(CMCL.L) Caledonia Mining Corporation Buy/Sell

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Balance at December 31, 2007 195,006 1,040 (57) (171,894) 24,095
Shares issued 5(b)(i) 1,119 1,119

Equity-based compensation
expense 862 862

Investments revaluation to
fair value (10) (10)

Reclassification adjustment for other than temporary
decline in value 70 70
Net loss for the year (4,940) (4,940)

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Balance at December 31, 2008 196,125 1,902 3 (176,834) 21,196

Equity-based compensation
expense 23 23

Investments revaluation to
fair value 35 35

Translation loss from Blanket
Mine (330) (330)
Net loss for the year to date (213) (213)

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196,125 1,925 (292) (177,047) 20,711

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

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Caledonia Mining Corporation
Consolidated Statements of Operations and Comprehensive Income/ (Loss)
(in thousands of Canadian Dollars except share and per share amounts)

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Unaudited For the three months For the nine months ended
ended September 30 September 30

Revenue and Operating Costs
Revenue from sales 4,932 2,280 1,950 7,295 7,668 6,808
Operating Costs 3,130 1,978 1,176 5,700 4,595 7,534

Gross profit(loss) 1,802 302 774 1,595 3,073 (726)

Costs and expenses

General and 499 2,016 542 1,644 3,174 1,584

administrative

Interest - (106) 65 (29) (133) 120

expense/(income)

Amortization 101 101 4 299 302 510
Exchange loss/(gain) 231 992 1,017 (328) 1,752 1,468

Other

expense/(income) 109 48 - 109 198 (11)

940 3,051 1,628 1,695 5,293 3,671

Income/(Loss) before
discontinued operations 862 (2,749) (854) (100) (2,220) (4,397)
Current Income Tax - - (1) - - (3)

Net Income/(Loss) before
discontinued operations 862 (2,749) (855) (100) (2,220) (4,400)

Discontinued operations
(Loss) (36) (30) (80) (113) (123) (460)

Net Income/(Loss) after
discontinued operations 826 (2,779) (935) (213) (2,343) (4,860)

Revaluation of Investments to fair
value (Note 1) 20 (6) (76) 35 2 (76)

Comprehensive
Income/(Loss) 846 (2,785) (1,011) (178) (2,341) (4,936)

Income/(Loss) per share Basic and diluted from $0.002 ($0.005) ($0.002) ($0.000) ($0.004) ($0.009) continuing operations Basic and diluted from
discontinued operations $0.002 - - ($0.000) - ($0.001)

Basic and diluted for
the quarter $0.002 ($0.005) ($0.002) ($0.000) ($0.004) ($0.010)

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

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Caledonia Mining Corporation
Consolidated Statements of Cash Flows
(in thousands of Canadian Dollars)

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Unaudited For the three months For the nine months
ended September 30 ended September 30

Cash provided by (used in) Operating activities
Income/(Loss) before 862 (2,749) (855) (100) (2,220) (4,400)

discontinued operations Adjustments to reconcile
net cash from operations (32) 835 3 (39) 1,073 415

(Note 9) Changes in non-cash
working capital balances (63) (73) 396 (642) (2,142) 1,766

(Note 9)

Cash flows provided from
(used for) continuing 767 (1,987) (456) (703) (3,289) (2,219)

operations

Investing activities Expenditures on capital
assets and mineral (521) (993) (904) (1,158) (1,493) (2,284)

properties
Sale of Barbrook Mine - (19) - - 9,213 -

(521) (1,012) (904) (1,158) 7,720 (2,284)

Financing activities
Bank overdraft (85) - - 608 (13) -
Issue of share capital - - - - 1,119 4,380

net of issue costs

(85) - - 608 1,106 4,380

Cash flow from discontinued operations
Operating activities (36) (28) (75) (98) (114) (439)
Financing activities - - - - -
Investing activities - - (55) - (55)

Increase/(Decrease) in 125 (3,027) (1,490) (1,351) (5,423) (617)

cash for the period Cash and cash equivalents, beginning
of period 2,176 8,526 2,171 3,652 76 1,298

Cash and cash equivalents, end of
period 2,301 5,499 681 2,301 5,499 681

Cash and cash equivalents at end of period relate to:
Continuing operations 2,299 5,500 691 2,299 5,500 691
Discontinued operations 2 (1) (10) 2 (1) (10)

2,301 5,499 681 2,301 5,499 681

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

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Caledonia Mining Corporation
Summary of Significant Accounting Policies
For the nine months ended September 30, 2009
(in thousands of Canadian Dollars)

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Nature of Business

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

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

Basis of Presentation and Going Concern

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

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

Significant Accounting Policies:

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

Adoption of New Accounting Standards

a. Goodwill and intangible assets

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

Recently issued accounting pronouncements issued and not yet effective

International Financial Reporting Standards ("IFRS")

In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for public accountable companies to use IFRS, replacing Canada's own GAAP. The transition date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Corporation for the year ended December 31, 2010.

Caledonia is assessing the adoption of IFRS for 2011 and used the services of an independent consultant to produce an Impact Assessment Report. This report sets out the preliminary assessment of the potential impact of Caledonia's conversion from Canadian GAAP to IFRS and is based on Caledonia's publicly reported financial information for the year ended 31 December 2008.

The areas that require additional work and quantitative evaluation are:

Ongoing assessments will be performed to prepare Caledonia for the production of the opening IFRS balance sheet as at January 1, 2010.

Business Combinations

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

Other Existing Accounting Policies

Inventories

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

Capital Assets

Producing Assets

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

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

Non-Producing Assets

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

Assets held for sale and discontinued operations

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

The components held for sale are as follows:

Eersteling Gold Mine
September 30 December 31

$ $
Capital Assets and mineral properties 712 681
Current Assets 133 106
Current Liabilities 14 16
Asset Retirement obligation 346 314

As a consequence of this decision Eersteling Mine's results for 2009 and preceding years are disclosed under discontinued operations. Revenue from discontinued operations is $Nil ($Nil in 2008 and $61 in 2007). There is no tax applicable to discontinued operations.

Mineral Properties

Producing Properties

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

Non-Producing Properties

Costs relating to the acquisition, exploration, and development of non-producing resource properties which are held by the Corporation or through its participation in joint ventures are capitalized until such time as either economically recoverable reserves are established or the properties are sold or abandoned.

A decision to abandon, reduce or expand activity on a specific project is based upon many factors including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral property leases, and the general likelihood that the Corporation will continue exploration on the project. However, based on the results at the conclusion of each phase of an exploration program, properties that are not suitable as prospects are re-evaluated to determine if future exploration is warranted and that carrying values are appropriate.

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

Foreign Currency Translation

Balances of the Corporation denominated in foreign currencies and the accounts of its foreign subsidiaries, except Blanket Mine, are translated into Canadian Dollars using the temporal method as follows:

(i) monetary assets and liabilities at period end rates;

(ii) all other assets and liabilities at historical rates; and

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

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

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

i. all assets and liabilities at rates at balance sheet date; and

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

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

Included in the statement of operations, for the nine month period ended September 30, is an exchange gain of $328 (loss $1,752 - 2008 and loss $1,468 - 2007). Due to the translation of Blanket Mine a loss of $330 (Nil 2008) has been disclosed under accumulated other comprehensive income.

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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)

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1. Investments

On May 9, 2002, the Corporation participated in a private placement of the purchase of shares of Motapa Diamonds Inc. ("Motapa") at a cost of $79. The shares of Motapa were listed on the TSX Venture Exchange in Canada prior to Motapa being acquired by Lucara (LUC.V) In terms of the transaction one Motapa share was exchanged for 0.9055 Lucara shares

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

The fair value of the investment in Lucara is $42 ($9 -2008) and the fair value of the shares held in Old Mutual Plc is $5 ($3 - 2008).

2. Capital Assets

September 30, 2009

Accumulated Net
Cost (1) Amortization Book Value

$ $ $
Land - plant sites 12 - 12

Plant and equipment

1,687 1,441 246

December 31, 2008

Accumulated Net
Cost (1) Amortization Book Value

$ $ $
Land - plant sites 12 - 12

Plant and equipment

1,560 1,387 173

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

3. Mineral Properties

September 30, 2009

Accumulated Net
Cost (1) Amortization Book Value

Producing: $ $ $
Blanket, Zimbabwe - gold property 5,242 535 4,707
Non-producing - exploration: - - -
Rooipoort, South Africa 4,393 - 4,393
Goedgevonden, South Africa(3) - - -
Nama, Zambia 6,206 - 6,206
Mulonga, Zambia(2) - - -

15,841 535 15,306

December 31, 2008

Accumulated Net
Cost (1) Amortization Book Value

Producing: $ $ $
Blanket, Zimbabwe - gold property 5,006 303 4,703

Non-producing - exploration:
Rooipoort, South Africa 4,399 - 4,399
Goedgevonden, South Africa(3) - - -
Nama, Zambia 5,464 - 5,464
Mulonga, Zambia(2) - - -

14,869 303 14,566

1. Cost is comprised of the original cost of the asset, less write-downs,

removal of cost for disposals, and includes the capitalized value of the

estimated asset retirement obligations.

2. The Corporation had entered into strategic alliances with a third party

on a Zambian property (Mulonga) valued at $0 ($1,044 - 2008). The

Zambian strategic alliance partner, Motapa Diamonds Inc., has terminated

the strategic alliance agreement. The Corporation has applied for a

retention licence over the properties. All interest in the strategic

alliance will be transferred to the Corporation by Motapa Diamonds Inc.

As a consequence of the current economic climate, lack of exploration in

the past 2 years and no planned expenditure for 2009, the Mulonga

property was fully written down to $Nil at December 31, 2008. It is

still the Corporation's intention to form a joint venture with a new

strategic partner.

3. Due to the current economic climate, lack of exploration expenditure in

the past 2 years, no planned expenditure for 2009 and the fact that

prospecting licences are still to be granted, the Goedgevonden property

was written down to $Nil at December 31, 2008.

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

4. Asset Retirement Obligation

September 30 December 31

$ $

Continuing operation
Opening balance 839 732
Accretion expense 14 19
Foreign exchange loss (gain) - 88

Closing balance - continuing operations 853 839

Discontinued operation
Opening balance 314 311
Accretion expense 8 20
Sale of Barbrook - (107)
Foreign exchange loss (gain) 24 90

Closing balance - held for sale 346 314

The asset retirement obligations relate to Blanket Mine $853 ($839 - 2008), and Eersteling Gold Mine $346 ($314 - 2008) and are estimates of costs of rehabilitation at the end of the mine life, increased annually for accretion expense at a rate of 5%.

5. Share Capital

(a) Authorized

An unlimited number of common shares

An unlimited number of preference shares. (b) Issued

Number of Shares Amount

Common shares $

Balance - December 31 , 2007 487,869,280 195,006
Issued pursuant to a private placement(i) 12,300,000 1,119

Balance - December 31, 2008 500,169,280 196,125

Balance - September 30, 2009 500,169,280 196,125

(i) In February 2008 the Corporation commenced a private placement to

raise additional funds. This placement raised $1,119 after expenses

from the sale of 12,300,000 units. Each unit consisted of one common

share and one share purchase warrant.

(c) Stock Option Plans and Stock-Based Compensation

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

Number of Options Exercise Price Expiry Date
----------------- -------------- -----------
$
9,450,000 0.235 April 24, 2012
210,000 0.260 April 29, 2014
4,000,000 0.110 February 01, 2015
300,000 0.125 May 11,2016
1,300,000 0.113 May 31, 2012
1,000,000 0.155 July 1, 2013
15,820,000 0.155 Mar 18, 2013
500,000 0.100 Mar 23, 2014

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32,580,000 0.1706

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

Number of Options Weighted Avg. Exercise Price

$

Options outstanding at
December 31, 2007 18,588,000 0.198
Forfeited or expired (1,778,000) (0.28)
Granted 17,320,000 0.155

Options outstanding at
December 31, 2008 34,130,000 0.173
Granted 500,000 0.10
Forfeited or expired (2,050,000) 0.187

Options outstanding at
Sept. 30, 2009 32,580,000 0.1706

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.

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

(d) Warrants

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

The continuity of warrants issued and outstanding is as follows:

Number of Warrants

Outstanding December 31, 2007 15,437,626
Expired (15,437,626)
Issued pursuant to private placements 12,300,000

Outstanding December 31, 2008 12,300,000
Expired (12,300,000)

Outstanding Sept. 30, 2009 -

6. Net Income/ (Loss) Per Share

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

7. Accounts Receivable

September 30, 2009 December 31, 2008

Current Assets
Amount owing on Gold Backed Exchange

Foreign
Bond at fair value 2,890 -

Amount owing on current gold
sales 1,092 -
Vat refund 270 19
Other 140 113

4,392 132

Included in accounts receivable is an amount owing by the Reserve Bank of Zimbabwe ("RBZ") of $2,890 ($2,890 - 2008) for gold sold, plus interest accrued, during 2008. This value is the estimated fair value as calculated at December 31, 2008. The face value of the capital plus interest owing by RBZ at September 30,2009 is $3,271. In the monetary policy statement announced by the Governor of the RBZ in February 2009, this debt was converted into a Special Tradable Gold- Backed Foreign Exchange Bond, with a term of 12 months and an 8% interest rate. This bond can be sold to any interested party locally, regionally or internationally at an agreed to time maturity discount. This bond plus interest is guaranteed by RBZ on maturity on February 1, 2010.

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

8. Inventory

September 30 December 31

Consumable
stores 1,403 1,059

9. Statement of Cash Flows

Items not involving cash are as follows:

Three months ended Nine months ended
September 30 September 30

$ $ $ $ $ $
Amortization 101 101 4 299 302 15

Rehabilitation
accretion 8 11 (52) 22 33 (146)

Blanket long
term liability - - - - (11) -

Equity-based compensation
expense 8 616 40 23 684 40

Translation loss
Blanket Mine (155) - - (330) - -

Write down of mineral
properties - - - - - 495
Other 6 107 11 25 65 11

(32) 835 3 (39) 1,073 415

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

Three months ended Nine months ended
September 30 September 30

$ $ $ $ $ $
Accounts payable 683 (36) 163 1,103 (1,979 (3,426)

Accounts
receivable (794) (537) (147) (1,370) (1,359) 608
Inventories 61 613 377 (344) 1,225 4,445
Prepaid expenses (13) (11) (12) (4) (9) 33

Assets held for
sale - (102) 15 (27) (20) 106

(63) (73) 396 (642) (2,142) 1,766

Supplemental cash flow Information:

Three months ended Nine months ended
September 30 September 30

$ $ $ $ $ $
Interest paid 14 56 65 50 100 120
Interest received 14 162 - 79 233 -

10. Segmental Information

For the nine months ended September 30, 2009

Corporate Zimbabwe South Zambia Total
--------- -------- Africa ------ -----

Revenue from sales - 7,295 - - 7,295
Operating costs - (5,048) (652) - (5,700)

General and
administrative (1,370) (170) (104) - (1,644)
Interest received (paid) 77 (50) 2 - 29
Amortization - (280) (19) - (299)

Foreign exchange
gains/(loss) 13 60 274 (19) 328

Other income
(expense) - (109) - - (109)

Income (loss) for continuing
operations (1,280) 1,698 (499) (19) (100)

Discontinued operations
(loss) - - (113) - (113)
Income tax expense - - - - -

Net income (loss) for
the year (1,280) 1,698 (612) (19) (213)

For the nine months ended September 30, 2009

Corporate Zimbabwe South Zambia Total
--------- -------- Africa ------ -----

Revenue from
sales - 4,932 - - 4,932
Operating costs - (2,911) (219) - (3,130)

General and
administrative (348) (116) (35) - (499)

Interest received
(paid) 12 (12) - - -
Amortization - (96) (5) - (101)

Foreign exchange
gains/(loss) (76) (172) 26 (9) (231)

Other income
(expense) - (109) - - (109)

Income (loss) for
continuing operations (412) 1,516 (233) (9) 862

Discontinued operations
(loss) - - (36) - (36)
Income tax expense - - - - -

Net income (loss)
for the year (412) 1,516 (269) (9) (826)

For the nine months ended September 30, 2008

Corporate Zimbabwe South Zambia Total
--------- -------- Africa ------ -----

$ $ $ $ $
Revenue from sales 4 7,664 - - 7,668
Operating costs - (4,184) (411) - (4,595)

General and
administrative (2,864) (49) (260) - (3,173)
Interest 226 (100) 7 - 133
Amortization - (292) (10) - (302)

Foreign exchange
gains/(loss) 238 (1,878) (9) (103) (1,752)
Other income (expense) - - (198) - (198)

Income (loss) for
continuing operations (2,396) 1,160 (881) (103) (2,220)

Discontinued operations
(loss) - - (123) - (123)
Income tax expense - - - - -

Net income (loss)
for the year (2,396) 1,160 (1,004) (103) (2,343)

For the nine months ended September 30, 2008

Corporate Zimbabwe South Zambia Total
--------- -------- Africa ------ -----

$ $ $ $ $
Revenue from sales 1 2,279 - - 2,280
Operating costs - (1,803) (175) - (1,978)

General and
administrative (1,890) (24) (102) - (2,016)
Interest 160 (57) 3 - 106
Amortization - (97) (4) - (101)

Foreign exchange
gains/(loss) 269 (857) (250) (154) (992)
Other income (expense) - - (48) - (48)

Income (loss) for
continuing operations (1,460) 559 (576) (154) (2,749)

Discontinued operations
(loss) - - (30) - (30)
Income tax expense - - - - -

Net income (loss) for
the year (1,460) 559 (606) (154) (2,779)

11. Contingent Liability

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

12. Fair Value of Financial Instruments

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

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

(i) Cash and cash equivalents are classified as "assets held for trading". They are stated at fair value and any gains/losses arising on revaluation at the end of each period are included in the statement of operations. The Corporation has no derivative financial instruments that would have been classified on a similar basis.

(ii) Investments are classified as "assets available for sale". They are presented at fair value and the gains/losses arising from their revaluation at the end of each quarter will be included in other comprehensive income. When a decline in fair value is other than temporary, the accumulated loss that had been recognized directly in other comprehensive income is removed from accumulated other comprehensive income and recognized in net income even though the financial asset has not been derecognized.

(iii) Trade receivables are classified under "loans and receivables". They are recorded at their original cost which is deemed their fair value at that time. Subsequent measurement will be at amortized cost using the effective interest rate method.

(iv) Bank overdraft is classified as a "financial liability held for trading" as there is a contractual obligation to deliver cash. It is measured at fair value which is book value plus accrued interest. It is stated at fair value and any gains/losses arising on revaluation at the end of each period are included in the statement of operations.

(v) Accounts payable and accrued liabilities and long term debt are classified under "other financial liabilities". They are recorded at their fair value at that time. Subsequent measurement will be at amortized cost using the effective interest rate method.

13. Financial Risk Exposure and Risk Management

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

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

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

i) Currency Risk

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

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

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

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

--------------------------------------------------------------------------
$000 US Dollars SA Rands

--------------------------------------------------------------------------
Cash 1,278 1,902

--------------------------------------------------------------------------
Accounts Receivable 3,866 1,397

--------------------------------------------------------------------------
Accounts Payable 1,462 365

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

--------------------------------------------------------------------------
$000 US Dollars SA Rands

--------------------------------------------------------------------------
Cash 11 3

--------------------------------------------------------------------------
Accounts Receivable 35 2

--------------------------------------------------------------------------
Accounts Payable 13 1

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

ii) Interest Rate Risk

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

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

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

iii) Concentration of Credit Risk

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

Currently all gold produced is delivered to Rand Refineries in South Africa and payment is received within the contractual period.

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

iv) Liquidity Risk

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

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

v) Commodity Price Risk

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

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

14. Capital Management

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

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

The Corporation's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns for shareholders and benefits for other stakeholders and to pursue growth opportunities. To secure additional capital to pursue these plans, the Corporation may attempt to raise additional funds through borrowing and/or the issuance of equity, debt or by securing strategic partners. As at September 30, 2009, the Corporation is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy.

As at September 30, 2009 As at December 31, 2008
$000 ---------------------------------------------------
Issued common shares 196,125 196,125
Contributed surplus 1,925 1,902
Other comprehensive income (292) 3
Deficit (177,047) (176,834)

Total 20,711 21,196

15. Comparative Figures

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

Directors and Management at September 30, 2009

BOARD OF DIRECTORS OFFICERS

G.R. Pardoe (1) (2) (3) (4) (5) G.R. Pardoe (1)(2)(3)(4)(5)
Chairman of the Board, Chairman of the Board,
Johannesburg, South Africa Johannesburg, South Africa
S. E. Hayden(3) (4) (5) S. E. Hayden(3)(4)(5)
President and Chief Executive President and Chief Executive Officer
Officer Johannesburg, South Africa

Johannesburg, South Africa

J. Johnstone S. R. Curtis (5)
Retired Mining Engineer Vice-President Finance and Chief
Gibsons, British Columbia, Canada Financial officer
Johannesburg, South Africa
F C. Harvey (1) Dr. T. Pearton
Retired Executive Vice President Exploration
Oakville, Ontario, Canada Johannesburg, South Africa
C. R. Jonsson (2) (3) (5) J.M. Learmonth

Principal of Tupper Jonsson& Yeadon Vice-President Business Development
Barristers & Solicitors Johannesburg, South Africa

Vancouver, British Columbia,
Canada BOARD COMMITTEES
(1) Audit Committee
R. W. Babensee (1) (2) (2) Compensation Committee
Chartered Accountant - Retired (3) Corporate Governance Committee
Toronto, Ontario, Canada (4) Nominating Committee
(5) Disclosure Committee

S. R. Curtis (5) Vice-President Finance and Chief Financial officer Johannesburg, South Africa

Corporate Directory SOLICITORS

CORPORATE OFFICES

Canada - Head Office Tupper, Jonsson & Yeadon
Caledonia Mining Corporation 1710-1177 West Hastings St, Vancouver,
Suite 1201, 67 Yonge Street British Columbia V6E 2L3 Canada

Toronto, Ontario M5E 1J8 Canada Tel:(1)(416) 369-9835
Fax:(1)(416) 369-0449 Borden Ladner Gervais LLP
info@caledoniamining.com Suite 4100, Scotia Plaza
40 King Street West
South Africa - Africa Office Toronto, Ontario M5H 3Y4 Canada

Greenstone Management Services (Pty) Ltd.
P.O. Box 834 AUDITORS
Saxonwold 2132 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
P.O. Box 36604 REGISTRAR & TRANSFER AGENT
Lusaka, Zambia Equity Transfer Services Inc.
Tel:(260)(1) 29-1574 Suite 400 200 University Ave.
Fax(260)(1) 29-2154 Toronto, Ontario M5H 4H1 Canada
Tel: (416) 361 0152 Fax: (416) 361 0470
Zimbabwe BANKERS
Caledonia Holdings Zimbabwe Canadian Imperial Bank of Commerce
(Limited) 6266 Dixie Road
P.O. Box CY1277 Mississauga, Ontario L5T 1A7 Canada

Causeway, Harare Zimbabwe Tel: (263) (4) 701 152/4
Fax: (263)(4) 702 248 NOMADS AND BROKERS (AIM)
RBC Capital Markets

CAPITALIZATION at November 09, 2009 71 Queen Victoria Street
Authorised: Unlimited London EC4V 4DE

Shares, Warrants and Options Issued: Tel: +44 20 7653 4000 Common Shares: 500,169,280
Warrants: Nil SHARES LISTED
Options: 32,580,000 Toronto Stock Exchange Symbol "CAL"
NASDAQ OTC BB Symbol "CALVF"
London "AIM" Market Symbol "CMCL"
Web Site:
http://www.caledoniamining.com

CALEDONIA MINING CORPORATION

Management's Discussion and Analysis

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

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

Listings

Caledonia's shares are listed on the Toronto Stock Exchange as "CAL", on London's AIM as "CMCL" and are also traded on NASDAQ-OTCBB as "CALVF".

1. EXECUTIVE SUMMARY

1.1 Core Business and Strategy

Caledonia is an exploration, development and mining corporation focused on Africa. The Corporation's primary assets are a gold operation in Zimbabwe, a base metals exploration project in Zambia (Nama), platinum group and base metals (PGE) projects in South Africa (Rooipoort/Mapochs) and a non-producing gold mine in South Africa (Eersteling) which has been identified for possible disposal. Caledonia also has diamond projects in Zambia and South Africa.

The Corporation's business model is to identify and/or 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 joint venture agreements. The possibility of divestiture in whole or part will be considered at different points in time and will be governed by the benefit to shareholders. Where appropriate, Caledonia will seek strategic alliances through existing or new joint ventures.

Now that Blanket has been returned to a production level of approximately 550 tonnes per day ("tpd") the focus is now on completing the No. 4 Shaft Expansion Project to achieve the planned 40,000 ounces of gold production per annum. In addition to the No. 4 Shaft Expansion Project, judicious expenditure on the essential sustaining capital expenditure will continue to progressively remedy the lack of investment over the last few years due to foreign currency shortages.

Activity at Nama and Rooipoort/Mapochs properties will be determined by available cash resources.

1.2 Key Performance Drivers

The positive drivers for the Blanket Mine are a high gold price, the successful retention of its skilled workforce during the shutdown, and the dollarization of the Zimbabwean economy which has resulted in the elimination of hyperinflation. However restarting a mine in Zimbabwe is subject to numerous challenges namely, access to affordable and sufficient working capital, lack of past investment, rising labour and power costs, frequent disruptions to power supplies and the vagaries of changing legislation which all ultimately lead to increased operating costs and production interruptions.

Extensive staff safety training continues so as to provide a safe working environment for all personnel, and upgrade the skills of the mine's employees. Operating and capital cost containment and budgetary controls are in place at Blanket and are continually monitored to ensure that the production profile and costs meet the strategic goals set by management.

1.3 Capability to Deliver

Management has applied to the Zimbabwean Ministry of Finance ("ZMF") for the renewal of the Gold Dealership License for Blanket Mine which expires on December 31, 2009. Management has also proposed to the ZMF that the new License be issued for longer than the previous Licence's 12 month term. Receipt of the new License is expected during November 2009. Management has also applied to the ZMF for the No 4 Shaft Expansion Project to be granted import duty exemption status.

Early in November 2009 Blanket was awarded the "Exporter of the Year - Mining - Matabeleland Region" Award by the Zimbabwe National Chamber of Commerce based on figures supplied by the Reserve Bank of Zimbabwe. This achievement underlines managements' ability to deliver despite the challenging environment prevailing in Zimbabwe at present and is testament to the hard work of the entire team at Blanket Mine and Caledonia, and vindicates the planning and implementation of the strategy whereby Blanket was rapidly able to restart and ramp-up production.

Additional debt facilities have been negotiated with a local Zimbabwean Bank, which, in conjunction with internally generated cash flows, will give Blanket sufficient financial resources to complete the No. 4 Shaft Expansion Project to allow Blanket to increase its gold production to about 40,000 ounces per annum.

Additional suitable personnel have and are being recruited by Blanket to ensure that a skilled and trained work force is available to achieve the targeted 40,000 ounce production level once the No 4 Shaft Expansion Project has been completed.

With the advent of a dollarized Zimbabwean economy normal budgetary processes have been reinstated and management has re-implemented budgetary, cost control and performance measurement procedures.

Exploration expenditures on the Nama copper/cobalt project, and the Rooipoort and Mapochsgronde PGM properties during 2009 will continue to be determined by available cash resources after the necessary provisions required for completion of the Blanket No 4 Shaft Expansion Project.

1.4 Results and Outlook

At Blanket, tonnages milled in the 3rd quarter were 49.7% higher than the 2nd quarter with gold production 103% higher despite considerable production interruption from breakdowns of compressors and the large regrind mill. Average cost per ounce of production in the 3rd quarter was 40% higher than 2nd quarter due to increased labour rates and recruitment, higher electricity costs, and once off repair costs related to compressor and regrind mill breakdowns.

Subsequent to the completion of the No. 4 Shaft Expansion Project, it is anticipated that mine production of 1,000 tpd and gold production at an annualized rate of about 40,000 ounces per annum could be achieved by September 2010 barring any unforeseen disruptions be they mechanical, electrical, political, legislative or economic.

1.5 Operational Risks

Caledonia considers the downside risk relating to the re-issuance of a new Gold Dealership License as low, the opportunity to reduce operating costs per ounce as high, the strength of the long term gold price as positive (although this effect is mitigated somewhat by the strength of the South African Rand, in which most of Blanket's consumables are denominated, against the US Dollar). The likelihood of sustained power interruptions remains high, the likelihood of an increased royalty and/or taxation, and the introduction of acceptable indigenization legislation is high.

2. OPERATIONAL REVIEW AND RESULTS OF OPERATIONS

2.1 Gold Production

Blanket Mine - Zimbabwe

After the receipt of the initial Gold Dealership Licence and the announcement of the recommencement of production on April 3, 2009, production levels have increased steadily. During the 2nd quarter of 2009 average tonnes milled were 345tpd and during the 3rd quarter this had been increased to an average of 439 tpd despite only achieving 362 tpd in September due to mechanical breakdowns on the two largest compressors, and breakdown of the large regrind mill gearbox which resulted in both drive motors being badly damaged. During October the average tonnes milled increased to 535 tpd by utilising two other available mills (BM3 and BM5) as regrind mills. A gearbox and motor for the regrind mill have been completely reconditioned and the mill can be brought back into operation when underground production levels warrant it. A spare gearbox for the large regrind mill has been acquired and refurbished, and the spare motor for this mill has been completely reconditioned and its cracked shaft replaced.

The shortage of foreign currency since July 2007 has resulted in Blanket being forced to delay the completion of the planned No.4 Shaft Expansion Project. The continuation of mining activities during this delay has resulted in the available tonnages and ore grades above the 14 Level mid shaft loading level being depleted to the extent that these resources can now only support production at an annualised rate of approximately 21,600 ounces per annum from a mine production rate of 550 tpd as ore must now be double or triple handled for mid shaft loading. Once the underground portion of the No. 4 Shaft Expansion Project has been completed, together with the refurbishment and maintenance of existing equipment, and the acquisition and installation of the new equipment and infrastructure required to complete the No.4 Shaft Expansion Project, the resource below 14 Level in conjunction with the new 4 shaft bottom crushing and loading will rapidly return the mine to its optimal mine plan, which allows for a production ramp-up to a rate of about 40,000 ounces per annum from an average daily mining rate of 1,000tpd. The labour force has been rebuilt from the start-up level of 480 in April 2009 to a current level of 741 as at the end of October. This level will be maintained until the No. 4 Shaft Expansion Project is completed. Ongoing training will continue to ensure the necessary skills exist to meet the production demands of the planned 1,000 tpd production.

Underground

September's production levels were adversely affected by the failure of two compressors comprising 4,000 cubic feet per minute (cfm) capacity as well as unplanned power supply interruptions and mandatory load shedding. Subsequent to our negotiations with the Zimbabwean Electricity Supply Agency ("ZESA") there has been some improvement in power supply to Blanket. The efficiency of the underground operations is improving from the sub-optimal levels when production was restarted. The supply of compressed air is planned to be increased by 86% to an overall capacity of 16,800 cfm by the acquisition, refurbishment, and installation of seven modern screw-type compressors after the end of the 3rd Quarter. This will be sufficient to support a mining rate of 1,000 tpd and includes 25% excess compressor capacity as backup. This will enable the mine to reduce its operating costs by preferentially using the two large reciprocating compressors as installed spares.

Safety, Health and Environment ("SHE")

The following safety statistics have been recorded:

---------------------------------------------------------------------
Class Q1 2009 Q2 2009 Q3 2009 YTD 2009 YTD 2008

---------------------------------------------------------------------
Lost time injury 0 0 1 1 0

---------------------------------------------------------------------
Medical aid 0 1 1 2 4

---------------------------------------------------------------------
Restricted work activity 1 3 11 15 4

---------------------------------------------------------------------
First aid 1 0 4 5 15

---------------------------------------------------------------------
Total 2 4 17 23 23

---------------------------------------------------------------------
Incidents 6 9 13 28 53

---------------------------------------------------------------------
Near misses 4 4 7 15 23

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

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

There were no adverse environmental issues during the quarter although there were 3 bush fires in the surrounding area and a dramatic increase in animal snares. Water sampling results from the 14 monitoring holes downstream of the tailing dams continue to verify satisfactory environmental controls.

Even though the economic situation in Zimbabwe continues to be challenging the number of employee dismissals due to desertion has decreased dramatically. The number of employees who were dismissed for being absent without permission up to the end of 3rd quarter was 8 compared to 73 in 2008 year.

Capital Projects

Number 4 Shaft Expansion Project

The completion of the No. 4 Shaft Expansion Project was suspended in July 2007 due solely to the shortage of foreign currency to fund it. The US$2.4 million of debt funding initially sought for the project could not be obtained on commercially acceptable terms. A smaller facility of US$1.25 million has now been arranged on acceptable terms and the balance of the funding required will come from internally generated funds. Caledonia's Board has now approved the proposed debt facility of US$1.25m and has also approved the capital expenditures required to complete the No.4 Shaft Expansion Project. It is anticipated that mine production of 1,000 tonnes per day and gold production at an annualized rate of about 40,000 ounces per annum could be achieved by September 2010 barring any unforeseen disruptions be they mechanical, electrical, political, legislative or economic.

Operations

During the quarter operations were again hampered by recurrent power failures or requested load shedding from ZESA. Negotiations with ZESA are ongoing and we continue to strive for a more predictable mandatory load shedding window which will enable the mine to alter shifts so that this load shedding takes place before the re-entry of a shift as this will result in lower production losses. An additional 8 crews have been allocated to underground mining development significantly increasing the number of development crews to 15.

The plant operated for 92% of available time producing 100% of budgeted tonnage. The improved mining and milling tonnages are a result of more underground production crews being employed. The plant throughput tonnages could have been significantly higher had Blanket not lost the use of BM6, its large regrind mill, at the same time as its other available regrind mill - BM3 mill was down for maintenance. Both mills are again fully operational. It is estimated that the BM6 regrind mill failure caused about 5,600 tonnes lost milling production in September.

During the quarter all 8 of the carbon-in-leach (CIL) tanks were refurbished, 2 of the tank agitator gearboxes, agitator shafts and impellors were refurbished and first 2 newly purchased complete agitator assemblies complete with agitator shafts and impellors were installed. The direct-on-line (DOL) starters for all the CIL tank agitators have been replaced with soft starters to reduce the gearbox maintenance and maximum demand power consumption. The DOL starters will be introduced underground for the in-line ventilation fans. Six fully operational CIL agitators are more than sufficient to cater for 1,000 tpd milling operations and will allow the first two CIL tanks to be used as preconditioning tanks with a view to further increasing the gold recovery and reducing leaching reagent consumption in accordance with the 2006 leach test work completed in the Blanket metallurgical laboratory.

The current facility of US$1,000,000 provided by Blanket's local bank has been extended for a further 6 months and increased by US$250,000 to meet part of the mine's expansion requirements.

The net US Dollar proceeds for gold sales from the Rand Refinery in South Africa are being received in full by Blanket within the agreed contractual time period. Blanket has applied to the ZMF for permission to export bullion directly from Bulawayo by air to Rand Refinery and this request, if granted, will result in lower bullion export costs, much faster bullion deliveries to the Rand Refinery, and the resultant faster receipt of payment from Rand Refinery.

----------------------------------------------------------------------------
Nine
Nine months to
3rd months to September
3rd Quarter Quarter September 2008 October
Production results 2009 2008 2009 (i) (ii) 2009

----------------------------------------------------------------------------
Ore milled Tonnes 34,266 22,884 58,443 81,688 16,582

---------------------------------------------------------------------------- Ore Gold Grade Grams/tonne
milled 3.99 3.09 4.00 3.33 3.34

----------------------------------------------------------------------------
Recovery % Per cent 91 88 90 88 91

----------------------------------------------------------------------------
Gold produced Ounces 4,117 2,028 6,860 7,687 1,614

----------------------------------------------------------------------------
Gold Sold Ounces 4,696 2,466 6,860 8,364 1,614

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

(i) Gold production only re-commenced on the 20th April 2009 (ii) Gold production was declining during the year with the

eventual shutdown on October 3, 2008 due to lack of payment

for gold sales.

Outlook

Having achieved the short term targets of:

underground development and production machines

mining rock drills, drill rods and bits,

ore loaders,

wide variety of installed machinery

tank agitator mechanisms.

Blanket is now well placed to achieve a production level of approximately 1,800 ounces of gold per month whilst the Mine completes the Shaft Expansion Project as long as the risks attributable to:

do not override all the good work done over the last 6 months to increase production.

2.2 Exploration and Project Development

2.2.1 BASE METALS

Nama Copper/Cobalt Project - Zambia

The 3rd Quarter of the Financial Year, July to September, is the latter half of the dry season in Zambia when access to the field is easy and sampling and mapping is facilitated by the fact that most of the undergrowth has been burnt by the winter grass fires. The activities carried out during the quarter involved the detailed soil sampling and follow-up of previously detected geochemical anomalies.

The current work program has as its goal the investigation of all cobalt/copper (Co/Cu) anomalies within the Nama area, be they of a geochemical or geophysical nature. It is anticipated that this work will result in the definition of resource targets characterized as belonging to the Ore Shale hosted Cu-Co style of mineralization. Mineralization of this type is currently being exploited immediately east of the Nama license areas and it is known to extend westwards into the Nama license area for some 2,000 meters.

Detailed auger sampling over the 'B' Anomaly has resulted in the delineation of separate Co and Cu anomalies. Shallow surface-pitting was carried out at selected sites in order to establish the cause of the anomalous enrichments. Values of cobalt and copper as high as 0.2% were encountered in the pits and these appear to be related to shear zones which extend to depth. Further sampling is being conducted to determine the attitude and extent of the mineralized zones. Follow-up auger sampling will be undertaken to better define the area.

It was previously reported that a portion of the 1996 geochemical grid laid out west of the 'A' Resource Body was not sampled. This sampling has now been completed and has revealed the existence of a broad anomalous zone approximately 3 km north-south and about 0.5 km east-west. It was further established that this anomalous pattern was not reflected by previous, adjacent surveys, probably on account of the shallower soil sampling depth used previously prior to the use of soil augers. Re-sampling of the surrounding areas has now been completed and analytical results are awaited. From the work completed to date, it is apparent that two discrete zones of Co enrichment occur in this area. Pitting will be carried out over much of this anomalous area to determine the structure and to site future drill targets if warranted.

The 2009 Exploration Season

The current field season is proceeding in line with the forecast plan of activities with the systematic and detailed exploration of the geochemically anomalous areas at Nama. In ascertaining the potential of the anomalies, they are ranked according to the indicated style of mineralisation and magnitude which will enable the exploration team to select the most appropriate targets for the 2009/10 follow up exploration programs.

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

Property

Rooipoort

Caledonia announced on July 1, 2009 that Mitsubishi Corporation had withdrawn from the proposed participation in the Rooipoort and Mapochsgronde Platinum Projects ("the Projects"). The Rooipoort and Mapochsgronde properties continue to remain 100% owned by Caledonia. Caledonia is currently in discussion with other interested parties with regard to securing the necessary funding to continue the PGE Exploration Projects.

2.2.3 GOLD

Zimbabwe Exploration - Gold

Due to the lack of foreign currency and the immediate focus on re-starting and ramping up production at Blanket, limited exploration work took place during the quarter and resources were allocated primarily to the resumption of gold production. The proposed exploration activities are being reviewed and prioritised with a view to re-commencing exploration activities as soon as the cash flow allows.

3. SUMMARY OF QUARTERLY RESULTS

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

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

($000's

---------------------------------------------------------------------------- Sales from contin- uing opera-
tions 4,932 2,364 - 29 2,280 2,883 2,504 3,231

---------------------------------------------------------------------------- Income/ (loss) for contin- uing operat- ions

---------------------------------------------------------------------------- Discon- tinued operat- ions
(loss) (36) (37) (40) (531) (30) (24) (70) (249)

---------------------------------------------------------------------------- Net Income/ (loss) after discon- tinued operat- ions

---------------------------------------------------------------------------- No of shares basic
'000 500,169 500,169 500,169 500,169 500,169 500,169 493,199 487,869

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

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

During the quarter Caledonia made gross operating profit of $1,802,000 ($302,000 - 2008) which resulted in a net profit of $862,000 (loss $2,749,000 - 2008) from continuing operations which included an unrealized foreign exchange loss of $231,000 (loss $992,000 - 2008). The operating profit was achieved from the sale of 4,696 (2,466 ounces - 2008) ounces of gold. The monthly operating costs (bulk consumable stores, labour costs, electricity, repairs and maintenance, training, health and safety) per ounce during the quarter were July US$579, August US$520, September US$785 and US$566 in October. The September costs per ounce were negatively affected by breakdowns on the two compressors and the BM6 regrind mill which gave rise to increased expenditure and reduced production. The resultant September abnormal maintenance costs associated with the aforementioned equipment failures are considered to be once off expenses. The current labour numbers, structure and cost base is virtually sufficient to achieve the increase production rate of 1,000 tpd with very little additional cost. The resulting cost per ounce is expected to decrease significantly as production levels increase.

Blanket's operational costs for the 3rd quarter included total employment costs of $1,182,000 ($840,000 - Q2, and $403,000 - Q1 2009), consumables of $1,702,000 ($371,000 - Q2 and $321,000 - Q1 2009) and mine administration costs of $341,000 ($230,000 - Q2 and $175,000 Q1 - 2009). The dollarization of the economy has resulted in the legislated increased remuneration rates as illustrated above, and management is monitoring this closely to ensure we are paying affordable and market related rates to ensure the scarce skills are attracted and retained.

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

Included in the 3rd quarter statement of operations is an exchange loss of $155,000 (gain $100,000 Q2 and Loss $275,000

The discontinued operations relate to Barbrook and Eersteling Mines up to Q1 2008, thereafter Eersteling is the only discontinued operation. The loss on sale of Barbrook Mine was reclassified to discontinued operations in the fourth quarter 2008.

4. INVESTING

During the 3rd quarter 2009 Caledonia invested $521,000 ($251,000 - Q2 2009) in capital assets and mineral properties ($993,000 in 2008 and $904,000 in 2007). Of the amount invested in 2009, $165,000 ($193,000 - Q2 2009) was spent at Nama and $332,000 ($17,000 - Q2 2009) at Blanket

5. FINANCING

Caledonia financed its operations, except Blanket Mine, using funds on hand. No equity fund raising is currently intended during 2009 and funds available from the sale of Barbrook are expected to be sufficient to finance Caledonia's activities until year end, after which loan repayments and surplus cash flow from Blanket will be used to finance the operations. Blanket was granted a working capital loan facility from its bankers in Zimbabwe during the 2nd quarter of 2009 and utilized $694,000 of the facility, no additional facility was used in the 3rd quarter. As the additional funding of US$2,400,000 that was originally sought for the completion of the No. 4 shaft expansion has proven to be unavailable on commercially acceptable terms, Caledonia has authorized Blanket to obtain a further six month extension on the current loan facility and to increase this facility to US$1.25 million. The smaller facility of US$1.25 million has now been arranged on acceptable terms and the balance of the funding required will come from internally generated funds.

6. LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2009, Caledonia had a working capital surplus of $5,599,000 (surplus of $5,340,000 - Q2 and $2,657,000 Q1 2009). Current assets of $8,258,000 ($7,255,000 Q2 and $3,960,000 Q1, 2009) increased as accounts receivable for bullion increased by $571,000 due to the increase in production and timing of deliveries to Rand Refineries. The accounts receivable includes $1,091,000 due from Rand Refineries for gold sales and was all received by October 08, 2009. The amount of $2,890,301 (shown at fair value) owing to Blanket by RBZ is now classified as a current asset as the gold bond is redeemable on February 1, 2010.

Blanket Mine continues to be self funding with increasing amounts being spent on capital development as working capital requirements stabilize and production ramps up in the months ahead

During 2009, it is expected that the cash requirements of Caledonia will be met from the cash on hand, Blanket Mine loan repayment and from excess cash from receipts of gold sales from Blanket Mine.

As of September 30, 2009 Caledonia had potential liabilities to do rehabilitation work on the Blanket and Eersteling Mines - if and when those Mines are permanently closed - at an estimated cost of $1,199,

7. OFF-BALANCE SHEET ARRANGEMENTS

There are no off balance sheet arrangements.

8. RELATED PARTY TRANSACTIONS

Caledonia had the following related party transactions:

Nine months ended
September 30

$'000 $'000 $'000

------------------------------------------------------------------------- Management, and allowances paid or accrued to a company which provides the services of the Corporation's
President 338 423 388

------------------------------------------------------------------------- Rent paid to a Company owned by members of the
President's family 36 32 33

-------------------------------------------------------------------------
Fees paid to the Chairman of the Board 113 250 35

------------------------------------------------------------------------- Legal fees paid to a law firm where a Director is a
partner 46 84 72

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

9. CRITICAL ACCOUNTING POLICIES

There are two major areas where accounting estimates are made, asset impairment, and asset retirement obligation. As significant impairment provisions have already been made against the assets and there is a reasonable level of certainty around the estimate it is considered unlikely that any change in estimate would result in a material impact on the results of Caledonia. The asset retirement obligations are also considered to be estimated with a reasonable degree of certainty, although the original estimations were calculated some years ago. The estimation for Blanket will be recalculated before December 31, 2009. The estimations are accreted annually at 5% and thus any change in circumstances is considered unlikely to have a material impact on the results of Caledonia or its operations.

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

a. Goodwill and intangible assets

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

b. International Financial Reporting Standards

The Canadian Accounting Standards Board confirmed in February 2008 plans to converge Canadian GAAP with International Financial Reporting Standards ("IFRS") over a transition period expected to be effective for interim and annual periods commencing January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes amounts reported by Caledonia for the year ended December 31, 2010.

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

The approach followed was:

statements for the year ended 31 December 2008 and compared them with

the requirements of IFRS; and

and Canadian GAAP and the applicability to Caledonia.

This approach provides Caledonia with a clear and concise format for understanding and communicating the effects of implementing IFRS to senior management, the Audit Committee and the Board. Reference to the relevant standards and other authoritative material will be made and specific advice taken before acting if considered necessary. It should also be noted that the Report primarily focuses on differences between IFRSs and Canadian GAAP from a recognition and measurement perspective and does not deal with disclosure requirements (except for the IFRS 1 disclosures), which will be addressed shortly.

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

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

The areas that require additional work and quantitative evaluation are:

Ongoing assessments will be performed to prepare Caledonia for the production of the opening IFRS balance sheet as at January 1, 2010.

10. FINANCIAL RISK EXPOSURE AND RISK MANAGEMENT

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

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

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

i) Currency Risk

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

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

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

---------------------------------------
$000 US Dollars SA Rands

---------------------------------------
Cash 1,278 1,902

---------------------------------------
Accounts Receivable 3,866 1,397

---------------------------------------
Accounts Payable 1,462 365

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

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

---------------------------------------
$000 US Dollars SA Rands

---------------------------------------
Cash 11 3

---------------------------------------
Accounts Receivable 35 2

---------------------------------------
Accounts Payable 13 1

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

ii) Interest Rate Risk

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

Unless otherwise noted, it is the opinion of management that Caledonia is not exposed to significant interest rate risk as it is debt free outside of Zimbabwe. As a result of Blanket Mine being brought back into production working capital borrowings have increased in Zimbabwe. The working capital loans are US Dollar denominated and have been secured on commercially acceptable terms. It is the intention of Blanket to borrow further funds to complete the No 4 Shaft Expansion Project. The additional funds have been secured at rates that are identical to the current borrowings and the total external debt will increase to US$1.25 million. Caledonia's cash and cash equivalents include highly liquid investments that earn interest at market rates. Caledonia manages its interest rate risk by endeavouring to maximize the interest income earned on excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis. Caledonia's policy focuses on preservation of capital and limits the investing of excess funds to liquid term deposits in "A" grade financial institutions.

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

iii) Concentration of Credit Risk

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

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

price

Currently all gold produced is delivered to Rand Refineries in South Africa and payment is received within the contractual period.

iv) Liquidity Risk

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

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

v) Commodity Price Risk

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

Gold prices historically have fluctuated widely and are affected by numerous factors outside of Caledonia's control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and macro-economic variables, and certain other factors related specifically to gold. Recently the US$ price of gold hit an all-time high of US$1,100 per ounce of gold although the benefit of this to Blanket was somewhat reduced by the ongoing strength on the South African Rand, in which currency most of Blanket' consumables are denominated, against the US Dollar. During 2009, diamond, platinum group metals, copper and cobalt metal prices have been considerably lower than attained those in 2008.

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

11. SECURITIES OUTSTANDING

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

(1) 500,169,280 common shares;

(2) Options and warrants as follows:

---------------------------------------------------------------------------
Number Description Exercise Price Expiry Date

---------------------------------------------------------------------------
32,580,000 Common share
purchase options Average $0.1706 Various until May 11, 2016

---------------------------------------------------------------------------
Nil Common share
purchase warrants -

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

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

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

12. CONTROLS

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

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

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

Caledonia, has engaged independent consultants to carry out an assessment of the effectiveness of Caledonia's internal controls over financial reporting using an internationally acceptable framework. Prior to this engagement, management concluded that the following disclosable material weaknesses still exist, as at September 30, 2009.

Segregation of duties

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

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

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

13. FORWARD LOOKING STATEMENTS

This Management Discussion and Analysis contains certain forward-looking statements relating but not limited to Caledonia'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.

14. QUALIFIED PERSONS

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

FOR FURTHER INFORMATION PLEASE CONTACT:

Caledonia Mining Mark Learmonth +27 11 447 2499 Website: www.caledoniamining.com

OR

BuckBias Alex Buck +44 7932 740 452

OR

RBC Capital Markets Martin Eales +44 20 7029 7881

Caledonia Mining Corp

Sept 4 (Reuters) - Caledonia Mining Corp said it plans to slash the exercise price of its currently outstanding share purchase options by about 59 percent.
"This reduction recognises the fact that the existing options are all substantially 'out of the money' due to the reduced trading price of Caledonia's shares," the company said in a statement.
The company said the exercise price of 32.6 million options will be reduced to 7 Canadian cents a share from around 17.2 Canadian cents.
Shares of the Toronto, Ontario-based company were flat at 7 Canadian cents Friday morning on the Toronto Stock Exchange.

(Reporting by Koustav Samanta in Bangalore; Editing by Anil D'Silva) Keywords: CALEDONIA/ (koustav.samanta@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: koustav.samanta.reuters.com@reuters.net)

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