms=2,204.6 pounds | 255,000
      53,000
      308,000
      
      
      495,000
      1,254,000
      1,749,000
      
      8,781,000 | 5.88
      6.11
      5.92
      
      
      2.96
      5.35
      4.67
      
      5.76 | 48,100
      10,400
      58,500
      
      
      47,100
      216,000
      263,100
      
      1,627,000

**Some
numbers may not add due to rounding.



Mr. David Grant, C.Geol.,
FGS, Pr.Sci.Nat., an independent consultant is the "Independent Qualified
Person" for Barbrook's reserves and resources as required by National
Instrument 43-101 of the Canadian Securities Administrators.



In the metallurgical
processing plant, the broken ore is de-slimed, crushed to minus 13mm size and
stored in a coarse ore storage bin.  From this bin, ore is conveyed to the
1300 kW Allis Chalmers primary ball mill, with its associated flash flotation
cell. This flash flotation cell recovers and produces a concentrate containing
up to 70% of the gold from the mill discharge. The milled ore then passes to the
flotation plant, which includes scavenger and cleaner circuits.  The
combined flotation concentrates with a gold grade of between 30 to 40 g/t is
processed through a carbon removal circuit consisting of Diester Tables and
cyclones to remove most of the amorphous carbon that is a gold preg-robber and
previously caused metallurgical problems in gold recovery. The amorphous carbon
is discarded with the main flotation tailings. The plus 140 micron oversize
"carbon-free" concentrate is batch separated from the slurry in the Sala 90
kW regrind mill, and then fed into the 95% -25 microns ore stream feed to the
Deswik ultra-fine-grinding mill.   This fine-milled concentrate is
pumped to the 3-stage, newly developed Aachen pre-oxidation circuit where oxygen
gas is added to satisfy the high oxygen demand of the fine sulphide concentrate.
 Paraffin is added to mask any residual carbon preg-robbers and lime is
added to increase the pH to above 10 and the slurry is then pumped to the
resin-in-leach (RIL) circuit. Gold is then recovered from the loaded resin in
the elution and electrowinning circuits. The high-grade gold bullion bars
produced are sent to a South African refinery for further processing and sale of
gold.



The present
metallurgical circuit has a design capacity +/- 20% of 15,000 tonnes per month.
 Mining production is planned to reach 15,000 tonnes per month as the
underground and stope development progresses and provides greater mining
flexibility. As additional ore resources are developed increased



7





---











production
may be possible. Tailings are pumped to the tailings deposition area located
about 3km from the mine site.  Tailings deposition operations are managed
by a licensed contractor and are fully compliant with all requisite legislation
and codes of practice.



Barbrook owns a full
mine infrastructure including administration areas, change-house, lamp room,
security barracks, training and first aid rooms, mine stores,
engineering/maintenance workshops, assay and metallurgical laboratories,
explosive magazines and the tailings deposition area.



Eersteling Gold
Mining Company Limited



The 100% owned
Eersteling Gold Mining Company Limited ("Eersteling") is located 36 km south
of the city of Polokwane in Limpopo Province of the Republic of South Africa,
300 km north of Johannesburg.



The Eersteling Mine and
nearby Zandrivier property covers an area of 47,000 acres (19,020 hectares),
extending for a distance of about 25 km east-west. They are located in the
Pietersburg Greenstone Belt which is of Archean age consisting of an upper and
lower sequence.  The upper sequence is a sedimentary unit consisting mainly
of conglomerate, grit and sandstone while the lower sequence is undifferentiated
mafic and ultramafic volcanic rocks and intrusives, with banded iron formation
and chert.  The Willemse shear feature is the locus of gold mineralization
in the Eersteling area.



The Eersteling mine has
been on care and maintenance since early 1997 when production was suspended due
to the then prevailing low gold price. In 2002, Eersteling applied for its
required Section 9 permanent mining licence which was granted during April 2003.
 Caledonia intends, subject to a sustainable economic rand gold price and
favourable Eersteling exploration results, to re-commence commercial production
at Eersteling in the future.



The Eersteling Mine
gold resource estimate based on the 1997 data before the mine was placed on care
and maintenance, is as follows:

|                                                           |                                    |                            |                                   
|---------------------------------------------------------- | ---------------------------------- | -------------------------- | ----------------------------------
|GOLD
      RESOURCES (Undiluted) - as at December 31, 2005
|Resource
      category                                    | Tonnes                             | Gold
      Grade g/tonne   | Gold
      Ounces                 
|Measured
      Indicated
      Total                       | 60,500
      537,000
      597,500 | 7.43
      7.78
      7.74 | 14,500
      134,400
      148,900
|Inferred                                                   | 2,049,000                          | 5.79                       | 381,000                           



The above resource
estimate is historic and the company does not consider this estimate to be a
defined resource in terms of National Instrument 43-101. The Company has not
completed the work necessary to verify the classification of the resource in
terms of National Instrument 43-101 and as such the historic estimate should not
be relied upon.



Eersteling has a number
of exploration prospects on its mineral holdings, including the Roodepoort Gold
Exploration Project and the Rooipoort PGE/Ni/Cu Exploration Project.  These
are detailed in the Exploration section of this report.



Eersteling owns a full
mine infrastructure, including administration areas, change-houses, lamp room,
security barracks, hostels, kitchen and dining areas, training and first aid
rooms, mine stores, engineering/maintenance workshops, assay and metallurgical
laboratories, explosive magazines and a licensed tailings deposition area.
  In the event that mining operations resume at Eersteling, these
facilities will require some refurbishing prior to being returned to use.



8





---













|         
|---------
|MARKETING



All
gold bullion produced is delivered to Rand Refinery in Germiston, South Africa
and sold at spot at the discretion of the company. The company nominates the
currency of settlement for each individual sale.



|                             
|-----------------------------
|KEY
      PERFORMANCE FACTORS



The key performance
factor of a gold mine is the ability to produce gold at a cost per ounce that is
low enough to pay all obligations and generate an acceptable return to
shareholders. The price of gold is established in an international market and is
considered a commodity. The Rand price of gold plays a large part in determining
the profitability of South African gold mines. During 2005, the South African
Rand strengthened by 1.2% against the United States dollar and this, coupled
with an 8.9% increase in the US$ gold price, resulted in a 7.8% increase in the
market Rand gold price per ounce. Due to the timing of Caledonia's production,
the company recorded an increase of 5.2% in the average Rands per ounce received
over Caledonia's 2004 financial year.



|                                   
|-----------------------------------
|CAPABILITY
      TO DELIVER RESULTS



The
successful operation of mining and exploration depends on the presence of
economic in-situ resources, the availability of experienced and skilled
management and employees and financial resources to be able to carry out the
work, and the support of the holding company.

§

Caledonia
initiated a human resources program focused on strengthening senior management.
 This program commenced in late 2003 and is detailed in the 2003 and 2004
Annual Reports.   Mr. Patrick Smith was appointed mine manager of
Barbrook Mine on August 1, 2005. Additional appointments will be required during
2006 as Mr. Harvey retired in December 2005 and Mr. Johnstone has indicated his
intention to retire in September 2006.

§

Additional
Board appointments are now being contemplated to maintain an adequate total
number of independent Board directors.



The financings of 2005
and of January/February 2006 enabled Caledonia to carry out the planned
development of its projects into 2006. Caledonia remains completely debt-free.



9





---













|                                    
|------------------------------------
|CONSOLIDATED
      FINANCIAL RESULTS



For
the year ended December 31, 2005, the Company recorded a net loss, after write
downs, of $9.7 million ($0.031 per share) compared to a net loss of $10.0
million in 2004 ($0.034 per share) and a net loss of $14.5 million ($0.062 per
share) in 2003.  The loss in 2005 included losses from operations of $5.3
million.  There was a mineral property write down of $0.152 million in
2005, $1.1 million in 2004 and $9.8 million in 2003. The loss from operating
activities of $5.3 million has decreased from the $5.6 million in 2004 as
Barbrook's production levels have increased, although extensive maintenance
work also resulted in significant increased cost. In 2003, an operating loss of
$3.0 million was recorded. In 2005, general and administrative expense includes
a charge of $0.3 million for stock option grant expense as compared to $0.2
million for 2004 and $0.1 million in 2003.



|                        
|------------------------
|OPERATIONAL
      REVIEW



Barbrook Mine



There were two fatal
accidents in the underground mine at Barbrook during 2005.  In one a miner
fell to his death when he slipped while working at an orepass; in the other a
train guard was struck by a moving train and died of his injuries.



Operations at Barbrook
during 2005 focused mainly on expanding the metallurgical circuit and developing
mining areas to cater for the planned increase in mill throughput and to
improving the plant gold recovery. The carbon removal circuit developed by
Barbrook in 2004 was incorporated into the plant circuit during the first part
of the year. Gold recoveries improved during the 2nd quarter -
averaging 61% compared to 48% in the first quarter. This gold recovery
improvement was not maintained and was probably caused by an overloading of the
carbon-removal and the resin-in-leach circuits. The result was that gold
recoveries fell to 48% in the 3rd quarter and to 40% in the 4th
quarter. Despite the more consistent milling operations in the last half of the
year leading to steadier tonnage throughput, gold recoveries still did not reach
the targeted 60 to 65%.



Metallurgical tests on
the French Bob's orebody showed that gold recoveries could be slightly
increased and made more consistent by ultra fine milling of the flotation
concentrate. A review of the mine economics in mid 2005 showed that with newly
identified ore zones it would be possible to increase production levels. It was
therefore determined that an expansion of the existing metallurgical plant,
allowing an increased throughput, would enhance the mine economics. In the
second half of 2005, it was decided to expand the metallurgical plant to process
at a design rate of 15,000 tonnes per month.



On the mining side, the
following changes have been made. Long hole drills were introduced on the stope
benches to improve operating efficiencies and to provide a safer mining method. Mining has been concentrated in the French Bob's ore zone between
10 and 7 Levels.  Geological sampling and evaluation on the Twala and
Taylors zones, adjacent to, and along strike from, the French Bob's zone is
ongoing.  Production from these areas, and up-dip extensions above 7 Level,
will supplement the present production allowing the mill throughput to be
increased to the 15,000 tonnes per month planned range for 2006.



To ensure the
continuity of the ore supply from the French Bob's and adjacent ore zones,
development has started on a vertical shaft, which will provide access to the
French Bob's, Twala and Taylors zones below the 10 Level elevation.  The
mine plan is focused on converting the Resources to Reserves by means of
underground development and drilling and has now embarked on an aggressive
development program to access the Taylors West, Crescent and Browns new zones
between 10 Level and 6 Level.



10





---













Circuit
changes and necessary mechanical repairs to the Barbrook metallurgical plant
resulted in sporadic operation during much of 2005.  The results achieved
are as follows:







|                                              |        |       
|--------------------------------------------- | ------ | ------
|Barbrook
      Mine - 2005 Production Results
|Ore mined                                     | Tonnes | 75,411
|Development
      advance                     | Meters | 2,459 
|Ore milled                                    | Tonnes | 66,365
|Grade milled                                  | g/t    | 4.58  
|Gold sold                                     | Ounces | 4,951 



In the metallurgical
plant, the following changes were made:



The crushing plant was
reconfigured to wet washing and screening operation - all of the screens were
refurbished and three stage washing and screening employed. The original Allis
Chalmers ("AC"), 12ft by 14ft, 1300 kW drive ball mill and its associated
feed conveyor and slurry pumping circuits were rehabilitated and a new Outokumpu
20m3 flash flotation cell installed to treat the whole of the AC mill
discharge. The secondary flotation section was upgraded and a cleaner flotation
section included. The flotation concentrate product is now processed through an
expanded carbon-removal circuit consisting of three Diester '999' tables and
multiple double-cyclone stages to remove the preg-robbing amorphous carbon and
retain the floated gold-bearing sulphide minerals. The flotation tails thickener
has been rehabilitated and included in the new circuit. This thickener will
re-use most of the water from the flotation and carbon cleaning circuits and
thus provides far more efficient pumping and deposition of tailings onto the
tailings dam.



The relatively
carbon-free flotation concentrate, designed to be about 12 to 15% of the
original AC mill feed throughput, is screened to remove trash, thickened and
then ultra-fine milled. In February 2006, the Sala mill was reintroduced as a
secondary mill to ensure that no oversize material is fed to the Deswik mill.
 The 250 litre Deswik turbo-mill developed and produced locally in South
Africa, is designed to reduce the size of the flotation concentrate to a D80
of 12 microns. The finely-milled concentrate is processed through the Aachen
oxidation sections where the high oxygen demand of the fine concentrate is
satisfied by passing it through three Aachen circuits where high pressure oxygen
gas is introduced and to the recirculating slurry flow over a specific time
period.  A small amount of paraffin is added after the final Aachen
treatment. The paraffin 'blinds' small amounts of residual amorphous carbon
that maystill be present from liberation of carbon in the ultra-fine milling
section.  Lime slurry is added in this circuit to maintain the slurry pH
between 10 and 11.



The 'oxidised'
concentrate is pumped through a very fine trash screen sited ahead of a new
eight-stage resin-in-leach (RIL) section that originally comprised the CIL
section of the old metallurgical plant. The RIL tanks are fitted with Kemix
inter-stage resin screens and have been designed to operate as a
'carousel-type' operation with sufficient retention time to cater for future
tonnage extensions. An entirely new resin washing, elution and electrowinning
section has been designed and constructed to handle the larger resin processing
requirement.



It is estimated that
the above changes will allow for a consistent plant throughput of up to 18,000
tonnes per month and a gold recovery of at least 65% on the Barbrook line ore
bodies.



In the Zwartkoppies
section of the mine, the higher grade ore zones are generally associated with
arsenopyrite. The gold is disseminated within the arsenopyrite as extremely fine
particles and poses metallurgical problems in conventional gold recovery
methods. Some very preliminary tests based on ultra-fine grinding have shown
significant leaching improvements. However, this test work needs to be repeated
and optimized on plant scale in order to determine whether such a fine grind and
resultant processing can be economically attained. It may be possible to
separate an "arsenopyrite" fraction during the carbon-removal process that
could be processed separately by ultra-fine milling. Testing of these
Daylight/Victory ores will continue in 2006 with the aim of providing the plant
with an additional higher grade source than that of the Barbrook line ore zones.





11





---











The
construction of the new milling plant was largely completed and commissioned in
January 2006 and is now fully operational.



Outlook



The forecast production
and sale of Caledonia's gold for 2006 is difficult to estimate at this stage.
 It will depend on the rate and timing of the improved gold production
expected at Barbrook, which will be better established during March 2006, and
the Rand-US Dollar exchange rate and US Dollar gold price that will prevail
during 2006.



Looking to the future,
should the ultra-fine grinding process tests prove positive, the
Daylight/Victory ore zones could provide the Barbrook plant with a readily
accessible, additional source of higher than average grade ore.  As
highlighted, development is currently in progress on 7 and 10 Levels to provide
access to other known ore shoots, such as Crescent and Browns, which extend
through both levels. In order to ensure continuity of the ore supply from the
French Bob's ore zone, development has already started on a vertical shaft,
which will provide access to the French Bob's zone below the 10 Level
elevation. Further, the mine has also embarked on an aggressive development
program to access the lower portions of the French Bob's, Twala Crescent and
Browns ore zones, all part of the Barbrook's existing underground
infrastructure.



Caledonia intends to
re-commence commercial production at Eersteling, subject to the Rand gold price
maintaining an economic level and favourable Eersteling/Roodeport exploration
results.



|                                         
|-----------------------------------------
|EXPLORATION
      AND PROJECT DEVELOPMENT



Rooipoort PGE/Ni/Cu
Project (Including Grasvally)



In 2002, Eersteling
acquired the Rooipoort PGE/Ni/Cu Prospect from Rustenburg Platinum, owned by
Anglo Platinum Limited. The property is located approximately 30 km southwest of
the Eersteling Gold Mine property and is located in an area that is presently
undergoing a surge in platinum group metal exploration along a well mineralised
feature known as the "Platreef".  In 2004, Caledonia purchased and
acquired prospecting rights over an additional 342 hectares on the farm
Grasvally, immediately adjacent to and south of the Rooipoort property. To date
Caledonia has drilled a total of 18,450 meters in 54 holes on the Rooipoort PGE/Ni/Cu
Exploration Project. This drilling covers the full 6km strike length that makes
up the project area.



At the end of 2004,
flotation amenability test work was performed at the SGS Lakefield laboratories
in Johannesburg, South Africa on mineralized composite samples from 5
lithological units prepared from the diamond drill-hole cores to verify the
flotation amenability of the ore. The tests included milling and basic flotation
to produce a flotation concentrate. The tests indicated that from each of the 5
mineralized zones,  a re-cleaner flotation concentrate of low mass recovery
can be produced that contains medium to high recovery of platinum, palladium,
gold, copper and nickel . This initial test work indicates that a simple
metallurgical process route could process a flotation concentrate from a
high-tonnage low-grade feed ore from an open-pit ore source.



In September 2005, an
independent resource estimate was calculated and incorporated into a NI 43-101
report by RSG Global of Australia.  The results of this estimate are:

|                                                                              |                              |            |                     |                |                |                |            |           
|----------------------------------------------------------------------------- | ---------------------------- | ---------- | ------------------- | -------------- | -------------- | -------------- | ---------- | ----------
|Inferred
      Resource: At 0.5g/t 2PGE+Au and 200m below surface (900m base)
|Zone                                                                          | Average
      True Width (m) | Tonnes     | 2PGE+Au
      (g/t) | Pt
      (g/t) | Pd
      (g/t) | Au
      (g/t) | Ni
      % | Cu
      %
|M2                                                                            | 1.8                          | 12,791,200 | 1.34                | 0.42           | 0.83           | 0.10           | 0.20       | 0.12      
|L3                                                                            | 1.3                          | 5,337,154  | 1.15                | 0.59           | 0.51           | 0.05           | 0.15       | 0.10      



The
resource estimate is the work of Dr. Julian Verbeek supported by Mr. Ken Lomberg,
both of RSG Global.





12





---











Maps
and drill logs for the Rooipoort PGE/Ni/Cu Exploration Project shown on
Caledonia's website provide an appreciation of the exploration activity that
has been carried out on the Rooipoort property. Also on the website is a Project
Summary Report and the full RSG NI 43-101 report.



As a result of the work
to date, additional target areas have been identified on the west and north-west
of the property (refer to Project Status Report on the website).



In
March 2006, the Company concluded an agreement, with Falconbridge Ventures of
Africa (Pty) Ltd

("Falconbridge") to
acquire a 100% interest in Falconbridge's prospecting rights covering a total
area of 4,315.81 hectares adjoining the Company's Rooipoort project and
effectively doubles the area of Caledonia's Rooipoort Project underlain by
Bushveld Complex rocks with proven PGE potential.  Further details of this
agreement are available in Note 14 of the attached financial statements.



GOLD



Eersteling Gold Mine



A full geological
review of the Eersteling property, including the mine plans and other technical
data, was commenced in October 2004 and continued throughout 2005.  The
resources at Eersteling were evaluated and a development program prioritized.



Field work in 2005
focussed on mapping of known mineralised reef structures around the Doreen Shaft
and the Pienaar and Girlie Reef. Compilation of previous information is being
integrated with the results of the high resolution aeromagnetic survey flown in
January as well as the gold-in-soil sampling completed in the first quarter.



The near surface gold
potential of at least 8 km of gold bearing structures along the Doreen, Pienaar
and Girlie structures was highlighted. Only Girlie has been systematically
drilled (by Anglo American in the 1980's) and has an inclined shaft to 60m
depth with limited development.  Pienaar was excavated on surface to 10m
depth by Eersteling's previous owners, Severin Mining Development, in early
1990's. Doreen has a shaft to 60m and 100m of strike development as well as a
number of old winzes in the oxide zone which has been systematically trenched.
Twenty-three trenches and old workings have been cleared, logged and resampled
along the strike of the Doreen reef. A total of 223 channel and grab samples
have been collected for analysis. Similar work along the Pienaar strike is
planned for 2006. Apart from the vertical Franka shaft, which was sunk to a
depth of 220 meters to access the Maltz reef, all other reefs are essentially
"virgin" even though they limited access from various shafts.



Diamond drilling is
planned in 2006 to systematically test the structures to 100m depth initially.



Roodepoort



The Roodepoort Gold
Property is located 22km north-east of the Eersteling Mine and 8km east of the
Zandrivier mine. Roodepoort is situated in an area of historical gold mining
associated with a near surface unusual gold-bearing albitite intrusive. Grab
samples have returned values of up to 2g/t gold from pyritic portions of this
unit and values greater than 16g/t gold from younger shear zones.



In 2005, Caledonia
concluded that the potential for an open-pit operation, based on gold
mineralization in the albitite body, as previously reported, requires further
exploration.  However, potential exists for narrow high grade vein
mineralization on this property. This requires further evaluation and could
provide a source of ore for the Eersteling metallurgical plant. Compilation of
previous data and assessment of the intersections made commenced in 2005 and
will continue in 2006. Drill sections and drill logs from this program are
listed under the Roodepoort Project in the "Maps and Reports" section of the
Caledonia website.





13





---











DIAMONDS



Kikerk Lake



The Kikerk Lake
property consists of 15 mineral leases currently pending approval by the Nunavut
Mining Recorder. These leases cover 38,738 acres (15,677 hectares).  It is
likely that some of this ground will be relinquished during 2006. In 2001 and
2002, Caledonia announced the discoveries of two diamondiferous kimberlites,
"Potentilla" and "Stellaria", on the Kikerk Lake property in Nunavut
Canada, by its joint venture partner and operator of the property, Ashton Mining
of Canada Inc. ("Ashton").  The two kimberlite pipes are approximately
700 meters apart.  In 2005, Ashton collected 108 heavy mineral samples to
follow-up on previous anomalous results. These samples have been sent to
Ashton's laboratory, results are expected in the second quarter of 2006.



Approximately 24
line-kilometers of ground magnetic survey were conducted over a structural trend
line, there were no new magnetic features noted that would be indicative of
kimberlite emplacement.



Four diamond drill
holes, totalling 382 meters were drilled to test the Stellaria kimberlite and a
possible source of kimberlite indicator minerals east of Stellaria. Results
confirm that the Stellaria body has a steep dip to the north-west and limited
width.



Caledonia's 17.5%
share of this program is funded by Ashton.  Ashton holds a 52.5% interest,
having incurred in excess of $750,000 in exploration expenditures on the
property.  This interest can be increased to 59.5% if Ashton funds
Caledonia's share of the costs through to a completed feasibility study.
 The remaining 30% interest is held by Stornoway Diamond Corporation.



Mulonga Plain



Caledonia has a joint
venture agreement with BHP World Exploration Inc. and its affiliate Motapa
Diamonds Inc. ("Motapa"), collectively known as "the BHP Entity",
on the Mulonga Plain, Kashiji Plain and Lukulu licences in Western Zambia.
Motapa is the project operator on behalf of the joint venture.  The BHP
Entity is now vested with a 60% participating interest, with Caledonia holding a
40% interest.  In terms of the joint venture, the BHP Entity will continue
to fund operations through the completion of a feasibility study at which point
their interest will increase to 75%. Caledonia will then have various options
including that of the BHP Entity funding the project through to commercial
production.



The Mulonga Plain
licence area is located in Western Zambia, between the Zambezi River and the
Angolan border identified discrete areas within the licence area. An airborne
gravity survey was completed on the easternmost of these in late 2004.



Ten, out of an original
eleven, airborne gravity and magnetic targets were drill tested during 2005 and
one hole was abandoned due to poor drilling conditions.  Basalt basement
was intersected in each of the holes at depths ranging from 87 meters to 173
meters with no kimberlite intercepts reported from any of the holes.  Motapa
has defined four prospective regions within the extensive Mulonga Plain anomaly
through prior heavy mineral sampling, airborne magnetics and reconnaissance
drilling. The 2005 drill program was designed to test the easternmost of these
prospective regions and followed on from completion and interpretation of an
airborne gravity survey in late 2004.



Core samples from this
drill program have been sent to Cape Town for kimberlite indicator mineral
recovery and analysis. These results are anticipated during the first quarter
2006 and will be used to formulate plans for ongoing work on the easternmost
prospective region of the Mulonga Plain anomaly.



Commenting on the
results, Motapa's CEO Dr. Larry Ott noted: "The extensive Mulonga Plain
diamond and kimberlite indicator mineral anomaly remains highly prospective for
discovery.  This program has provided an initial drill test of one of four
well defined indicator mineral dispersions.  The remaining three areas, in
the central and western portions of the Mulonga Plain remain essentially
untested and results of this program should add considerably to our
understanding of kimberlite indicator mineral dispersion within the Mulonga
Plain and better constrain likely source kimberlite areas."





14





---











Kashiji
Plain



This licence area is
located in northwest Zambia, adjacent to the Angolan border.  Prior work by
Motapa has recovered 22 microdiamonds in association with numerous kimberlitic
ilmenites.  Work in 2005 focused on interpretation of results from the
field work of 2004 in two discrete areas of anomalous kimberlite indicator
mineral and diamond recoveries.    No field work was carried out
on the Kashiji or Lukulu licences in 2005.



Goedgevonden



Caledonia holds
prospecting rights over the Goedgevonden diamond bearing kimberlite pipe. This
property is located approximately 20km north of the Stilfontein gold mine in the
Klerksdorp district of the North West Province in South Africa and 200km south
west of Johannesburg.



Previous prospecting
activities carried out in the mid 1970's on Goedgevonden indicate that the
pipe is oval in shape and covers a surface area of approximately 0.27 hectares.
 This work also confirms that the pipe was drill intersected at a depth of
425 meters, and that further down, dip extensions remain undefined.  Previous
drilling reported an average diamond content of 35 to 45 cpht, with one hole
yielding 65 cpht.



A preliminary drilling
program conducted in 2002 consisted of 7", 8" and 12" diameter reverse
circulation drill holes, followed by the collection of the drill samples and
diamond recovery.  Four holes were drilled in the centre of the pipe, three
to a depth of 150 meters, and the other to 120 meters.  The three remaining
holes were drilled to delineate the pipe in more detail.  All of the seven
holes drilled entered the kimberlite at a depth of about 6 meters, and the four
centrally-located holes were stopped whilst still in the kimberlite.  A
total of about 56 tonnes of drilling sample was collected and processed through
a Van Eck and Lurie dense-media separation ("DMS") plant and wet Sortex
machine. A fair portion of the diamonds recovered from the drilling were gem
quality with a notable tendency toward pink coloured diamonds.  From the
diamond recoveries it was confirmed that the Goedgevonden pipe was
diamondiferous, and sufficient gem-quality diamonds were recovered to warrant a
larger bulk sample.  Geological interpretive work was completed during 2003
but there was no exploration activity on this property during 2004 or 2005 as
corporate resources were concentrated on Caledonia's other projects which were
considered to be of higher priority in adding shareholder value.





BASE
METALS



Nama



Caledonia Nama Limited,
a wholly owned subsidiary of Caledonia, holds five contiguous exploration
licences in northern Zambia which host open-pittable near-surface cobalt/copper
mineralization.  The 2001/2002 soil sampling program carried out jointly by
Caledonia and BHP Billiton was completed over the majority of the remaining
licence area.  This program identified a number of high priority anomalous
targets within the required geological setting.  These targets should be
followed up in the search for larger, deeper, sulphide ore bodies. With the
recent substantial increase in the price of copper, Caledonia will search for
joint venture partners for the exploration of the potential deeper sulphide-ore
zones.



In the second quarter
of 2004, a mini bulk sample was excavated at Nama and underwent successful
screening tests and heavy media/gravity separation tests in South Africa.
Following encouraging results, it is now planned to excavate a larger sample, in
conjunction with a cobalt end-user, which will be screened and processed on site
to produce a suitable cobalt concentrate for further testing. If the test is
successful and satisfactory economic terms are obtained, it is expected that a
long-term supply contract for the Nama cobalt/copper concentrate will be
negotiated with a smelter or other end users. However, these tests and
initial discussions have been more extensive than first expected and continue
with a number of potential end-users and possible joint venture partners.



15





---













Kadola



This large exploration
property consisting of three contiguous licence areas was previously joint
ventured with Cyprus Amex and is prospective for copper and cobalt. With the
recent substantial increase in the price of copper, Caledonia is holding
discussions with potential joint venture partners for the exploration of the
copper/cobalt potential of Kadola.



The Kadola properties
also include the Eureka gold/copper/pyrite anomaly. With the significant
increase in the price of gold and copper, this project area will be re-evaluated
for either joint-venture or for further work by Caledonia.



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.  Caledonia manages this risk by using
well-qualified exploration professionals, senior mining company joint venture
partners and by exploring in areas which are considered as having a better than
average potential for discovery.  The recent increases in the prices of
precious and base metals should improve exploration expenditures of the major
mining companies and could improve the likelihood of Caledonia negotiating joint
venture agreements for its remaining wholly-owned exploration properties.



STRATEGIC ALLIANCES



Exploration is a
high-risk, high-cost but potentially high-reward business.  Caledonia's
strategy in this area is to position itself to participate in a significant part
of the "reward" through joint venture interests in order to minimize early
exploration costs.  Details of the strategic alliances with joint venture
partners have been discussed above.



Caledonia currently has
two joint venture interests in place, each of which is presently conducting
aggressive diamond exploration programmes.  Caledonia intends to continue
to focus its exploration activities of prospective properties by developing the
properties through strategic alliances with senior producers.



SOUTH AFRICAN
MINERALS LEGISLATION



In terms of the
Minerals and Petroleum Resources Development Act (No 28 of 2002) ('MPRDA")
and implemented May 1, 2004, all "old order" mineral rights in South Africa
are required to be converted to "new order" rights, by a process of
re-applying for these rights. All inactive (immediately preceding May 1, 2004)
prospecting and mining rights were required to apply for conversion by April 30,
2004. Active prospecting rights conversion applications close on April 30, 2006
and active mining rights conversion on April 30, 2009.



16





---













The
status of Caledonia's South African rights is as follows:



|                                                                 |                             |                             |                                            
|---------------------------------------------------------------- | --------------------------- | --------------------------- | -------------------------------------------
|PROPERTY                                                         | ACTIVE/INACTIVE             | APPLICATION
      LODGED    | STATUS AT
      31 DEC 2005                
|Barbrook Mining Licence                                          | Active                      | Due By April
      30, 2009 | Not applicable                             
|Eersteling/Zandrivier Mining
      Licence                       | Active                      | Due By April 30, 2009       | Not applicable                             
|Marabastad Mineral Rights (Eersteling)                           | Inactive                    | March 10,
      2005        | Awaited                                    
|Rooipoort Prospecting Permit                                     | Active                      | Due April 30,
      2006    | Application in
      prep.                 
|Grasvally Mineral Rights Ptn 9,
      11, 13, 14, 16 (Rooipoort) | Active                      |                             | New Order rights granted May 4,
      2005.
|Grasvally Mineral Rights  Ptn
      8, 29 (Rooipoort)            | Inactive                    | April 1, 2005               | Awaited                                    
|Grasvally Ptn 17, 20 (Rooipoort)                                 | New order
      application | May 11, 2005                | Awaited                                    
|Goedgevonden/Syferfontein
      Prospecting Permit               | Inactive                    | April 14, 2005              | Awaited                                    
|Eleazar                                                          | New order
      application | May 3, 2005                 | Awaited                                    



Apart from various
technical requirements for conversion the new legislation requires that
companies give attention to:



"MPRDA"



Section 2(d):
substantially and meaningfully expand opportunities for historically
disadvantaged persons, including women, to enter the mineral and petroleum
industries and to benefit from the exploitation of the nation's mineral and
petroleum resources;"



Mining Charter



This document was
formulated in negotiation between government and the mining industry as largely
represented by the Chamber of Mines of South Africa and organised labour.



The Mining Charter
seeks to address the implementation of section 2(d) in practical and measurable
terms. Lack of clarity as to the status of prospecting under the Mining Charter
has led to considerable debate and confusion in terms of the ability of
companies involved in early stage prospecting work to meet or even indicate
their commitment to meeting the terms of the Mining Charter, even before any
sort of mineral resource has been established. This in part has been the cause
of considerable delays in processing of the thousands of applications submitted
as part of this process.





|                          
|--------------------------
|ENVIRONMENTAL
      POLICY



Caledonia is committed
to maintain the highest environmental standards such that its operations and/or
its products do not present an unacceptable risk to its employees, its
customers, the public or the environment.



Caledonia and its
subsidiaries operate under Caledonia's Environmental Policy that encompasses
the following:

§

Caledonia
directs its employees and its subsidiary companies to conduct their exploration
and operations activities in a professional, environmentally responsible manner,
in compliance with all applicable legislation and policies in the jurisdictions
in which they undertake business.



17





---











§

Caledonia
liaises closely with the applicable government regulatory bodies and the public
to optimize communication and an understanding of Caledonia's activities in
relation to environmental protection.

§

Caledonia
is committed to the diligent application of technically proven, economically
feasible, environmental protection measures throughout its exploration,
development, mining, processing and decommissioning activities.

§

Caledonia
on a regular ongoing basis monitors its environmental protection management
programs to ensure their compliance with the applicable regulatory requirements.



It is the
responsibility of all the employees of Caledonia and its subsidiaries to carry
out their employment activities in accordance with this code of practice.
Operational line management has the direct responsibility for regular
environmental protection management.



|         
|---------
|INVESTING



During 2005, Caledonia
invested $5.3 million in capital assets and mineral properties as compared to
$3.8 million in 2004 and $2.3 million in 2003.  The majority of the $5.3
million invested in 2005 was spent in South Africa on Barbrook, Eersteling,
Rooipoort and Roodepoort.





|         
|---------
|FINANCING



During the year, $6.6
million was raised from private placements, exercise of warrants and options as
compared to $14.3 million in 2004 and $9.5 million in 2003 (all net of issue
costs).



The majority of these
funds are being used to finance the expansion of the metallurgical plant at
Barbrook and exploration activity on the Company's most prospective projects.



Caledonia and its
subsidiaries are completely debt-free.



|                                     
|-------------------------------------
|LIQUIDITY
      AND CAPITAL RESOURCES



As of December 31,
2005, the Company had a working capital deficit of $325 as compared to a surplus
of $6.4 million at December 31, 2004 and $3.8 million at December 31, 2003.
During January 2006, additional shareholder funds were introduced to cover the
deficit.   Cash, including short term deposits, decreased from $6.5
million at the end of 2004 to $1,076 at December 31, 2005.



During 2005, Caledonia
raised $4.7 million in equity financing net of expenses from private placements
by issuing 52,738,888 common shares and $1.9 million from the exercise of
16,863,962 common share purchase warrants. Details of financing activities are
presented in note 5 (b) of the notes to the consolidated financial statements.
During 2006, it is expected that further cash requirements of Caledonia will be
met from equity financing activity and cash flow from gold production at
Barbrook.



The following table
summarizes cash flows and cash on hand ($ thousands):



|                                                   |         |         |        
|-------------------------------------------------- | ------- | ------- | -------
|                                                   | 2005    | 2004    | 2003   
|Cash                                               | $1,076  | $6,470  | $4,179 
|Working capital                                    | (325)   | 6,419   | 3,783  
|Cash provided
      (used) by operating activities | (6,895) | (8,210) | (4,848)
|Cash provided
      (used) by investing activities | (5,284) | (3,813) | (2,279)
|Cash provided
      (used) by financing activities | 6,785   | 14,314  | 9,442  







18





---













|                       
|-----------------------
|USES
      OF LIQUIDITY



The
anticipated significant increase in gold production at Barbrook Mine following
commissioning of the expanded metallurgical facilities will generate cash flow
in 2006.  However, if funds fall short of requirements, Caledonia will
undertake financing options such as private placements with private investors,
and if this is still insufficient for its needs, will investigate either project
joint ventures or project bank funding.   The funds raised by the 2005
financing together with anticipated cash inflows in 2006 have been and will be
used mainly by Caledonia on its exploration, development and production
activities such as:

·

at
Barbrook by developing shaft access to ore resources below the 10 Level and to
the east along strike, providing continuity of the mining operations, making
capital additions to the Barbrook metallurgical plant, such as a Biox® circuit;

·

by
further drilling/possible bulk sampling and processing of material from
Caledonia's Goedgevonden Diamond Project;

·

by
further drilling at Caledonia's Rooipoort PGE/Ni/Cu Project;

·

by
further bulk sampling and concentration test work on Caledonia's Nama
Cobalt/Copper Project, and

·

by
further exploration in respect of Eersteling Mine to establish the prospects of
re-opening it.



The funds raised will
be sufficient to move forward with the direct development of the above assets if
the projects are proven to be economically and technically justified.  The
Mulonga Plain joint venture with the BHP Entity is subject to joint venture
agreements and is entirely funded by the joint venture partner through to
commercial production. Similarly, the Kikerk Lake joint venture with Ashton
Mining is fully funded by Ashton. Caledonia continues to actively review the
benefits, to Caledonia and its shareholders, of seeking new joint venture
partners for most, if not all of its exploration properties.



|                                                        
|--------------------------------------------------------
|CONTRACTUAL
      OBLIGATIONS AND COMMERCIAL COMMITMENTS



The Company does not
have any significant long-term contractual obligations or commercial commitments
other than its responsibilities pursuant to two joint venture agreements
discussed elsewhere in this document. The company has minor obligations in
respect of licence fees for its exploration and mining properties some of which
are paid in full by Caledonia's joint venture partners.



|                                
|--------------------------------
|QUARTERLY
      DATA (unaudited)



Selected Financial
Highlights - 2005

|                                     |                     |                      |                     |                |                 
|------------------------------------ | ------------------- | -------------------- | ------------------- | -------------- | ----------------
|$000's except
      per share amount | First
      Quarter | Second
      Quarter | Third
      Quarter | Fourth Quarter | Total
      Year
|Balance Sheet                        |                     |                      |                     |                |                 
|Current assets                       | $
      4,389       | $
      3,923        | $
      1,244       | $ 2,264        | $
      2,264   
|Capital assets                       | 7,005               | 7,141                | 6,897               | 9,156          | 9,156           
|Mineral
      properties             | 10,286              | 10,859               | 11,452              | 10,839         | 10,839          
|Shareholders'
      equity           | 20,429              | 20,353               | 18,199              | 19,372         | 19,372          
|Operations                           |                     |                      |                     |                |                 
|Revenue                              | 481                 | 965                  | 743                 | 453            | 2,642           
|Operating costs                      | 1,748               | 2,393                | 2,052               | 1,724          | 7,917           
|Costs and
      expenses             | 519                 | 1,848                | 1,255               | 783            | 4,405           
|Net (loss) for
      the period      | (1,786)             | (3,276)              | (2,564)             | (2,054)        | (9,680)         
|Net (loss) per
      share (2)       | (0.007)             | (0.011)              | (0.004)             | (0.006)        | (0.031)         





19





---













Selected
Financial Highlights - 2004

|                                     |               |                      |                     |                |                 
|------------------------------------ | ------------- | -------------------- | ------------------- | -------------- | ----------------
|$000's except
      per share amount | First Quarter | Second
      Quarter | Third
      Quarter | Fourth Quarter | Total
      Year
|Balance Sheet                        |               |                      |                     |                |                 
|Current assets                       | $11,621       | $13,022              | $9,753              | $7,481         | $7,481          
|Capital assets                       | 8,484         | 9,411                | 9,731               | 7,158          | 7,158           
|Mineral
      properties             | 7,395         | 7,891                | 8,454               | 8,948          | 8,948           
|Shareholders'
      equity           | 25,362        | 28,882               | 26,646              | 22,181         | 22,181          
|Operations                           |               |                      |                     |                |                 
|Revenue                              | 140           | 30                   | 202                 | 469            | 841             
|Operating costs                      | 1,315         | 1,396                | 2,054               | 1,686          | 6,451           
|Costs and
      expenses (1)         | 563           | 69                   | 398                 | 3,352          | 4,382           
|Net (loss) for the period            | (1,725)       | (1,435)              | (2,250)             | (4,569)        | (9,979)         
|Net (loss) per share (2)             | (0.007)       | (0.005)              | (0.008)             | (0.015)        | (0.034)         

(1)

Includes
a write down of mineral rights and capital assets at Eersteling in South Africa
in the fourth quarter of $1,062.

(2)Represents basic and fully diluted loss per
share in $ per share.

The fluctuations in the
operating costs and revenue through the year related to changes in activity at
Barbrook as early modifications were made to the gold plant followed by a
full-scale plant expansion in the fourth quarter. This capital expansion is also
reflected by the increase in capital assets in the fourth quarter.  Gold
production at Barbrook remained below target, due to poor metallurgical
recoveries in the second half of the year together with reduced plant operation.
 The expanded metallurgical plant is now treating higher tonnages and these
are expected to increase over the first half of 2006, in addition efforts are
continuing to reach targeted metallurgical recovery levels.A significant increase in gold recovery was obtained in February 2006 and
is continuing into March.



|                                  
|----------------------------------
|CRITICAL
      ACCOUNTING POLICIES



Nature of Business



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



Basis of
Presentation



These financial
statements have been prepared on the basis of a going concern, which
contemplates that the Company will be able to realize assets and discharge
liabilities in the normal course of business.  The Company's ability to
continue as a going concern is dependent upon attaining profitable operations
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
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 mineral resources, future cash flows associated with capital
assets and mineral properties.  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 amount
ultimately recovered could be materially different than the estimated values.







20





---











Principles
of Consolidation



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



The Company's
consolidated subsidiaries (all 100% owned) are Barbrook Mines Limited  ("Barbrook"),
Eersteling Gold Mining Company Limited (100% owned since June 2004) ("Eersteling")
Greenstone Management Services (Proprietary) Limited, Fintona Investments
(Proprietary) Limited, Maid O' Mist (Proprietary) Limited, Caledonia Mining
(Zambia) Limited, Caledonia Kadola Limited, Caledonia Nama Limited, Caledonia
Western Limited and Mulonga Mining Limited.



Revenue Recognition



Revenue from the sale
of precious metals is recognized when the significant risks and rewards of
ownership are transferred to the buyer and collection is reasonably 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.  Barbrook re-commenced commercial operations during 2003 and, as
such, has been presented as a producing asset inthese
financial statements.



Non-Producing
Assets

Non-producing assets
are recorded at cost less write downs.  At the time of commercial
production, the assets are reclassified as producing. During non-producing
periods, no amortization is recorded.



Mineral Properties



Producing
Properties

When and if properties
are placed in production, the applicable capitalized costs are amortized using
the unit-of-production method as described above. Barbrook re-commenced
commercial operations during 2003 and, as such, has been presented as a
producing asset in these financial statements.



Non-Producing
Properties

Costs relating to the
acquisition, exploration and development of non-producing resource properties
which are held by the Company 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 Company 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.





21





---











Strategic
Alliances



The Company 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 Company are reflected in these financial statements.



Foreign Currency
Translation



Balances of the Company
denominated in foreign currencies and the accounts of its foreign subsidiaries
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.



Income Taxes



The Company 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.



Stock Based
Compensation



The Company has adopted
the new accounting standard of the CICA for the accounting of stock-based
compensation expense effective January 1, 2002 on a prospective basis.  Under
this standard, compensation expense on stock options granted to non-employees is
recorded as an expense in the period the options are vested using the fair value
method estimated by using the Black-Scholes Option Pricing Model.



During 2002, the
Company reported compensation expense associated with stock options granted to
directors, officers and employees as pro-forma information. Effective January 1,
2003, the Company commenced recording compensation expense for stock options
granted to directors, officers and employees in the Consolidated Statements of
Operations using the same method as for non-employees described above.



Any consideration paid
by directors, officers, employees and non-employees on exercise of stock options
or purchases of shares is credited to share capital.



22





---













|                                                    
|----------------------------------------------------
|CHANGES
      IN CANADIAN ACCOUNTING RECOMMENDATIONS



2003

Effective
January 1, 2003, the Company adopted the new recommendations of the CICA in
Handbook Section 3870, "Stock-based compensation and other stock-based
payments".  Section 3870 is applied prospectively to all stock-based
payments granted on or after January 1, 2003.  The Company has chosen to
reflect the stock-based compensation as an expense in the statement of
operations from that date.



Effective January 1,
2003, the Company adopted a new accounting standard of the CICA in respect of
the impairment or disposal of long-lived assets. During the year, the Company
reviewed the carrying value of numerous long-lived assets under the new standard
resulting in the recording of valuation adjustments as disclosed in Note 3 of
the financial statements.



2004

The Company has adopted
the accounting guidelines issued by the CICA in respect of hedging relationships
for Canadian reporting purposes. The new guidelines will be applied at such time
as Caledonia undertakes any hedging contracts.



Effective January 1,
2004, the Company has adopted CICA 1100, Generally Accepted Accounting
Principles. CICA 1100 describes what constitutes Canadian GAAP and its sources.



Effective January 1,
2004, the Company has adopted the new CICA rules concerning the accounting for
asset retirement obligations.  The adoption of this rule has brought
Canadian and US GAAP into alignment. For Canadian reporting purposes the new
rules have been adopted retrospectively to January 1, 2002.

2005

The Company has adopted
the accounting guideline issued by the CICA in respect of consolidation of
variable interest entities effective for years after November 1, 2004.  The
Company has reviewed its interests and determined that the new guideline has not
had a material effect on the results of operations and financial condition of
the Company.



23





---













|                                            
|--------------------------------------------
|SUPPLEMENT
      TO THE FINANCIAL STATEMENTS



As
at March 18, 2006 the following equity instruments were outstanding:



386,152,762 common
shares and the following options and warrants:



|           |                                      |                      |                                     
|---------- | ------------------------------------ | -------------------- | ------------------------------------
|Number     | Description                          | Exercise
      Price | Validity                            
|16,898,000 | Common share
      purchase options  | Average $0.21        | Various until
      February 1, 2015
|17,850,000 | Common share
      purchase warrants | $0.20                | Until December 28,
      2007       
|10,000,000 | Common share
      purchase warrants | $0.20                | Until January 31,
      2008        
|2,715,476  | Common share
      purchase warrants | $0.20                | Until February 2,
      2008        
|2,722,150  | Common share
      purchase warrants | $0.20                | Until February 3,
       2008       





|                                
|--------------------------------
|FORWARD
      LOOKING STATEMENTS



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



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



24





---













|                                                           
|-----------------------------------------------------------
|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 have been prepared in conformity with generally accepted
accounting principles applied in Canada and, where appropriate, reflect
management's best estimates and judgement. The financial information presented
throughout this report is consistent with the data presented in the consolidated
financial statements.



Caledonia 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 consolidated financial
statements and expressing an opinion on them.



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 two unrelated directors and one who is unrelated except
for the provision of remunerated legal services to the Company. 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
Company's independent auditors, BDO Dunwoody LLP, in accordance with generally
accepted auditing standards in Canada and the standards of the Public 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

M.
D. Tombs

President
and Chief Executive Officer

Vice-President,
Finance and Chief Financial Officer



25





---





|[objectives002.gif] | BDO
      DunwoodyLLP
      LLPChartered Accountants
      And
      Advisors |  | Royal
      Bank Plaza
      P.O. Box 32
      Toronto
       Ontario  Canada  M5J 2J8
      Telephone: (416) 865-0200
      Telefax: (416) 865-0887
|------------------- | ----------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



Auditors'
Report







To
the Shareholders of

Caledonia
Mining Corporation



We
have audited the consolidated balance sheets of Caledonia Mining Corporation as
at December 31, 2005 and 2004 and the consolidated statements of deficit,
operations and cash flows for each of the years in the three year period ended
December 31, 2005.  These financial statements are the responsibility of
the Company'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 Accounting Oversight Board (United
States).   Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
 An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.



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

[objectives004.gif]

Chartered
Accountants

Toronto,
Ontario

March
10, 2006







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 financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described
in the summary of significant accounting policies.  Our report to the
shareholders dated March 10, 2006 is expressed in accordance with Canadian
reporting standards which do not require a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.

[objectives006.gif]

Chartered
Accountants

Toronto,
Ontario

March
10, 2006



26





---







Caledonia
Mining Corporation

Consolidated
Balance Sheets

(in
thousands of Canadian dollars)



|December 31                       | 2005    | 2004   
|--------------------------------- | ------- | -------
|Assets                            |         |        
|Current                           |         |        
|Cash
      and cash equivalents   | $1,076  | $6,470 
|Accounts
      receivable         | 768     | 316    
|Inventories                       | 90      | 508    
|Prepaid
      expenses            | 330     | 187    
|                                  | 2,264   | 7,481  
|Investment at
      cost (Note 1) | 79      | 79     
|Capital
      assets (Note 2)     | 9,156   | 7,158  
|Mineral
      properties (Note 3) | 10,839  | 8,948  
|                                  | $22,338 | $23,666



|                                           |       |      
|------------------------------------------ | ----- | -----
|Liabilities
      and Shareholders' Equity |       |      
|Current                                    |       |      
|Bank
      overdraft                       | $197  | $ -  
|Accounts
      payable                     | 2,392 | 1,062
|                                           | 2,589 | 1,062
|Asset
      retirement obligation(Note 4)  | 377   | 423  
|                                           | 2,966 | 1,485



|                                       |           |          
|-------------------------------------- | --------- | ---------
|Shareholders'
      Equity             |           |          
|Share
      capital (Note 5 (b))       | 180,053   | 173,304  
|Contributed
      surplus (Note 5 (c)) | 923       | 480      
|Broker
      Warrants (Note 5 (d))     | -         | 321      
|Deficit                                | (161,604) | (151,924)
|                                       | 19,372    | 22,181   
|                                       | $22,338   | $23,666  



On behalf of the
Board:





(Signed)

_______________________________

Director

J.Johnstone





(Signed)

_______________________________

Director

F.C Harvey



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



27





---













Caledonia
Mining Corporation

Consolidated
Statements of Deficit

(in
thousands of Canadian dollars)



|r the years
      ended December 31 | 2005       | 2004       | 2003      
|----------------------------------- | ---------- | ---------- | ----------
|Deficit,
      beginning of year    | ($151,924) | ($141,945) | ($127,449)
|Net (loss)
      for the year       | (9,680)    | (9,979)    | (14,496)  
|Deficit,
      end of year          | ($161,604) | ($151,924) | ($141,945)









Consolidated
Statements of Operations

(in
thousands of Canadian dollars except share and per share amounts)





|r the years
      ended December 31 | 2005    | 2004    | 2003   
|----------------------------------- | ------- | ------- | -------
|Revenue and
      operating costs   |         |         |        
|Revenue
      from sales            | $2,642  | $841    | $646   
|Operating
      costs               | 7,917   | 6,451   | 3,630  
|Gross profit
      (loss)           | (5,275) | (5,610) | (2,984)



|                                                          |       |       |       
|--------------------------------------------------------- | ----- | ----- | ------
|Costs and
      expenses                                  |       |       |       
|General
      and administrative                          | 3,001 | 1,984 | 1,276 
|Interest                                                  | 13    | 175   | 127   
|Amortization                                              | 1,243 | 800   | 438   
|Other
      expense (income) (Note 8)                     | (4)   | 361   | (50)  
|Write
      down of mineral properties and capital assets | 152   | 1,062 | 9,759 
|                                                          | 4,405 | 4,382 | 11,550



|                                             |          |          |          
|-------------------------------------------- | -------- | -------- | ---------
|(Loss) before
      non-controlling interest | (9,680)  | (9,992)  | (14,534) 
|Non-controlling
      interest (Note 13)     | -        | (13)     | (38)     
|Net (loss)
      for the year                | ($9,680) | ($9,979) | ($14,496)



|                                    |          |          |         
|----------------------------------- | -------- | -------- | --------
|Net
      (loss) per share (Note 7) |          |          |         
|Basic
      and fully diluted       | ($0.031) | ($0.034) | ($0.062)





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



28





---













Caledonia
Mining Corporation

Consolidated
Statements of Cash Flows

(in
thousands of Canadian dollars)





|r the years
      ended December 31 | 2005 | 2004 | 2003
|----------------------------------- | ---- | ---- | ----
|Cash provided
      by (used in)    |      |      |     



|                              |          |          |          
|----------------------------- | -------- | -------- | ---------
|Operating
      activities    |          |          |          
|Net
      (loss) for the year | ($9,680) | ($9,979) | ($14,496)



|                                                                 |       |       |       
|---------------------------------------------------------------- | ----- | ----- | ------
|Adjustments to
      reconcile net cash from operations (Note 9) | 1,632 | 2,114 | 10,289



|                                                            |       |       |      
|----------------------------------------------------------- | ----- | ----- | -----
|Changes in
      non-cash working capital balances (Note 9) | 1,153 | (345) | (641)



| |         |         |        
| | ------- | ------- | -------
| | (6,895) | (8,210) | (4,848)



|                                                            |         |         |        
|----------------------------------------------------------- | ------- | ------- | -------
|Investing
      activities                                  |         |         |        
|Expenditures
      on capital assets and mineral properties | (5,284) | (3,813) | (2,279)
|                                                            | (5,284) | (3,813) | (2,279)



|                                                |       |        |      
|----------------------------------------------- | ----- | ------ | -----
|Financing
      activities                      |       |        |      
|Loan
      payable                              | -     | -      | (69) 
|Bank
      overdraft                            | 197   | -      | -    
|Issue
      of share capital net of issue costs | 6,588 | 14,314 | 9,511
|                                                | 6,785 | 14,314 | 9,442



|                                                   |         |        |       
|-------------------------------------------------- | ------- | ------ | ------
|Increase (decrease) in cash for
      the year     | (5,394) | 2,291  | 2,315 
|Cash and cash equivalents,
      beginning of year | 6,470   | 4,179  | 1,864 
|Cash and cash equivalents, end of
      year       | $1,076  | $6,470 | $4,179





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





29





---











Caledonia
Mining Corporation

Summary
of Significant Accounting Policies

December
31, 2005, 2004 and 2003





Nature of Business



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



Basis of
Presentation



These financial
statements have been prepared on the basis of a going concern, which
contemplates that the Company will be able to realize assets and discharge
liabilities in the normal course of business.  The Company's ability to
continue as a going concern is dependent upon attaining profitable operations
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
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 mineral resources, future cash flows associated with capital
assets and mineral properties.  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 amount
ultimately recovered could be materially different than the estimated values.



Principles of
Consolidation



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



The Company's
consolidated subsidiaries (all 100% owned) are Barbrook Mines Limited  ("Barbrook"),
Eersteling Gold Mining Company Limited (100% owned since June 2004) ("Eersteling")
Greenstone Management Services (Proprietary) Limited, Fintona Investments
(Proprietary) Limited, Maid O' Mist (Proprietary) Limited, Caledonia Mining
(Zambia) Limited, Caledonia Kadola Limited, Caledonia Nama Limited, Caledonia
Western Limited and Mulonga Mining Limited.



Cash and Cash
Equivalents



Cash and cash
equivalents represent cash on hand in operating bank accounts and money market
funds maturing in less than three months.



Inventories



Inventories are
stated at the lower of cost, which is determined on an average cost basis, and
net realizable value.



Revenue Recognition



Revenue from the sale
of precious metals is recognized when the significant risks and rewards of
ownership are transferred to the buyer and collection is reasonably assured.



30





---













Caledonia
Mining Corporation

Summary
of Significant Accounting Policies (continued)

December
31, 2005, 2004 and 2003



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.  Barbrook re-commenced commercial operations during 2003 and, as
such, has been presented as a producing asset in these financial statements.



Non-Producing
Assets

Non-producing assets
are recorded at cost less write downs.  At the time of commercial
production, the assets are reclassified as producing.  During non-producing
periods, no amortization is recorded.



Mineral Properties



Producing
Properties

When and if
properties are placed in production, the applicable capitalized costs are
amortized using the unit-of-production method as described above. Barbrook
re-commenced commercial operations during 2003 and, as such, has been presented
as a producing asset in these financial statements.



Non-Producing
Properties

Costs relating to the
acquisition, exploration and development of non-producing resource properties
which are held by the Company 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 Company 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.



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.



31





---













Caledonia
Mining Corporation

Summary
of Significant Accounting Policies (continued)

December 31, 2005, 2004 and 2003





Strategic Alliances



The Company 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 Company are reflected in these financial
statements.



Foreign Currency
Translation



Balances of the
Company denominated in foreign currencies and the accounts of its foreign
subsidiaries 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.



Income Taxes



The Company 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.



Change in
Accounting Policies



(a) Asset Retirement
Obligations



Effective January 1,
2004, the Company adopted the Canadian Institute of Chartered Accountants ("CICA")
Standard 3110, "Asset Retirement Obligations". This standard requires that a
liability for retirement obligations, to be settled as a result of an existing
law, regulation or contract, be recognized when incurred and recorded at fair
value on a retroactive basis. The new standard has been applied retroactively to
January 1, 2002 and results previously reported have been restated as necessary.



The restatement has
resulted in the following notable adjustments (in thousands of Canadian Dollars)

|                                                                         |          |        
|------------------------------------------------------------------------ | -------- | -------
|                                                                         | 2003     | 2002   
|(Loss) for the period previously
      reported                          | (14,556) | (4,331)
|(Loss) for the period restated                                           | (14,496) | (4,446)
|Basic and fully diluted earnings per
      share previously reported ($) | (0.063)  | (0.023)
|Basic and fully diluted earnings per
      share restated ($)            | (0.062)  | (0.023)
|Total shareholder equity previously
      reported                       | 17,182   | 22,151 
|Total shareholder equity restated                                        | 17,651   | 22,560 
|Total assets previously reported                                         | 19,335   | 24,767 
|Total assets restated                                                    | 19,530   | 24,969 





32





---







Caledonia
Mining Corporation

Summary
of Significant Accounting Policies (continued)

December 31, 2005, 2004 and 2003









(b)

Stock
Based Compensation



The Company adopted
the new accounting standard of the CICA for the accounting of stock-based
compensation expense effective January 1, 2002 on a prospective basis.  Under
this standard, compensation expense on stock options granted to non-employees is
recorded as an expense in the period the options are vested using the fair value
method estimated by using the Black-Scholes Option Pricing Model.



During 2002, the
Company reported compensation expense associated with stock options granted to
directors, officers and employees as pro-forma information. Effective January 1,
2003, the Company commenced recording compensation expense for stock options
granted to directors, officers and employees in the Consolidated Statements of
Operations using the same method as for non-employees described above.



Any consideration
paid by directors, officers, employees and non-employees on exercise of stock
options or purchases of shares is credited to share capital.



(c)

Impairment
of Long-lived Assets



Effective January 1,
2003, the Company adopted the new accounting standard of the CICA in respect of
the impairment or disposal of long-lived assets.  The new standard requires
that a fair value determination be made for long-lived assets where indicators
of impairment exist and the carrying amount of the long-lived assets are not
recoverable.  Since adoption, the Company has continued to review the
carrying value of numerous long-lived assets under the new standard resulting in
the recording of valuation adjustments where applicable.



---





33





---







Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



1.

Investment at Cost



On May 9, 2002, the
Company participated in a private placement of the purchase of shares of Motapa
Diamonds Inc. ("Motapa") in an amount of US$50 ($79 Canadian).  The
shares of Motapa are listed on the TSX Venture Exchange in Canada.  Motapa
Diamonds Inc. is participating in a strategic alliance with the Company on the
Mulonga Plain diamond exploration project in Zambia. The market value of the
shares as at December 31, 2005 is $25.





2.

Capital Assets

2005

|                          |          |                                |                     
|------------------------- | -------- | ------------------------------ | --------------------
|                          | Cost (1) | Accumulated
      Amortization | Net
      Book Value
|Land - plant sites        | $1,541   | $
         -                   | $1,541              
|Plant and equipment       |          |                                |                     
|- producing (2)           | 7,591    | 957                            | 6,634               
|-
      non-producing (3) | 747      | -                              | 747                 
|Office equipment          | 934      | 831                            | 103                 
|Vehicles                  | 451      | 320                            | 131                 
|                          | $11,264  | $2,108                         | $9,156              







2004

|                          |          |                                |                     
|------------------------- | -------- | ------------------------------ | --------------------
|                          | Cost (1) | Accumulated
      Amortization | Net
      Book Value
|Land - plant sites        | $1,541   | $
          -                  | $1,541              
|Plant and equipment       |          |                                |                     
|- producing (2)           | 4,967    | 497                            | 4,470               
|-
      non-producing (3) | 887      | -                              | 887                 
|Office furniture          | 869      | 786                            | 83                  
|Vehicles                  | 451      | 274                            | 177                 
|                          | $8,715   | $1,557                         | $7,158              



(1)

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

(2)

The producing plant
and equipment in 2005 and 2004 relates to the Barbrook operation.

(3)

The net book value of
non-producing plant and equipment at December 31, 2005 and 2004 represents
Eersteling.



The recoverability
of the carrying amount of the Barbrook capital assets is dependent upon the
availability of sufficient funding, the ability of the Company to bring the
property into production, the price of gold, the exchange rate of the South
African rand relative to the US dollar and the undertaking of a profitable
mining operation. The recoverability of the carrying amount of the Eersteling
capital assets is dependent upon the availability of sufficient funding to bring
the property into profitable production or the value realized from the possible
disposal of the assets.  As a result of these uncertainties, the actual
amount recovered may vary significantly from the carrying amount.





34





---











Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



3.

Mineral Properties

2005

|                                               |          |                                |                     
|---------------------------------------------- | -------- | ------------------------------ | --------------------
|                                               | Cost (1) | Accumulated
      Amortization | Net Book
      Value
|Producing:                                     |          |                                |                     
|Barbrook, South
      Africa - gold property   | $6,675   | $1,338                         | $5,337              
|Non-producing - care and
      maintenance:    |          |                                |                     
|Eersteling, South
      Africa - gold property | -        | -                              | -                   
|Non-producing - exploration:                   |          |                                |                     
|Rooiport and
      Roodeport, South Africa     | 3,324    | -                              | 3,324               
|Nunavut, Canada                                | 750      | -                              | 750                 
|Stilfontein, South
      Africa                | 37       | -                              | 37                  
|Zambia                                         | 1,391    | -                              | 1,391               
|                                               | $12,177  | $1,338                         | $10,839             



2004

|                                               |          |                                |                     
|---------------------------------------------- | -------- | ------------------------------ | --------------------
|                                               | Cost (1) | Accumulated
      Amortization | Net Book
      Value
|Producing:                                     |          |                                |                     
|Barbrook, South
      Africa - gold property   | $6,132   | $646                           | $5,486              
|Non-producing - care and
      maintenance:    |          |                                |                     
|Eersteling, South
      Africa - gold property | -        | -                              | -                   
|Non-producing - exploration:                   |          |                                |                     
|Rooiport and
      Roodeport, South Africa     | 1,671    |                                | 1,671               
|Nunavut, Canada                                | 750      | -                              | 750                 
|Zambia                                         | 1,041    | -                              | 1,041               
|                                               | $9,594   | $646                           | $8,948              



(1)

Cost is comprised of
the original cost of the asset, less write-downs, removal of cost for disposals
and government grants.



The Company has
entered into strategic alliances with third parties on a Canadian property and a
Zambian property valued at $750 and $1,391 respectively.  The third parties
may earn varying percentage interests in these properties by carrying out
exploration work on the properties.



The recoverability
of the carrying amount of the Canadian, 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.





35





---









Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003





4.

Asset Retirement
Obligation





|                             |      |     
|---------------------------- | ---- | ----
|                             | 2005 | 2004
|Opening balance              | 423  | 353 
|Accretion expense            | 22   | 70  
|Foreign exchange loss (gain) | (68) | -   
|Closing balance              | 377  | 423 



The asset retirement
obligations relate to Barbrook Gold Mine and Eersteling Gold Mine and are
estimates of costs of rehabilitation at the end of the mine life, adjusted
annually for accretion expense at a rate of 5%.





5.

Share Capital



(a)

Authorized

An unlimited number
of common shares.

An unlimited number
of preference shares.



(b)

Issued



|                                                   |                  |         
|-------------------------------------------------- | ---------------- | --------
|                                                   | Number of Shares | Amount  
|Common shares                                      |                  |         
|Balance,
      December 31, 2002                   | 211,795,270      | $149,623
|Issued pursuant
      to private placements        | 25,280,000       | 5,674   
|Warrants
      exercised                           | 15,093,252       | 3,814   
|Shares issued
      from exercise of stock options | 106,475          | 40      
|Balance,
      December 31, 2003                   | 252,274,997      | $159,151
|Issued pursuant
      to private placements        | 45,388,175       | 13,392  
|Warrants
      exercised                           | 3,449,114        | 761     
|Balance, December 31, 2004                         | 301,112,286      | $173,304
|Issued pursuant to private placements              | 52,738,888       | 4,733   
|Warrants exercised                                 | 16,863,962       | 2,016   
|Balance, December 31, 2005                         | 370,715,136      | $180,053



(1)

During December
2002, the Company concluded the first closing of a private placement which
raised proceeds gross proceeds of $1,680 resulting in the issuance of 6,720,000
units of common shares and common share purchase warrants. A total of 672,000
broker warrants were also issued which entitled the holder to purchase one
common share at a price of $0.33 for a period of one year from the date of
issue.  On January 6, 2003, the Company concluded the private placement
with the second closing for gross proceeds of $1,320 resulting in the issuance
of 5,280,000 units.  A further 528,000 broker warrants were issued under
the same terms and conditions as noted above.  A value of $0.11 per warrant
was assigned to the broker compensation warrants for total consideration of $58.
 Share issue costs associated with the second closing have been charged to
share capital in 2003 in an amount of $119.





36





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003





5.

Share Capital(continued)





(2)

During the third
quarter of 2003, the Company concluded a private placement financing for $5,000
gross proceeds comprised of 20,000,000 units.  Each unit is comprised of
one common share and one half common share purchase warrant issued at $0.25 per
unit.  In addition, a total of 2,000,000 whole broker warrants were issued
with each warrant exchangeable for one whole common share.  Whole warrants
are exchangeable for shares at $0.35 per share for a period of eighteen months
from the date of closing.  The 2,000,000 broker compensation warrants
issued upon closing were assigned a value of $0.08 per warrant for total
considerations of $160.  Share issue costs of $544 have been charged to
share capital.



(3)

During the first
half of 2004, Caledonia raised a gross amount $14,978 from a private placement
by the issuance of 45,388,175 units consisting of one common share and one-half
common share purchase warrant.  Each unit is priced at $0.33 per unit and
the common share purchase warrants are exercisable for one common share at $0.55
per whole warrant for a period of eighteen months from the date of issuance.



The private
placement agents were paid a commission of 9% of the gross proceeds raised and
whole common share purchase warrants equal to 10% of the total units sold.
 The agent compensation warrants are exercisable for one common share at
$0.55 per warrant for a period of eighteen months from the date of issuance.
 A total of 4,538,818 agent compensation warrants were issued at an
assigned value of $161.  Cash commissions and expenses paid amounted to
$1,425.



(4)

In June 2005,
Caledonia successfully listed on the London Stock Exchange's Alternative
Investment Market ("AIM") and placed a small float of shares into the AIM
market in conjunction with a financing.  The financing on AIM raised a
gross amount $3,534 from the issuance of 34,888,888 units consisting of one
common share priced at $0.10.  Commissions and expenses paid amounted to
$508 and have been charged to share capital in 2005.



(5)

In September 2005,
the warrants described above were re-priced to $0.11 with the date of expiry
extended to October 31, 2005.  As at that date, 16,863,962 warrants were
exercised for gross proceeds of $1,855 while the remaining expired (see 5 (d)
below).



(6)

During December
2005, the Company commenced a private placement to raise $3,496.  As at
December 31, 2005, the first closing raised gross proceeds of $1,875 comprising
17,850,000 units. The balance of the offering was received by February 2006 upon
completion of the second to fourth closings (see Note 14 below).  A total
of 33,287,626 units priced at $0.105 were subscribed for all closings. Each unit
consisted of one common share and one common share purchase warrant.  The
common share purchase warrants are exercisable for one common share at $0.20 per
whole warrant for a period of 24 months from the date of issuance.



The private
placement agents were paid a commission of 9% of the gross proceeds raised. Cash
commissions paid on the first closing amounted to $168 and has been charged to
share capital in 2005.







37





---















Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



5.

Share Capital(continued)





(7)

The fair value of
the broker warrants noted above was estimated using the Black-Scholes Option
Pricing Model with the following assumptions for the periods ended December 31,
2005, 2004 and 2003:



|                                |      |        |      
|------------------------------- | ---- | ------ | -----
|                                | 2005 | 2004   | 2003 
|Risk-free interest rate         | -    | 2.25%  | 3.63%
|Expected dividend yield         | -    | nil    | nil  
|Expected stock price volatility | -    | 64-65% | 48%  
|Expected option life in years   | -    | 1      | 1    





(c)

Stock
Option Plans and Stock-Based Compensation



The Company has
established incentive stock option plans (the "Plans") for employees,
officers, directors, consultants and other service providers.  Under the
Plans, as at December 31, 2005, the Company has the following options
outstanding:



|                  |                |                  
|----------------- | -------------- | -----------------
|Number of Options | Exercise Price | Expiry Date      
|813,000           | $ 0.330        | February 9, 2008 
|9,950,000         | $ 0.235        | April 24, 2012   
|225,000           | $ 0.345        | June 2, 2012     
|710,000           | $ 0.260        | April 29, 2014   
|200,000           | $ 0.260        | August 15, 2014  
|4,000,000         | $ 0.110        | February 15, 2015
|1,000,000         | $ 0.140        | July 10, 2010    
|16,898,000        |                |                  



The continuity of the
options granted, exercised, cancelled and expired under the Plans during 2005,
2004 and 2003 are as follows:



|                                               |                   |                             
|---------------------------------------------- | ----------------- | ----------------------------
|                                               | Number of Options | Weighted Avg. Exercise Price
|Options
      outstanding at December 31, 2002 | 12,680,800        | $0.29                       
|Granted                                        | 500,000           | $0.28                       
|Exercised                                      | (106,475)         | ($0.38)                     
|Cancelled or
      expired                     | (1,175,625)       | ($0.50)                     
|Options
      outstanding at December 31, 2003 | 11,898,700        | $0.26                       
|Granted                                        | 1,210,000         | $0.26                       
|Options
      outstanding at December 31, 2004 | 13,108,700        | $0.26                       
|Granted                                        | 5,000,000         | $0.12                       
|Cancelled or
      expired                     | (1,210,700)       | ($0.43)                     
|Options
      outstanding at December 31, 2005 | 16,898,000        | $0.21                       
|Options
      exercisable at December 31, 2005 | 14,798,000        | $0.22                       





38





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



5.

Share
Capital(continued)







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, 2005 there are 8,487,000 stock options
available to grant.



Effective January 1,
2003, the Company commenced recording compensation expense on a prospective
basis in the Consolidated Statements of Operations for stock options granted to
directors, officers, employees, consultants and service providers using the fair
value method.  During 2005, stock option expense of $283 for the grant of
5,000,000 options was charged to expense and credited to contributed surplus
(2004 - $195 for 1,210,000; 2003 - $76 for 500,000 options).



The
continuity of contributed surplus is as follows:



|                                  |       
|--------------------------------- | ------
|                                  | Amount
|Opening balance December 31, 2003 | $285  
|Stock options granted             | 195   
|Closing balance December 31, 2004 | 480   
|Stock options granted             | 283   
|Compensation warrants expired     | 160   
|Closing balance December 31, 2005 | $923  





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,
2005, 2004 and 2003.



|                                |         |          |      
|------------------------------- | ------- | -------- | -----
|                                | 2005    | 2004     | 2003 
|Risk-free interest rate         | 2.25%   | 2.25%    | 3.63%
|Expected dividend yield         | nil     | nil      | nil  
|Expected stock price volatility | 73-100% | 100-113% | 48%  
|Expected option life in years   | 2-3     | 3        | 3    





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
Company's stock options.



(d)

Warrants





The Company has
issued the following common share purchase warrants pursuant to private
placements which are outstanding as of December 31, 2005:



|                   |                     |                |                  
|------------------ | ------------------- | -------------- | -----------------
|Number of Warrants | Shares for Warrants | Exercise Price | Expiry Date      
|17,850,000         | 1 for 1             | $0.20          | December 28, 2007





39





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003







5.

Share Capital(continued)



The continuity of
warrants issued and outstanding is as follows:



|                                            |                   
|------------------------------------------- | ------------------
|                                            | Number of Warrants
|Outstanding December 31, 2002               | 15,374,366        
|Issued pursuant to private
      placements | 12,640,000        
|Issued to Broker                            | 2,528,000         
|Exercised                                   | (15,093,252)      
|Outstanding December 31, 2003               | 15,449,114        
|Issued pursuant to private
      placements | 22,694,091        
|Issued to Broker                            | 4,538,818         
|Exercised                                   | (3,449,114)       
|Outstanding December 31, 2004               | 39,232,909        
|Exercised                                   | (16,863,962)      
|Expired                                     | (22,368,947)      
|Issued pursuant to private
      placements | 17,850,000        
|Outstanding December 31, 2005               | 17,850,000        









6.

Income Taxes



The Company's
effective tax rate, which differs from the combined federal and provincial
statutory income tax rates, may be reconciled as follows:

2005

2004

2003

|                                                  |         |         |         |         |         |       
|------------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------
|                                                  |         |         |         |         |         |       
|                                                  | $       | %       | $       | %       | $       | %     
|Basic rate
      applied to pre-tax income (loss) | (3,496) | (36.12) | (3,609) | (36.12) | (5,319) | (36.6)
|Losses and other
      benefits not recognized    | 3,496   | 36.12   | 3,609   | 36.12   | 5,319   | 36.6  
|                                                  | -       | -       | -       | -       | -       | -     



The Company and its
subsidiaries have non-capital losses of approximately $27,482 which may be
carried forward to reduce future taxable income.  The right to claim
non-capital losses of $2,533, $1,584, $18,984, $3,611, $142 and $628 expires in
2016, 2015, 2011, 2010, 2009 and 2008 respectively.  The Company 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 Company 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  | $1,812





40





---











Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



6.

Income Taxes
(continued)



A valuation allowance
had been recorded to offset the benefit of these non-capital losses and expenses
in these consolidated financial statements as the realization thereof is not
considered likely.











7.

Net (Loss) Per
Share



The net (loss) per
share figures have been calculated using the weighted average number of common
shares outstanding during the respective fiscal years which amounted to
313,565,142 (2004 - 289,843,080; 2003 - 232,280,330).  Under the
treasury method of calculating fully diluted loss per share, exercise of the
outstanding stock options and warrants would be anti-dilutive in 2005, 2004 and
2003.







8.

Other Expense
(Income)



Other
expense (income) is comprised of the following:

|                                   |       |        |      
|---------------------------------- | ----- | ------ | -----
|                                   | 2005  | 2004   | 2003 
|                                   |       |        |      
|Investment income                  | ($57) | ($152) | ($51)
|Foreign exchange
      (gain) loss | 50    | 513    | 1    
|Loss on disposal
      of assets   | 3     | -      | -    
|                                   | ($4)  | $361   | ($50)







9.

Statement of Cash
Flows



Items
not involving cash are as follows:

|                                                          |        |        |         | 
|--------------------------------------------------------- | ------ | ------ | ------- | 
|                                                          | 2005   | 2004   | 2003   
|Amortization                                              | $1,243 | $800   | $438   
|Write down of mineral properties and
      capital assets | 152    | 1,062  | 9,759  
|Provision for site restoration                            | (46)   | 70     | 54     
|Non-controlling interest                                  | -      | (13)   | (38)   
|Option grant expensed                                     | 283    | 195    | 76     
|                                                          | $1,632 | $2,114 | $10,289



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

|                    |        |        |       
|------------------- | ------ | ------ | ------
|                    | 2005   | 2004   | 2003  
|Accounts payable    | $1,330 | $272   | ($477)
|Accounts receivable | (452)  | (138)  | (65)  
|Inventories         | 418    | (422)  | (86)  
|Prepaid expenses    | (143)  | (57)   | (13)  
|                    | $1,153 | ($345) | ($641)











41





---











Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



10.

Financial
Instruments



Unless otherwise
noted, it is the opinion of management that the Company is not exposed to
significant interest rate or credit risks arising from its financial
instruments.  A significant portion of the Company's assets and
liabilities are denominated in South African rand.  Fluctuations in the
value of the rand relative to the Canadian dollar could have a significant
impact on the results of operations.  The fair values of these financial
instruments approximate their carrying values, unless otherwise noted.  The
Company does not use any derivative instruments to reduce its foreign currency
risks.





11.

Related
Party Transactions



The
Company had the following related party transactions:



|                                                                                                                         |      |      |     
|------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ----
|                                                                                                                         | 2005 | 2004 | 2003
|Management and administrative
      services paid or accrued to a company which employs the Company's
      President(1) | $441 | $225 | $180
|Interest paid to the Company's
      President(2)                                                                        | -    | 127  | -   
|Consulting fees paid or accrued to
      the Chairman of the Board                                                       | 275  | -    | -   
|Rent paid to a company owned by
      members of the President's family                                                  | 37   | 83   | 78  
|Legal fees paid to a company
      director                                                                              | 17   | -    | -   
|Interest paid to a company owned by
      members of the President's family(3)                                           | -    | 23   | -   
|Sale of a motor vehicle to the
      President at a market-related price                                                 | -    | 114  | -   
|Purchase of a motor vehicle from the
      President at a market-related price                                           | -    | 16   | -   



(1)

In prior years the
President delayed submitting regular expense claims due to the Company's cash
situation. During 2004 all outstanding claims were submitted and the amount due,
including interest at market-related rates, was paid to him.



(2)

In prior years'
office rental payable to a company owned by members of the President's family
was not always paid.  During 2004 all outstanding amounts were paid,
including interest at market-related rates.

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



|                                                                               |       |      |     
|------------------------------------------------------------------------------ | ----- | ---- | ----
|                                                                               | 2005  | 2004 | 2003
|Included in accounts payable                                                   |       |      |     
|- owing to a company that employs the Company's
      President                | $   - | $ -  | $55 
|- owing to the Corporation's President                                         | -     | 3    | -   
|- owing to the Chairman of the Board for consulting
      fees                 | 85    | -    | -   
|- owing to directors/officers for unpaid salaries
      and/or directors' fees | 137   | -    | 112 







42





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003







12.

Segmented Financial
Information



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



The Company's
operating segments have been identified based on geographic areas as follows:





|                                                        | For the year ended December 31, 2005
|------------------------------------------------------- | ------------------------------------
|                                                        | Corporate                           
|Revenue from sales                                      | $
       -                          
|Operating costs                                         | -                                   
|General and
    administrative                          | (3,001)                             
|Interest                                                | -                                   
|Amortization                                            | -                                   
|Other income
    (expense)                              | 39                                  
|Write down of
    mineral properties and capital assets | -                                   
|Net income (loss)
    for the year                      | (2,962)                             
|Identifiable assets                                     | 2,042                               
|Expenditures on capital assets
    & mineral properties | $   -                               





|                                                        | For the year ended December 31, 2004
|------------------------------------------------------- | ------------------------------------
|                                                        | Corporate                           
|Revenue from sales                                      | $   -                               
|Operating costs                                         | -                                   
|General and
    administrative                          | (1,676)                             
|Interest                                                | -                                   
|Amortization                                            | -                                   
|Other income
    (expense)                              | 5                                   
|Write down of
    mineral properties                    | -                                   
|(Loss) before the
    undernoted                        | (1,671)                             
|Non-controlling
    interest                            | -                                   
|Net income (loss)
    for the year                      | (1,671)                             
|Identifiable assets                                     | 7,181                               
|Expenditures on
    capital assets & mineral properties | $   -                               



43





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



12.

Segmented
Financial Information (continued)



|                                                        | For the year ended December 31, 2003
|------------------------------------------------------- | ------------------------------------
|                                                        | Corporate                           
|Revenue from sales                                      | $   -                               
|Operating costs                                         | -                                   
|General and
    administrative                          | (1,276)                             
|Interest                                                | -                                   
|Amortization                                            | -                                   
|Other income
    (expense)                              | (26)                                
|Write down of
    mineral properties                    | -                                   
|(Loss) before the
    undernoted                        | (1,302)                             
|Non-controlling
    interest                            | -                                   
|Net (loss) for the
    year                             | (1,302)                             
|Identifiable assets                                     | 5,000                               
|Expenditures on
    capital assets & mineral properties | $  -                                







13.

Acquisition of the
Minority Interest of Eersteling Gold Mining Company Limited



On June 14, 2004,
Eersteling Gold Mining Company Limited, a subsidiary of the Corporation acquired
the remaining 3.6% minority shareholdings from the shareholders for a cash
consideration of $26.  The transaction has been accounted for as a
step-by-step acquisition by the Corporation, resulting in negative goodwill of
approximately $746 which has been allocated on a pro-rata basis as a reduction
of the non-monetary assets of the subsidiary.





14.

Subsequent Events



In February 2006, the
Company concluded the private placement described in Note 5 (6) above with the
second, third and fourth closings for gross proceeds of $1,621 resulting in the
issuance of 15,437,626 units. Each unit consists of one common share and one
common share purchase warrant. The private placement agents were paid a
commission of 9% of the gross proceeds amounting to $146 and expenses paid of
$17 were charged to share capital in 2006.



In March 2006, the
Company   concluded an agreement, with Falconbridge Ventures of Africa
(Pty) Ltd

("Falconbridge")
to acquire a 100% interest in Falconbridge's prospecting rights covering a
total area of 4,315.81 hectares adjoining the Company's Rooipoort project.
This effectively doubles the area of Caledonia's Rooipoort Project underlain
by Bushveld Complex rocks with proven PGE potential. The purchase consideration
for the property and the associated data is R1,500,000 (One million, five
hundred thousand South African Rands, - approximately two hundred and
seventy-eight thousand Canadian Dollars). In the event of any part of the
property acquired being brought into production, Falconbridge will also be
entitled to a royalty equal to 1.5% of the net smelter return on mineral
production from the property. In addition, the Company is obligated to conduct
work on the property and to comply with the work programmes submitted to the
South African Department of Minerals and Energy (DME) in respect of the
property, unless the DME agrees to any modifications. The Company will assume
liability for annual payments to Mineral Rights Holders estimated at R51,000 for
2006. In





44





---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003





the event of a Mining
Licence being granted the Company would be obligated to purchase the Mineral
Rights; the quantum cannot be determined until the specific areas affected have
been identified.



15.

Generally Accepted
Accounting Principles in Canada and the United States

The Company'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.



(b)

Employee
and Directors Stock Options



Prior
to 2003, the Company accounted for employee and director stock options under APB
Opinion No.  25 under which, no compensation cost is recognized when the
exercise price equals or exceeds the fair value at the date of grant. Effective
January 1, 2003, the company has, for US reporting purposes, prospectively
applied the fair-value recognition provisions of SFAS 123.



Under Canadian GAAP,
effective January 1, 2002 on a prospective basis, the Company adopted the new
CICA policy of accounting for stock based compensation. Compensation expense on
stock options granted to directors, officers and employees, was not 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 Company 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)

Comprehensive
Income



Under US GAAP,
comprehensive income must be reported which is defined as all changes in equity
other than those resulting from investments by owners and distributions to
owners.



(d)

Asset
Retirement Obligations



In 2004, the Company
adopted the Canadian GAAP standards of "Asset Retirement Obligations" which
are consistent with SFAS No. 143, "Accounting for Asset Retirement
Obligations".  These standards address financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs.  These standards require that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made.  The associated asset retirement costs are capitalized as part of the
carrying value of the long-lived asset.  For Canadian accounting purposes,
the Company adopted this standard during 2004 with retroactive restatement to
2002.  Under US GAAP the cumulative effect of the change in accounting
principles is shown, with no retroactive restatement of the comparative figures.

45







---













Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



15.

Generally Accepted
Accounting Principles in Canada and the United States (continued)



(e)

Marketable
Securities



Under accounting
principles generally accepted in Canada, unrealized gains and losses in shares
of public companies are not recognized until investments are sold unless there
is deemed to be an impairment of value which is other than temporary. Under US
GAAP, such investments are recorded at market value and the unrealised gains and
losses are recognized in other comprehensive income unless there is deemed to be
an impairment which is other than temporary.  Under FAS 115 the Company is
accounting for the marketable securities as available for sale.



(f)
      Warrants



Under
US GAAP the fair value of the warrants re-priced in Note 5(b)(5) 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 - 2.77%; Expected
dividend yield - nil; Expected stock volatility - 38%; Expected warrant life
in years - 0.134.



(g)
      Recently Issued United States Accounting
Standards



In December 2004, the
Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R
(Revised) Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Statement No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values and is
effective at the beginning of the first interim or annual period beginning after
June 15, 2005. Public entities that file as small business issuers will be
required to apply Statement 123R in the first interim or annual reporting period
that begins after December 15, 2005. The Company has determined that this will
have no effect on the Company's consolidated financial position or results of
operations.



In December 2004, the
FASB issued FASB Statement No. 153, Exchanges of Non-monetary Assets, which
eliminates an exception in APB 29 for recognizing non-monetary exchanges of
similar productive assets at fair value and replaces it with an exception for
recognizing exchanges of non-monetary assets at fair value that do not have
commercial substance. The provisions in Statement 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The adoption of this Statement will not have a significant effect on
the Company's financial statements.



In May 2005, the FASB
issued FASB Statement No. 154, Accounting Changes and Error Corrections.
Statement 154 establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to a newly adopted
accounting principle. The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005.



46





---











Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



15.

Generally Accepted
Accounting Principles in Canada and the United States (continued)



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





(a)
Income Statement



|                                                                                                                 |           |           |          
|---------------------------------------------------------------------------------------------------------------- | --------- | --------- | ---------
|                                                                                                                 | 2005      | 2004      | 2003     
|Loss
      for the year per Canadian GAAP                                                                        | ($9,680)  | ($9,979)  | $(14,496)
|Mineral
      property expenditure with no proven reserves (expensed) or previously
      expensed under US GAAP | (2,040)   | (406)     | 9,081    
|Asset
      retirement obligation                                                                                | -         | -         | (60)     
|Amortisation
      and closure accretion expense                                                                 | -         | -         | (69)     
|Income
      before cumulative effect adjustment                                                                 | ($11,720) | ($10,385) | ($5,544) 
|Cumulative
      effect adjustment                                                                               | -         | -         | 559      
|Net
      income (loss)                                                                                          | ($11,720) | ($10,385) | ($4,985) 
|Deemed
      Dividend                                                                                            | (171)     | -         | -        
|Net
      income (loss) available for common shareholders                                                        | ($11,891) | ($10,385) | ($4,985) 
|(Loss)
      per share before cumulative effect adjustment                                                       | ($0.038)  | ($0.036)  | ($0.024) 
|Cumulative
      effect adjustment per share                                                                     | -         | -         | $0.002   
|Basic
      and diluted (loss) per share                                                                         | ($0.038)  | ($0.036)  | ($0.022) 
|Net
      income (loss)                                                                                          | ($11,720) | ($10,385) | ($4,985) 
|Other
      comprehensive loss                                                                                   | (18)      | (36)      | -        
|Total
      comprehensive loss                                                                                   | ($11,738) | ($10,421) | ($4,985) 







(b)
Balance Sheet

|                                                           |         |        
|---------------------------------------------------------- | ------- | -------
|                                                           | 2005    | 2004   
|Total assets per
      Canadian GAAP                       | $22,338 | $23,666
|Unrealised loss on
      marketable securities             | (54)    | (36)   
|Mineral properties
      with no proven reserves expensed  | (4,693) | (2,653)
|Total assets per US
      GAAP                             | $17,591 | $20,977
|                                                           |         |        
|Total liabilities per
      Canadian and US GAAP           | $2,966  | $1,485 
|                                                           |         |        
|Shareholders'
      equity                                 |         |        
|Shareholders'
      equity per Canadian GAAP               | $19,372 | $22,181
|Mineral properties
      with no proven reserves expensed  | (4,693) | (2,653)
|Accumulated other
      comprehensive loss                 | (54)    | (36)   
|Shareholders'
      equity per US GAAP                     | $14,625 | $19,492
|                                                           |         |        
|Total liabilities
      & shareholder's equity per US GAAP | $17,591 | $20,977



47





---















Caledonia
Mining Corporation

Notes
to the Consolidated Financial Statements

(in thousands of
Canadian Dollars unless otherwise indicated and except for share and per share
amounts)

December
31, 2005, 2004 and 2003



15.

Generally Accepted
Accounting Principles in Canada and the United States (continued)





(c)
Cash Flow



|                                                    |          |          |         |  |  |  |  | 
|--------------------------------------------------- | -------- | -------- | ------- |  |  |  |  | 
|                                                    | 2005     | 2004     | 2003   
|Cash
      provided by (used in)                    |          |          |        
|Operating
      activities per Canadian GAAP        | ($6,895) | ($8,210) | (4,848)
|Mineral
      properties expenditure                | (2,040)  | (1,468)  | (678)  
|Operating
      activities per US GAAP              | (8,935)  | (9,678)  | (5,526)
|Investment
      activities per Canadian GAAP       | (5,284)  | (3,813)  | (2,279)
|Mineral
      properties expenditure                | 2,040    | 1,468    | 678    
|Investment
      activities per US GAAP             | (3,244)  | (2,345)  | (1,601)
|Financing
      Activities per Canadian and US GAAP | 6,785    | 14,314   | 9,442  
|Increase
      (decrease) in cash for the year      | (5,394)  | 2,291    | 2,315  
|Cash
      and cash equivalents, beginning of year  | 6,470    | 4,179    | 1,864  
|Cash and cash
      equivalents, end of year        | 1,076    | 6,470    | 4,179  
|                                                    |          |          |        



48





---













|                              
|------------------------------
|Directors
      and Management





BOARD
OF DIRECTORS

OFFICERS



G.R.
Pardoe (2) (3) (4)

S.
E. Hayden

Chairman
of the Board,

President
and

Johannesburg,
South Africa

Chief
Executive Officer



S.
E. Hayden (2) (3)

J.
Johnstone

President
and



Vice
President Operations

Chief
Executive Officer

and
Chief Operating Officer

Johannesburg,
South Africa







J.
Johnstone

M.D.
Tombs

Vice
President Operations

Vice-President
Finance

And
Chief Operating Officer

and
Chief Financial Officer

Mississauga,
Ontario, Canada

Johannesburg,
South Africa



F
C. Harvey

J.
Smith

Retired
Executive,

Vice-President
Exploration

Oakville,
Ontario, Canada

Cantabria,
Spain







W.
I. L. Forrest (1) (2) (3)



Business
Executive



Nyon,
Switzerland





C.
R. Jonsson (1) (2) (3)

Principal
of Tupper Jonsson

&
Yeadon

Barristers
& Solicitors

Vancouver,
British Columbia,

Canada



R.G.
Fasel (1) (4)

Business
Executive

Geneva,
Switzerland





BOARD
COMMITTEE MEMBERS

(1)
 Audit Committee

(2)
 Compensation Committee

(3)
 Corporate Governance Committee

(4)
 Nominating Committee



49





---











Corporate
Directory



CORPORATE
OFFICES

SOLICITORS

Canada
- Head Office

Borden
Ladner Gervais LLP

Caledonia
Mining Corporation

Suite
4100, Scotia Plaza

Unit
9, 2145 Dunwin Drive

40
King Street West

Mississauga,
Ontario

Toronto,
Ontario M5H 3Y4 Canada

L5L
4L9 Canada

Tel:
 (905) 607-7543

Tupper,
Jonsson & Yeadon

Fax:
(905) 607-9806

1710-1177
West Hastings Street

Vancouver,
British Columbia

South
Africa

V6E
2L3 Canada

Greenstone
Management Services (Pty) Ltd.

P.O.
Box 587

AUDITORS

Johannesburg
2000

BDO
Dunwoody LLP

South
Africa

Chartered
Accountants

Tel:
  (27) (11) 447-2499

Suite
3300, 200 Bay Street

Fax:
 (27) (11) 447-2554

Royal
Bank Plaza, South Tower

Toronto,
Ontario M5J 2J8 Canada

Zambia



Caledonia
Mining (Zambia) Limited

REGISTRAR
& TRANSFER AGENT

P.O.
Box 36604

Equity
Transfer Services Inc.

Lusaka,
Zambia

Suite
420 120 Adelaide Street West

Tel:
 (260) (1) 29-1574

Toronto,
Ontario M5H 4C3 Canada

Fax:
(260) (1) 29-2154

Tel:
 (416) 361-0152

Fax:
(416) 361-0470

SHARES
LISTED

The
Toronto Stock Exchange Symbol "CAL"

BANKERS

NASDAQ
OTC BB Symbol "CALVF"

Canadian
Imperial Bank of Commerce

London
"AIM" Market Symbol "CMCL"

6266
Dixie Road

Mississauga,
Ontario

L5T
1A7 Canada



CAPITALIZATIONat December 31, 2005



Authorised:
Unlimited

Shares,
Warrants and Options Issued:

Common
Shares: 370,715,136

Warrants:
17,850,000

Options:
16,898,000



Web
Site:http://www.caledoniamining.com



50





---











Caledonia
Mining Corporation

Unit
# 9

2145
Dunwin Drive

Mississauga,
Ontario, Canada

L5L
4L9



Tel:
(905) 607-7543

Fax:
(905) 607-9806

info@caledoniamining.com



51









---

























EXHIBIT #14b







CALEDONIA MINING CORPORATION







2005 MANAGEMENT PROXY CIRCULAR



---











Notice
of Annual

Meeting
of Shareholders

to be
held May 11, 2006





Management
Proxy Circular







[proxycircular002.gif]







Caledonia

Mining
Corporation



















---

NOTICE
OF ANNUAL

MEETING
OF SHAREHOLDERS



TAKE
NOTICEthat the Annual and Special Meeting of Shareholders of
Caledonia Mining Corporation (the "Corporation") will be held in
Boardroom No. 44-01, 44th Floor, Scotia Plaza (the offices of the
Corporation's Solicitors, Borden Ladner Gervais LLP), 40 King Street West,
Toronto, Ontario, on Thursday May 11, 2006 commencing at 11:00 a.m. for the
purposes of:



1.

receiving the annual
report that includes the financial statements and Auditors' report thereon for
the financial year ended December 31, 2005;



2.

electing directors;



3.

appointing
Auditors and authorizing the directors to fix their remuneration;



4.

transacting such other business as may
properly be brought before the meeting.



A copy of the annual report, form of proxy
and management proxy circular accompany this notice.  A copy of the
Corporation's Form 20F, filed with the United States Securities and Exchange
Commission, is available upon request and has been filed on SEDAR as the
Corporation's Annual Information Form.



Shareholders will be entitled to vote at
the meeting in person or by proxy.  Shareholders not attending the meeting
may exercise their right to vote by promptly signing, dating and returning the
proxy in the envelope provided for that purpose - or instruct intermediaries
who hold their shares to submit proxies on their behalf





BY ORDER OF THE BOARD



DATED:  March 16, 2006





- 2 -



---





MANAGEMENT
PROXY 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 Corporation (the "Corporation")
of proxies to be used at the Annual Meeting (the "Meeting") of
Shareholders of the Corporation to be held on Thursday, May 11, 2006 at 11.00 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 Corporation.  The cost of any such
solicitation by management will be borne by the Corporation.



APPOINTMENT AND REVOCATION OF PROXIES

The persons named in the enclosed form
of proxy are directors of the Corporation.  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 Corporation, 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 the registered office of the Corporation or at the offices of
Equity Transfer Services Inc., Suite 420, 120 Adelaide Street West, Toronto,
Ontario, M5H 4C3 prior to the day of the Meeting or with the Chairman of the
Meeting on the day of the Meeting or any adjournment thereof.



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 Corporation 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
Corporation knows of no such amendments, variations or other matters to come
before the Meeting.



VOTING SHARES AND PRINCIPAL HOLDERS
THEREOF

On February 28, 2006, the Corporation had
outstanding 386,152,762 common shares, each carrying the right of one vote per
share.  To the best of the knowledge of the directors and officers of the
Corporation, 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 Corporation.



The Board of Directors of the Corporation
has fixed the record date as April 11, 2006 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 10:00 a.m. (Toronto, Ontario
time) on May 10, 2006.  The failure of any shareholder to receive notice of
the Meeting shall not deprive the shareholder of voting at the Meeting.







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 Occupation                                                                                                                                                                                                                                                                                                            | Director
      Since | Number of Shares
      Beneficially Owned,
      Controlled
      or Directed
|G.R. Pardoe, (2)(3)(4)
      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.  Prior to this was employed by
      Anglo American Corporation from 1981 where he was Finance Director from
      1997. | February
      2005  | Nil                                                                          
|S. E. Hayden, (2)(3) President,
      Chief Executive Officer  & Director
      Johannesburg, South Africa              | President and Chief
      Executive Officer of the Corporation and Director of all Caledonia's
      subsidiary companies.  Chief Executive Officer of Eersteling Gold
      Mining Company Limited, Greenstone Management Services (Pty) Ltd., and
      Barbrook Mines Limited.                                               | 1996                 | Nil                                                                          
|J. Johnstone,
      Vice President Operations, Chief Operating Officer
      & Director
      Oakville, Ontario, Canada | Chief Operating Officer of
      the Corporation and Director of various subsidiary companies.                                                                                                                                                                                                                                  | 1997                 | Nil                                                                          
|F. C. Harvey,  Director,
      Oakville, Ontario, Canada                                                                | Retired.
       Until 31 December 2005 employed as Technical Director and Secretary
      of the Corporation and Director of various subsidiary companies.                                                                                                                                                                      | 1993                 | 4,300                                                                        
|C.R. Jonsson,(1)(2)(3)
      Director, Vancouver,
      British Columbia, Canada                                        | Principal of Tupper,
      Jonsson & Yeadon, Barristers & Solicitors.                                                                                                                                                                                                                                                           | 1992                 | 59,469                                                                       
|W. I. L. Forrest,(1)(2)(3)
      Director
      Nyon, Switzerland                                                       | Business Executive.                                                                                                                                                                                                                                                                                                             | 1992                 | 17,000                                                                       
|R.G. Fasel, (1)(4)
      Director
      Geneva, Switzerland                                                             | Director of  Progesco Geneve SA, public
      accountants in Geneva, Switzerland from 1989 to present.                                                                                                                                                                                                                          | 2004                 | Nil                                                                          



Notes:

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

(4) Member of
Nominating Committee.



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





In compliance with applicable disclosure
requirements - C.R. Jonsson has been, within the past 3 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.  Cease Trade Order was issued
against it for failure to file and distribute financial statements - which has
not been rescinded.



-

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 January 26, 2005.



W.I.L. Forrest became a director of AB Airlines plc on
30June 1999 and resigned on 30 July 1999. On 2 August 1999, AB Airlines plc was
placed in administrative receivership.



At the present time the following
Caledonia directors are also directors of the following issuers:



Rupert Pardoe

- none



Stefan Hayden

- none



Carl
Jonsson

-Bonterra Energy Income Trust, TSX

-Comaplex Minerals Corp, TSX



-Comet Industries Limited, TSX-V

-Global Net Entertainment Corp, TSX-V

-Acrex Ventures Limited, TSX -V

-Dolly Varden Resources Limited, TSX-V

-Altima Resources Limited, TSX-V

-Pine Cliff Energy Limited, TSX-V

Ian
Forrest

-Belmore Resources Holdings Plc,
London OFEX



-Georex
SA, Paris OTC

-Mengold Resources
Inc.TSX-V

-PolyMet Mining
Corp.,TSX-V

-Viatrade Plc, London OFEX



Chris Harvey

- none



Jim Johnstone

- none



Roland Fasel
            -none











APPOINTMENT OF AUDITORS



The shareholders will be asked to vote for
the appointment of BDO Dunwoody LLPas Auditors of the Corporation, 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.









- 3 -





---





REPORT ON EXECUTIVE COMPENSATION



Compensation of Named Executive
Officers



The following table, presented in
accordance with the applicable regulation (the "Regulation") under the
Securities Act (Ontario), sets forth all annual and long term compensation for
services in all capacities to the Corporation and its subsidiaries for the
fiscal year ended December 31, 2005 in respect of the named executive officers:



Summary Compensation Table



|                                    |                                                                                            |         |       |              |             |             |         |              |  |  |  | 
|----------------------------------- | ------------------------------------------------------------------------------------------ | ------- | ----- | ------------ | ----------- | ----------- | ------- | ------------ |  |  |  | 
|                                    | Annual
      Compensation
                                    Long
      Term Compensation |        
|                                    |                                                                                            |         |       |              | Awards      | Payouts     |        
|                                    |                                                                                            |         |       |              | Securities  | Restricted  |         |             
|                                    |                                                                                            |         |       |              | Under       | Shares or   |         |             
|Name and                            |                                                                                            |         |       | Other Annual | Options/    | Restricted  | LTIP    | All other   
|Principal                           |                                                                                            | Salary  | Bonus | Compensation | SARs        | Share Units | Payouts | Compensation
|Position                            | Year                                                                                       | ($)     | ($)   | ($) (1)      | Granted (#) | (#)         | ($)     | ($)         
|                                    |                                                                                            |         |       |              |             |             |         |             
|Stefan E. Hayden(2)(3)              | 2005                                                                                       | 360,000 | -     | 80,672       | Nil         | Nil         | Nil     | 10,000      
|President, & Chief                  | 2004                                                                                       | 225,000 | -     | 42,000       | Nil         | Nil         | Nil     | 7,500       
|Executive  Officer                  | 2003                                                                                       | 180,000 | -     | -            | Nil         | Nil         | Nil     | 5,000       
|                                    |                                                                                            |         |       |              |             |             |         |             
|Jim Johnstone (3)                   |                                                                                            |         |       |              |             |             |         |             
|Vice President                      | 2005                                                                                       | 207,200 | -     | -            | Nil         | Nil         | Nil     | 10,000      
|Operations and                      | 2004                                                                                       | 207,200 | -     | -            | Nil         | Nil         | Nil     | 7,500       
|Chief Operating                     | 2003                                                                                       | 207,200 | -     | -            | Nil         | Nil         | Nil     | 5,000       
|Officer                             |                                                                                            |         |       |              |             |             |         |             
|                                    |                                                                                            |         |       |              |             |             |         |             
|F.Chris Harvey  (3)                 | 2005                                                                                       | 150,000 | -     | -            | Nil         | Nil         | Nil     | 10,000      
|Technical Director                  | 2004                                                                                       | 150,000 | -     | -            | Nil         | Nil         | Nil     | 7,500       
|and Secretary                       | 2003                                                                                       | 150,000 | -     | -            | Nil         | Nil         | Nil     | 5,000       
|                                    |                                                                                            |         |       |              |             |             |         |             
|Steve Poad (4)(5)                   | 2005                                                                                       | 19,178  | -     | -            | Nil         | Nil         | Nil     | Nil         
|Controller                          | 2004                                                                                       | 32,720  | -     | -            | Nil         | Nil         | Nil     | Nil         
|                                    | 2003                                                                                       | 26,971  | -     | -            | 150,000     | Nil         | Nil     | Nil         
|                                    |                                                                                            |         |       |              |             |             |         |             
|Jacques du
      Plessis(6)         | 2005                                                                                       | 144,000 | _     | _            | Nil         | Nil         | Nil     | Nil         
|General
      Manager               | 2004                                                                                       | 306,000 | _     | _            | Nil         | Nil         | Nil     | Nil         
|                                    | 2003                                                                                       | 46,392  | _     | _            | 200,000     | Nil         | Nil     | Nil         
|                                    |                                                                                            |         |       |              |             |             |         |             
|Mike D
      Tombs(5)               | 2005                                                                                       | 123,000 | _     | _            | Nil         | Nil         | Nil     | Nil         
|Vice
      President
      F Financ | 2004                                                                                       | 103,594 | _     | _            | 100,000     | Nil         | Nil     | Nil         
|Finance and
      Chief             | 2003                                                                                       | Nil     | _     | _            | Nil         | Nil         | Nil     | Nil         
|Financial
      Officer             |                                                                                            |         |       |              |             |             |         |             

Notes:

(1)
  Perquisites and other personal benefits for each of the named executive
officers, with the exception of Mr. Hayden did not exceed the lesser of $50,000
and 10% of total annual salary and bonus in 2003, 2004 and 2005.

(2)  Mr. S. E. Hayden is employed indirectly by the Corporation
through a management and administrative agreement.

(3)
  The figures shown are the agreed salaries. The Officers noted have,
in recognition of the Corporation's cash position in the respective years,
agreed to defer an aggregate total of $302,201 of the salaries due them for the
period ending December 31, 2001 and further amounts totaling $173,067 and
$383,810 for the periods ending December 31, 2000 and December 31, 1999
respectively. During 2003 Mr. Johnstone was paid in full the sum of $278,666.33.
 Mr. Harvey was paid $100,000.00 in 2003 and was paid the balance of his
outstanding salary in 2004. Epicure was paid the full outstanding balance
pertaining to the management and administrative agreement relating to Mr. Hayden
during 2003 and 2004.

(4)  Mr. S. Poad is
employed indirectly by the Corporation through a service contract with Doelcam
Inc.

(5)
Mr. S. Poad served as VP Finance until June 24, 2004.  Mr. M. Tombs was
appointed as VP Finance and CFO on June 24, 2004.

(6)
Mr du Plessis was employed as General Manager, South Africa from November 2003
to May 2005



The following table (presented in accordance with the
Regulation) sets forth stock options granted by the Board of Directors of the
Corporation during the fiscal year ended December 31, 2005 to the named
executive officers:



Option/SAR Grants in Last Fiscal Year

|     |                                                     |                                                                   |                                           |                                                                                        |                      
|---- | --------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------
|Name | Securities Under
      Options/SARs
      Granted # | % of
      Total Options/SARs Granted to Employees in Fiscal Year | Exercise
      or Base Price ($/Security) | Market
      Value of Securities Underlying Options/SARs on Date of Grant ($/Security) | Expiration
      Date
|     | Nil                                                 |                                                                   |                                           |                                                                                        |                      



The following table (presented in
accordance with the Regulation) sets forth stock options exercised bythe
named executive officers during the fiscal year ended December 31, 2005:



Option/SAR
Exercises in Last Fiscal Year

|              |            |                 |                   |                               
|------------- | ---------- | --------------- | ----------------- | ------------------------------
|              |            |                 |                   | Value
      of Unexercised in-
|              |            |                 | Unexercised       | the-Money (1)                 
|              | Securities |                 | Options/SARs at   | Options/SARs at               
|              | Acquired   |                 | December 31, 2005 | December 31, 2005             
|              | on         | Aggregate Value | (#)               | ($)                           
|              | Exercise   | Realized        | Exercisable/      | Exercisable/                  
|Name          | (#)        | ($)             | Unexercisable     | Unexercisable                 
|              |            |                 |                   |                               
|S. E. Hayden  | Nil        | Nil             | 4,175,000/Nil     | Nil/Nil                       
|              |            |                 |                   |                               
|J. Johnstone  | Nil        | Nil             | 2,135,000/Nil     | Nil/Nil                       
|              |            |                 |                   |                               
|F. C. Harvey  | Nil        | Nil             | 2,135,000/Nil     | Nil/Nil                       
|              |            |                 |                   |                               
|S. Poad       | Nil        | Nil             | 430,000/Nil       | Nil/Nil                       
|              |            |                 |                   |                               
|J. du Plessis | Nil        | Nil             | Nil/Nil           | Nil/Nil                       
|              |            |                 |                   |                               
|M.D. Tombs    | Nil        | Nil             | 100,000/Nil       | Nil/Nil                       
|              |            |                 |                   |                               

Notes:

(1)
 "In-the-money" means the excess of the market value of the common
shares of the Corporation outstanding on December 31 2005 over the exercise
price of the options



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



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 (i) a "Key Executive Severance Protection
Plan" between Caledonia and one of its directors - namely Mr. S.E. Hayden
dating from 1996, (ii) the indirect employment of Mr. S.E.Hayden through a
management and administrative agreement and (iii) an employment contract with a
director, Mr. J. Johnstone.  The "Severance Plan" calls for severance
payments to these executives if employment is terminated as a result of a change
of control of Caledonia.  Mr. Johnstone's employment contract with
Caledonia has a termination clause whereby Mr. Johnstone is paid a severance
payment of one year of salary in the event of his termination due to change of
control or without cause. Mr Harvey resigned from his operating role with
Caledonia effective December 31, 2005.  Since then he has provided
consulting services from time-to-time, he continues as a director of Caledonia.
 Mr Johnstone has given Caledonia notice of his retirement from his
operating role effective September 30, 2006.  The corporation has an
agreement with Mr Pardoe as Chairman and for compensation of services provided
to Caledonia, in addition there are letters of appointment with Messrs Fasel,
Forrest, Harvey and Jonsson.



Composition
of the Compensation Committee

The
Corporation has a Compensation Committee ("Committee") comprised of four
members.  All issues as to compensation of  the Officers are
considered by the Committee, the members of which, during the fiscal year ended
December 31, 2005, were G.R.Pardoe (Chairman), C. R. Jonsson , W. I. L. Forrest
and  S. E. Hayden.  Mr. S. E. Hayden as President and CEO of the
Corporation is therefore an inside director. Mr. Hayden abstained from voting on
compensation matters pertaining to him.  Mr. G.R. Pardoe was appointed
 as a fourth member of this committee in March 2005. Since March 2005 Mr.
Pardoe 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 and may be considered a related director under recently adopted
 Ontario Securities Commission ("OSC") rules..  Mr. C. R. Jonsson
was granted 1,000,000 stock options in 2002 in lieu of being paid for legal
services provided by him.  Mr. Jonsson continues to provide the company
with limited legal services and has been paid for these services at normal rates
since April 2005. He has therefore been a service provider within the past three
years and may be considered a related director under recently adopted OSC rules.
The Board considers while Messrs Jonsson and Pardoe do not satisfy the strict
definition of independence, they meet the requirements of independence in every
other way.  Mr. W. I. L. Forrest is an independent director within the
meaning of the OSC's Multilateral Instrument 52-101.

The board has adopted a Charter of the
Compensation  Committee which is attached to this Information Circular as
Appendix C.



Compensation
Policies

While the
 Board  has not adopted a written policy concerning the compensation
of executive officers, it has developed a consistent approach and philosophy
relating to executive compensation.  The overriding principles in the
determination of executive compensation are the need to provide total
compensation packages that will attract and retain qualified and experienced
executives, to reward the executives for their contribution to the overall
success of the Corporation and to integrate the longer-term interest of the
executives with the investment objectives of the Corporation's shareholders.



Executive compensation at the Corporation
has two principal components: salary and stock options.  The Committee is
mindful that the Corporation competes within the framework of the international
mining industry.  The Compensation Committee is of the view that a
competitive salary level is appropriate for the executive officers, as their
total compensation package should emphasize salaries and the stock options
granted by the Corporation.  The Chief Executive Officer of the Corporation
is one of the named executive officers and therefore his compensation is
determined in the same manner as for the other executive officers of the
Corporation but with the proviso that he abstains from discussion and voting on
any such personal compensation determination.



Compensation
of Directors

The
compensation committee, consisting of one independent director and three who are
not independent (see above), 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. Effective
July 1, 2004 each of the directors, including directors who are officers of the
Corporation, is entitled to an annual director's fee of $10,000 Canadian and out
of pocket expenses relating to attendance at a board or committee meeting.
 Prior to 2004 directors were paid an annual directors fee of $5,000.
 For 2004, Mr. Fasel, who joined the board at mid-year was paid $5,000 on a
pro-rata basis, the other five directors were each paid $7,500 for 2004. The
Corporation obtained, in June 2003, liability insurance for directors and
officers of the Corporation and its affiliates with coverage of $1,000,000
Canadian per occurrence and in the aggregate. In February 2005 Mr Pardoe was
appointed a director of Caledonia and as Chairman of the Board with an annual
fee of $30,000 to be paid quarterly, he is also compensated at $3,000 per day
for services provided to Caledonia.



Effective July 5, 2005 each of the
non-executive directors is compensated for time spent in preparing and
participating in telephone conference Board and Committee meetings and for
travel and attending Board meetings being:

-  $275 per hour
for preparation for and participating in telephone meetings of the Board and
Committees;

-  $3,000 per day
for participating in meetings of the Board and travel time to get to and from
the location of a board meeting.

It was understood that should the
corporation's treasury be unable to afford this compensation, these payments
would be deferred until adequate funds were available. To date no such
compensation, totaling $ 48,520, has been paid for time spent in connection with
Board meetings in 2005.





PERFORMANCE GRAPH



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











|                        |          |          |          |          |          |         
|----------------------- | -------- | -------- | -------- | -------- | -------- | --------
|                        | Dec 2000 | Dec 2001 | Dec 2002 | Dec 2003 | Dec 2004 | Dec 2005
|S&P/TSX Composite       | 100      | 86       | 74       | 92       | 104      | 126     
|Caledonia Common Shares | 100      | 79       | 586      | 600      | 186      | 164     





CORPORATE GOVERNANCE PRACTISE



In June 2005 the Ontario Securities
Commission ("OSC") adopted National Instrument 58-101 ("NI 58-101")
Disclosure of Corporate Governance Practices, which  replaces the TSX
Guidelines of previous years. This Instrument requires the issuer to include in
its management information circular the disclosure required by Form 58-101F1.
 The Corporation's Statement of Corporate Governance Practices, which has
been prepared by the Corporate Governance Committee in terms of Form 58-101F1,
follows:



Mandate
of the Board

The Board of
Directors of the Corporation is responsible for the overall stewardship of the
Corporation, and has full power and authority to manage and control the affairs
and business of the Corporation.  The mandate of the Board of Directors is
detailed in the "Charter of the Board of Directors" which is attached to
this Information Circular as Appendix A and can be viewed at the Corporations
head office, at the Annual Meeting of Shareholders and on the Corporation's
website atwww.caledoniamining.com.



Amongst other things, the Board is
responsible for:



I.

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

2.

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

3.

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

4.

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

5.

overseeing the administration of a
policy for communications by the Corporation 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 Corporation 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.  Additional
meetings are held 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 Corporation's affairs and in light of opportunities or risks which
the Corporation faces. On average the Board has met between nine and ten times
per year during the past five years.





Attendance
Record of Directors from January 1, 2005 to December 31, 2005:



|                        |            |               |      
|----------------------- | ---------- | ------------- | -----
|                        | In Person: | By telephone: | Total
|Meetings Held           | 3          | 5             | 8    
|Attendance at Meetings: |           
|R. Fasel                | 2          | 4             | 6    
|I. Forrest              | 2          | 5             | 7    
|C. Harvey               | 3          | 3             | 6    
|S. Hayden               | 3          | 5             | 8    
|J. Johnstone            | 3          | 5             | 8    
|C. Jonsson              | 3          | 5             | 8    
|R. Pardoe               | 3          | 5             | 8    







Board Composition

National Instrument 58-101 requires the
Corporation to identify which directors are independent and which are not
independent as defined in MI 52-110.  National Policy 58-101 recommends
that a majority of the Board be independent to the Corporation.  The Policy
uses the term independent director to mean a director who is independent of
management and is free from any interest and any business or other relationship
which could, or could reasonably be perceived to, materially interfere with the
director's ability to act with a view to the best interests of the Corporation,
other than interests and relationships arising from shareholding.



The Board has concluded that two of the
seven directors, Messrs. Fasel and Forrest are independent directors within the
meaning of the NI 58-101 definitions. The Board considers while Messrs. Jonsson
and Pardoe do not satisfy the strict definition of independence in that they
receive remuneration for legal and consulting services provided to the
Corporation,, they meet the requirements of independence in every other way. In
reaching these conclusions, the Board has examined the factual circumstances of
each director and has considered any interests and business or other
relationship that any director may have with the Corporation.  The 58-101
definitions are quite restrictive of the Corporation and will require careful
consideration on how best to satisfy the guidelines of  maintaining a
majority of independent directors as defined in National Policy.  Mr. S. E.
Hayden is a related director by virtue of his position as the President and
Chief Executive Officer of the Corporation and Mr. J. Johnstone  is a
related director by virtue of his positions as an employee of the Corporation.
 Mr. Harvey was an employee of the Corporation until December 31, 2005
since then he has provided consulting services to the Corporation and is thus a
related director.  Similarly Messrs Jonsson and Pardoe have respectively
provided legal and consulting services to the Corporation and are thus related
directors. The Board believes that the extensive knowledge of Messrs. Hayden,
Johnstone, Jonsson and Harvey of the Corporation'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 Mr. Pardoe is most valuable to the other directors and to the
Corporation as a whole.



Caledonia's Board members consider that
the Board's current composition is efficient and appropriate considering the
extent of the Corporation's activities and the location of the properties on
which most of its activities are conducted.  It is the opinion of the two
unrelated Directors, Messrs. Fasel and Forrest, that the Board functions
adequately independently of management.  However, they believe that the
Corporation will benefit from the addition of independent directors. In early
2005 the Corporation invited  Mr. Pardoe to join the board as an  independent
director. The Board then elected Mr. Pardoe as Chairman and thereby, in the
interest of sound corporate governance, has separated the positions of Chairman
and President both of which were previously held by Mr. Hayden. However because
of his recent consulting role Mr. Pardoe can no longer be considered as
independent and thus the earlier intention of maintaining a majority of
independent directors and having an independent chairman has now been lost.



The Board determines each year the number
of directors to be elected at the annual general meeting.  Under the
articles of the Corporation, the number of directors of the Corporation must be
at least three.  For 2006, the Board has concluded that the number of
directors should be further increased to satisfy the Corporate Governance
requirements regarding independent directors and has been actively seeking an
additional qualified independent director.



The Board is aware of the need to use
independent judgement in carrying out its duties.  The independent
directors do not hold regularly scheduled meetings at which non-independent
directors and members of management are not in attendance. The Chairman of the
board of directors is mandated to "Ensure the Board has the opportunity to
meet separately without management present"; he does this by enquiring at each
board meeting if any independent directors wishes such a meeting.



The board has adopted a Charter of the
Board of Directors which is attached to this Circular as Appendix B.



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



Position
Descriptions and Charters



The board has developed a written position
description for the Chairman of the Board, but does not have written position
descriptions for the chairmen of each board committee.  The Board has
adopted committee charters for the Audit, Compensation, Corporate Governance and
Nomination committees, these charters outline the responsibilities of each
committee and the reporting responsibilities of the committee chairman.



The board has developed a written position
description for the C.E.O.



Board Committees

The Board of Directors has four standing
committees: the Audit Committee, the Compensation Committee, the Corporate
Governance Committee and the Nominating Committee.  The Board has
established a policy to strive to implement the recommendations of National
Policy 58-101 wherever possible and practical.



Audit Committee

The Audit Committee, which is chaired by
Mr. Forrest, is currently composed largely of, unrelated directors.  In
2004, Mr. Fasel was appointed to the Audit committee and at the same time the
related director, Mr. Hayden resigned his position. 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:



I.

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.



During 2004 the Board adopted a "Charter
of the Audit Committee" which is to be reviewed annually.  This Charter
can be viewed at the Corporation's head office, at the Annual Meeting of
Shareholders and on the Corporation's website at www.caledoniamining.com.



Compensation
Committee

The Compensation Committee is currently
composed of three related and one independent directors.  The Board
believes that the participation of Messrs. Hayden, Jonsson and Pardoe the
related directors, is important to the business of this committee. Mr. Pardoe
was appointed to this Committee, which he chairs, on his appointment to the
Board in 2005.  The Committee is responsible for making recommendations to
the Board on:



II.

Compensation
and bonuses of the Executive Directors

III.

Compensation
of officers and senior employees of the Corporation, including stock option
incentives;

IV.

Succession
planning for officers of the Corporation;

V.

Recommend
candidates for appointment as officers;

VI.

Review and
approve any employment contracts and other individual financial arrangements for
senior management.



The Charter of the
Compensation Committee is attached to this Circular as Appendix C.



Corporate
Governance Committee

The Corporate Governance Committee is
currently composed of one independent and three non-independent directors.
 The Board believes that the participation of Messrs. Hayden, Jonsson and
Pardoe, the related directors, is important to the business of this committee.
Mr. Pardoe brings considerable corporate governance experience to this Committee
which he chairs.  Mr. Jonsson has served on the committee for several
years, including a period as an independent director. The Committee has general
responsibility for developing the approach of the Corporation to matters of
corporate governance, which includes the responsibility for:



VII.

assessing,
at least annually, the effectiveness of the Board as a whole and the committees
of the Board;

2.

reviewing annually the
mandates of the Board and its committees and making recommendations for change;

3.

recommending procedures
to permit the Board to function independently from management;

4.

seeing to the adequacy
of the orientation and education programs for new members of the Board;

5.

determining annually
which directors should be considered to be unrelated directors, and recommending
such determination to the Board;

6.

preparing
annually and recommending to the Board a "Statement of Corporate Governance
Practices"; and

7.

overseeing
the Corporation's policy for communications with shareholders, the investment
community, the media, governments and the general public



The Charter of the Corporate Governance
Committee is attached to this Circular as Appendix D.



No compensation consultant or advisor has
been retained to assist in determining compensation for any of the company's
directors or officers since January 1, 2005.



Nominating
Committee

The Nominating Committee was composed of
one independent and one non-independent director during 2004.  In
accordance with the TSX recommendations the Board appointed only unrelated
directors, Mr. Fasel and Mr. Pardoe to this committee during 2005.  However,
recently Mr. Pardoe has provided consulting services to the Corporation and is
no longer independent. The Committee, which is chaired by Mr. Pardoe, is
responsible for:



I.

identifying
prospective nominees for the Board and recommending them to the Board; and

II.

establishing
criteria for Board membership and retirement therefrom.



The board has
adopted a Charter of the Nominating Committee which is attached to this Circular
as Appendix B.



Decisions
Requiring Board Approval

As part of the Board's responsibility for
the strategic planning process of the Corporation, 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 Corporation 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 Corporation.



Ethical
Business Conduct



In April 2004 the Board adopted a written
Code of Business Conduct and Ethics for the directors, officers and employees.



A
copy of this Code of Business Conduct and Ethics is available on the company
website at www.caledoniamining.com



The company does not monitor compliance
with its code, but from time to time satisfies itself regarding compliance with
the code.



There has been no material change report filed since
January 1, 2005 pertaining to any conduct of a director or executive officer
that constitutes a departure from the code.



Shareholder
Feedback

It is the Corporation's policy that
communications with shareholders, the investment community, the media,
governments and the general public are handled by the CEO through the South
African  office located in Johannesburg.



Expectations of
Management

The Board requires management to keep the
Board informed in a timely and candid manner of the progress of the Corporation
towards the achievement of its established goals, and of any material deviations
from such goals and from corporate strategies and policies approved by the
Board.



Orientation
& Continuing Education



The board takes the following steps to
orient new directors:

i.

By using the board and
committee charters described above, together with verbal discussion, to describe
the role of the board, its committees and its directors.

ii.

Providing updates, at
least quarterly, of the company's operations and activities



And to provide continuing education for
its directors by meeting as a  group from time to time  to better
understand the company business, meet with fellow directors and discuss matters
of mutual concern.



Other
Corporate Governance Segments.

The Board has reviewed the NP58-201
Guidelines on Corporate Governance and concluded that the Corporation complies
with the guidelines except in two areas, namely

(i)

The
independence of the majority of its directors and chairman, and

(ii)

Assessing
the board's effectiveness.



The board is addressing these
deficiencies and expects to comply with these outstanding guidelines during
2006.



Additional
Information

Additional information relating to the
Corporation is on SEDAR at www.sedar.com and
on the Corporation's website at www.caledoniamining.com
  Financial information is provided in the Corporation's comparative
financial statements and MD&A.



Copies of the Corporation's financial
statements and MD&A can be obtained by contacting the company's head
office at:



Unit #9, 2145 Dunwin
Drive

Mississauga

Ontario,
Canada

L5L 4L9

Phone:

+1-905-607-7543





GENERAL APPROVAL OF CIRCULAR



The contents and
sending of this management information circular have been approved by the Board
of Directors of the Corporation,



BY ORDER OF THE BOARD OF
DIRECTORS

DATED:  March 16th, 2006



- 4 -





---





Appendix
A



Caledonia
Mining Corporation

Charter
of the Board of Directors



I.

Purpose



The Board of Directors (the "Board") of Caledonia
Mining Corporation ("Caledonia") is responsible for overseeing the
management and business affairs of  Caledonia and makes all major policy
decisions. It may delegate certain of its authority and responsibilities to
Board committees ("Committees") or management of Caledonia
("Management"). Nonetheless, it will retain full effective control over the
company.



II.

Authority



The authority of the Board comes from its mandate given by
the shareholders - and the applicable law - to supervise the management of
 Caledonia. Through the Chief Executive Officer ("CEO"), the Board sets
standards of conduct, including the general moral and ethical standards for the
conduct of the business.



III.

Composition
and Meetings



1.

The Board consists of a pre-determined
number of directors elected annually by shareholders. A director may be
re-elected each year.

2.

The Board must include individuals who
qualify as independent directors. In addition, the Board must include a number
of directors who do not have interests in or relationships with either Caledonia
or the major shareholders and which fairly reflects the investment by minority
shareholders. The Board will meet all applicable legal and regulatory
requirements.

3.

The Board appoints one director
Chairman. The Chairman is responsible for ensuring that the Board carries out
its responsibilities effectively.

4.

The agenda for Board meetings shall
contain standing business reporting items. At a prior meeting, or through the
office of the Chairman, any director may request additional items for inclusion
on the agenda.

5.

All reports and material for approval
by the Board shall be delivered at least 48 hours in advance of a Board meeting
in rush circumstances, and seven days for regular reporting, unless extenuating
circumstances, as approved by the Chairman, dictate otherwise.

6.

A simple majority of the members forms
the quorum of such meetings; providing that at least 25% of the Directors
present at every meeting of the Board must be  resident Canadians.

7.

Any director may request a meeting of
the Board with no Management in attendance.

8.

Within five business days of a meeting
the Secretary will circulate the minutes for review and comment.

9.

In the event a resolution is to be
passed by way of written consent rather than a meeting of the Board, a brief
summary of the background and purpose of the resolution will be provided to the
directors.



IV.

Responsibilities



In discharging its duties and stewardship responsibility,
the Board:

1.

Sets strategic direction, adopts and
supervises the strategic planning process, and approves the strategic plans and
goals, which takes into account, among other things, the opportunities and risks
of the business. The CEO and Management have direct responsibility for the
ongoing development and implementation of the strategic planning process and the
fulfillment of long term goals.  The Board monitors the success of
Management in implementing the approved strategies and plans.

2.

Identifies the principal risks of
business and ensures the implementation of appropriate systems to manage these
risks. The Board must understand the principal risks of the business and oversee
the implementation of systems to monitor and manage these risks effectively with
a view to the long-term viability and success of Caledonia and the interests of
its shareholders.

3.

Appoints, monitors the performance of,
and determines the compensation for the CEO and senior Management. The Board
must ensure that Caledonia has Management of the highest caliber. This
responsibility is carried out primarily through the appointment of the CEO.

4.

Adopts procedures to ensure independent
functioning of the Board. The Board must put in place appropriate procedures to
ensure that the Board is able to function independently of Management. This
responsibility is fulfilled by ensuring that the directors have an opportunity
to discuss issues in the absence of Management and the CEO, and by establishing
a process and guidelines to enable individual directors and Committees to engage
outside advisors. The Board is responsible for defining its relationship with
Management and for establishing, through the development of clear policies and
procedures, specific levels of authority for Management.

5.

Ensures integrity of Caledonia's
internal control and management information systems. This responsibility
includes reviewing and approving historical financial information and ensuring
the integrity of the audit system and compliance with applicable accounting
principles and laws. The Board must ensure that it receives a flow of
information that provides a base for determining the future prospects and
direction of the business.

6.

Ensures adoption of a disclosure
policy. The Board must ensure that policies and procedures are in place to
enable Caledonia to communicate effectively with its shareholders and to satisfy
all applicable disclosure requirements.

7.

Ensures succession planning is in
place. The Board must ensure that adequate and effective succession plans are in
place for the CEO and senior Management.

8.

Ensures adoption of policies that
govern the conduct of directors, officers and employees. The Board must ensure
that clear and unambiguous policies are in place relating to the conduct of the
directors, officers and all employees and to ensure compliance with all
applicable standards, laws and regulations.  The Board is also responsible
for identification and reporting of conflicts of interest whether potential or
actual.

9.

Assess the contributions  and
effectiveness of the Committees.

10.

Develops Caledonia's approach to
corporate governance issues. The Board must ensure that Caledonia is in
compliance with existing regulations and requirements.



V.

DELEGATION



1.

The day-to-day management of the
business and affairs of Caledonia are delegated by the Board to the CEO and
other executive officers as directed by the CEO.

2.

The Board assigned to the Compensation
Committee the authority to examine  the compensation of the Officers -
including options proposed to be granted to the Officers.

3.

The Board assigned to the Audit
Committee the authority to monitor the integrity of Caledonia's financial
reporting process and systems of internal controls regarding finance,
accounting, and legal compliance; to monitor the independence and performance of
Caledonia's independent auditors and internal auditing department: and to
provide an avenue of communication among the independent auditors, Management,
the internal auditing department, and the Board of Directors.

4.

The Board assigned to the Governance
Committee the authority to develop Caledonia's approach to governance issues
to ensure that all requirements are met.

5.

The Board assigned to the Nominating
Committee the responsibility of establishing the criteria for Board membership
and identifying, vetting and recommending prospective nominees for Board
membership.



VI.

NOT
DELEGATED AUTHORITY



The following matters require the prior approval of the
Board:

1.

Strategic plans and annual budgets;

2.

Approval of the annual audited and
unaudited quarterly financial statements;

3.

Any transaction which is not in the
ordinary course of business of Caledonia;

4.

Acquisitions and dispositions of fixed
assets in excess of $1 million. The Chairman is mandated to approve acquisitions
and dispositions and below $1 million;

5.

Borrowings or giving guarantees in
excess of $1 million;

6.

All contracts with officers or
directors in excess of $75,000 annually;

7.

Decisions and recommendations of any
Committee;  and

8.

All other matters that are within the
Powers of the Board and are not delegated pursuant to Clause V.



Charter date:

March 1, 2005.





- 5 -



---

Appendix
B



Caledonia
Mining Corporation

Charter
of the Nominating Committee









I.

Purpose



The Nominating Committee (the "Committee") is
established by The Board of Directors (the "Board") of Caledonia Mining
Corporation (the "Corporation") to assist the Board in identifying qualified
individuals to become new directors, and recommending the appointment of
specific individuals. Where appropriate it will also recommend revisions to this
charter.



II.

Composition
and Meetings



1.

The Committee will consist of not less
than two directors, all of whom shall be independent and who will be appointed
by the Board.

2.

A quorum shall be a majority of the
members, present either in person or by telephonic conference call.

3.

The Committee shall appoint a Secretary.

4.

Within five business days of a meeting
the Secretary will circulate the minutes for review and comment.



III.

Reporting
to the Board



The Chairman of the Committee shall report to the Board at
its next meeting following any meeting of the Committee.



IV.

Authority
to Engage Advisors



The Committee shall have the authority to engage outside
consultants and advisers as it determines necessary to carry out its duties. The
Corporation shall provide appropriate funding to compensate any such consultant
or adviser, as determined by the Committee in its capacity as a committee of the
Board.



V.

Responsibilities



The Committee shall



1

Annually review the performance of the
Board of Directors, the committees of the Board and individual directors, and
the relationship between the Board and management.

2

Review and determine the criteria for
identifying potential nominees to the Board of Directors.

3

Seek guidance from the Chairman and the
President and Chief Executive Officer in identifying and assessing potential
candidates to be nominated for election to the Board of Directors, and the need
for the appointment of additional Directors.

4

Annually review the membership of the
committees of the Board and make recommendations to the Board on appointments to
the committees, including the appointment of a Chairman for each committee.

5

Review and oversee the orientation
program for new members of the Board.

6

Regularly review the position
descriptions of the Chairman of the Board and the Chief Executive Officer.





Charter date:

7th July 2005



- 6 -



---

Appendix
C



Caledonia
Mining Corporation

Charter
of the Compensation Committee



I.

Purpose



The Compensation Committee (the "Committee") is
established by The Board of Directors (the "Board") of Caledonia Mining
Corporation (the "Corporation") to assist the Board in developing senior
management succession planning and recommending to the Board adjustments in
remuneration and benefits for the Directors and senior management.



II.

Composition
and Meetings



1.

The Committee will consist of not less
than three directors, the majority of whom shall be independent, and who will be
appointed by the Board.

2.

A quorum shall be a majority of the
members, present either in person or by telephonic conference call.

3.

Where any matter discussed relates to a
member of the Committee, that member will retire from the meeting for that part
of the meeting.

4.

The Committee shall appoint a
Secretary.

5.

Within five business days of a meeting
the Secretary will circulate the minutes for review and comment.



III.

Reporting
to the Board



The Chairman of the Committee shall report to the Board at
its next meeting following any meeting of the Committee.



IV.

Authority
to Engage Advisors



The Committee shall have the authority to engage outside
consultants and advisers as it determines necessary to carry out its duties. The
Corporation shall provide appropriate funding to compensate any such consultant
or adviser, as determined by the Committee in its capacity as a committee of the
Board.



V.

Responsibilities



The Committee shall



1.

Review
and approve the annual compensation and any bonuses of the Executive Directors,
in consultation with the Chairman of the Board.

2.

Based
on the recommendation of the President and CEO, review and approve the annual
compensation for senior management as so designated by the Board from time to
time.

3.

Review
stock option plans and other equity related long term incentive plans operated
by the Corporation, and recommend any awards thereunder and any changes thereto.

4.

Approve
termination settlements for Executive Directors and senior management.

5.

Review
the senior management succession and development plans and report to the Board
at least annually on such plans.

6.

Recommend
to the Board candidates for appointment as officers of the Corporation to the
Board.

7.

Review
and approve any employment contracts and any other individual financial
arrangements for senior management.





Charter date:

7th July 2005



- 7 -



---

Appendix
D



Caledonia
Mining Corporation

Charter
of the Corporate Governance Committee





I.

Purpose



The Corporate Governance Committee (the "Committee")
is established by The Board of Directors (the "Board") of Caledonia Mining
Corporation (the "Corporation") to assist the Board by developing and
recommending to the Board a set of corporate governance principles.



II.

Composition
and Meetings



1.

The Committee will consist of not less
than three directors, the majority of whom shall be independent, and who will be
appointed by the Board.

2.

A quorum shall be a majority of the
members, present either in person or by telephonic conference call.

3.

The Committee shall appoint a
Secretary.

4.

Within five business days of a meeting
the Secretary will circulate the minutes for review and comment.



III.

Reporting
to the Board



The Chairman of the Committee shall report to the Board at
its next meeting following any meeting of the Committee.



IV.

Authority
to Engage Advisors



The Committee shall have the authority to engage outside
consultants and advisers as it determines necessary to carry out its duties. The
Corporation shall provide appropriate funding to compensate any such consultant
or adviser, as determined by the Committee in its capacity as a committee of the
Board.



V.

Responsibilities



The Committee shall



1.

Periodically
review and make recommendations to the Board on the Board mandate and the
mandates and responsibilities of the committees of the Board.

2.

Periodically
review and make recommendations to the Board on the position descriptions for
the Chairman of the Board and the Chief Executive Officer.

3.

Review
and recommend to the Board for approval a set of corporate governance principles
applicable to the Corporation.

4.

Regularly
review the corporate governance practices of the Corporation and their
compliance with Toronto Stock Exchange Regulations and other regulatory
guidelines and rules and, if appropriate, recommend changes in these practices
to the Board.

5.

Review
and make recommendations to the Board on any other matters related to the
governance of the Corporation that the Committee considers appropriate.





Charter
date:

7th
July 2005



- 8 -



---









EXHIBIT #14c







CALEDONIA MINING CORPORATION







SCHEDULES







All schedules specified in Article 5-04 of Regulation S-X are considered not to be applicable to Caledonia.



---









EXHIBIT #14d





CALEDONIA MINING CORPORATION







MINERAL PROPERTIES (Thousands of $Cdn)





The following is a summary of Caledonias mineral properties and the capitalized costs as at the 31st December 2005:



Canada:



Nunavut

$     750









Africa:



South Africa





8,698

Zambia



1,391



10,089



TOTAL MINERAL PROPERTIES

$10,839







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.













---













EXHIBIT #14e







CALEDONIA MINING CORPORATION





SUMMARY REPORT BY

INDEPENDENT QUALIFIED PERSON



BARBROOK MINES LIMITED

MPUMALANGA PROVINCE, SOUTH AFRICA





Prepared by Applied Geology Services cc

on behalf of

Caledonia Mining Corporation

28th February 2006





The complete Independent Qualified Persons Report (dated May 2004)

may be viewed on this companys website.







---

















---





---

APPLIED GEOLOGYSERVICES cc

CK 89128297/23

P O Box 2033, Rivonia, 2128, South Africa Tel: (27 11) 234 9750/1 Fax: (27 11) 234 9752 Cell: 083 626 4523

Email: admin@appliedgeology.co.za

Tuesday, 28 February 2006

This letter serves to confirm that I have examined the ore reserve and ore resourceestimations for Barbrook Mines Limited for the year ended December 2005, and consider them to be a fair reflection of their current status.

[caledonia20f042106003.gif]

David Grant Consulting Geologist C Geol, Pr, Sci. Nat.