10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

or

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange act of 1934

For the transition period from              to             

Commission File No. 0-51669

STERLING MINING COMPANY

(Exact name of registrant as specified in its charter)

IDAHO	82-0300575
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2201 Government Way, Suite E, Coeur d’Alene, ID 83814

(Address of principal executive offices and Zip Code)

(208) 666-4070

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large Accelerated Filer  ¨ Accelerated Filer  ¨ Non-Accelerated Filer  x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,733,548 shares of common stock as of August 11, 2006.

STERLING MINING COMPANY

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Balance Sheets -- June 30, 2006 and December 31, 2005 (audited)	3
	Income Statements -- Three and six months ended June 30, 2006 and 2005	4
	Statements of Cash Flows -- Six months ended June 30 March 31, 2006 and 2005	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	26
Item 4.	Control and Procedures	26
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities	27
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		29

2

STERLING MINING COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	June 30 2006			December 31 2005
	(unaudited)
ASSETS
CURRENT ASSETS
Cash	$	982,640		$	1,270,849
Marketable securities		408,011			288,715
Accounts receivable		96,558			42,934
Notes receivable		25,000			25,000
Inventories		275,333			252,275
Prepaid expenses and deposits		323,288			82,645
Other current assets		158,255			58,581
Total current assets		2,269,085			2,020,999
INVESTMENTS		972,507			724,853
PROPERTY AND EQUIPMENT
Property, plant and equipment		1,804,956			506,240
Less accumulated depreciation		(54,088	)		(38,392	)
Total property and equipment		1,750,869			467,848
OTHER ASSETS
Prepaid long-term leases		1,080,396			441,806
TOTAL ASSETS	$	6,072,857		$	3,655,506
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	561,537		$	403,001
Accrued expenses		167,869			365,492
Unearned revenue		72,395			80,885
Total current liabilities		801,801			849,378
LONG-TERM LIABILITIES
Convertible notes payable-related party		378,463			—
Derivative from convertible note		434,503			—
Total long-term liabilities		812,966			—
COMMITMENTS AND CONTINGENCIES		—			—
STOCKHOLDERS’ EQUITY
Common stock, $.05 par value; 40,000,000 shares authorized. 20,453,245 and 18,477,419 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		1,022,662			923,871
Additional paid in capital		21,121,937			16,871,941
Accumulated deficit		(17,590,043	)		(14,725,159	)
Accumulated comprehensive income		(96,466	)		(264,525	)
TOTAL STOCKHOLDERS’ EQUITY		4,458,090			2,806,128
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,072,857		$	3,655,506

The accompanying condensed notes are an integral part of these interim financial statements

3

STERLING MINING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Three Months Ended June 30 2006			Three Months Ended June 30 2005			Six Months Ended June 30 2006			Six Months Ended June 30 2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUES	$	316,509		$	6,930		$	597,033		$	14,427
COSTS AND EXPENSES
Production costs applicable to sales		303,985			4,100			528,433			8,324
Exploration		1,151,966			720,507			1,700,370			1,597,932
General and administrative		479,316			247,460			885,977			465,785
Pre-production costs		—			232,333			—			232,333
Depreciation and amortization		26,356			17,360			32,250			21,837
Professional services		219,997			57,914			312,967			75,777
Total expenses		2,181,622			1,279,674			3,459,997			2,401,988
(LOSS) FROM OPERATIONS		(1,865,112	)		(1,272,744	)		(2,862,964	)		(2,387,561	)
OTHER INCOME (EXPENSE)
Gain (loss) on investments		17,333			21,784			57,366			(44,548	)
Interest and dividends		17,979			4,420			21,702			3,502
Interest Expense		(19,410	)		(21,383	)		(27,739	)		(21,507	)
Gain (loss) on derivative instruments		146,958			—			(59,467	)		—
Miscellaneous income, gain (loss) on exchange		63,960			(2,477	)		6,220			2,306
Total Other Income (Expense)		226,820			2,344			(1,919	)		(60,247	)
LOSS BEFORE INCOME TAXES		(1,638,292	)		(1,270,400	)		(2,864,883	)		(2,447,808	)
INCOME TAXES		—			—			—			—
LOSS FROM CONTINUING OPERATIONS		(1,638,292	)		(1,270,400	)		(2,864,883	)		(2,447,808	)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS		—			—			—			—
NET LOSS		(1,638,292	)		(1,270,400	)		(2,864,883	)		(2,447,808	)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on investments		(279,641	)		(308,247	)		168,059			(623,595	)
COMPREHENSIVE LOSS	$	(1,917,933	)	$	(1,578,647	)	$	(2,696,824	)	$	(3,071,403	)
Basic and Fully Diluted Loss per Share	$	(0.08	)	$	(0.07	)	$	(0.14	)	$	(0.15	)
Basic and fully diluted weighted average shares outstanding		20,105,300			16,993,800			19,821,400			16,840,400

The accompanying condensed notes are an integral part of these interim financial statements

4

STERLING MINING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended June 30 2006			Six months ended June 30 2005
	(unaudited)			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,864,883	)	$	(2,447,808	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		32,250			21,837
Amortization of discount on debentures		84,755			—
Gain (loss) on investments		(57,366	)		44,548
Gain (loss) on derivatives		59,467			—
Payments for lease expenses with stock		1,005,000			592,275
Payment of general & admin. expenses with stock		5,200			33,500
(Increase) decrease in:
Accounts receivable		(53,624	)		(17,767	)
Notes receivable		—			(20,000	)
Inventories		(23,058	)		(26,559	)
Prepaid expenses		(883,368	)		(22,790	)
Other current assets		(99,675	)		(112,984	)
Increase (decrease) in:
Accounts payable		158,536			54,398
Accrued expenses		(197,622	)		(103,481	)
Other current liabilities		(8,490	)		136,160
Net cash used by operating activities		(2,842,879	)		(1,868,671	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments		(276,703	)		(9,754	)
Proceeds from investments		122,758			38,858
Investment in property plant and equipment		(1,208,716	)		3,603
Net cash provided (used) by investing activities		(1,362,661	)		32,707
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock net of costs		2,460,000			1,805,292
Proceeds from exercise of stock options and warrants		582,331			383,082
Payment of notes payable		—			(160,000	)
Purchase of common stock		—			(37,500	)
Proceeds from debentures payable		875,000			—
Net cash provided by financing activities:		3,917,331			1,990,874
Net increase (decrease) in cash and cash equivalents		(288,209	)		154,910
Cash beginning of period		1,270,849			363,464
Cash at end of period	$	982,640		$	518,374
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid	$	—		$	—
Interest paid	$	27,739		$	21,507
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services	$	5,200		$	33,500
Common stock issued for lease expenses	$	1,005,000		$	592,275
Common stock issued for equipment	$	90,000		$	—

The accompanying condensed notes are an integral part of these interim financial statements

5

Sterling Mining Company and Subsidiary

Condensed Notes to Financial Statements

June 30, 2006

Sterling Mining Company is engaged in the business of acquiring, exploring, and developing mineral properties, primarily those containing silver and associated base and precious metals. It is operating the Barones tailings plant in Zacatecas, Mexico and is preparing the Sunshine Mine for production in Idaho. The Company was incorporated under the laws of the State of Idaho on February 3, 1903. The Company’s executive offices are located at 2201 Government Way, Suite E, Coeur d’Alene, Idaho 83814.

Note 1: Basis of Presentation of Financial Statements

In the opinion of management, the accompanying unaudited consolidated balance sheet, consolidated statements of operations and comprehensive income (loss), consolidated statements of cash flows and notes to interim consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, the financial position of Sterling Mining Company and its consolidated subsidiaries (the “Company”). Management has made all adjustments necessary for a fair statement of the results for the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2005, as it may be amended from time to time.

The results of operations for the periods presented may not be indicative of those which may be expected for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted as permitted by GAAP.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.

Note 2: Summary of Significant Accounting Policies

This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Accounting Method

The Company’s financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

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Accounts Receivable

The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and determines if an allowance for doubtful accounts is necessary, based on a history of past write-offs and collections and current credit conditions.

Asset Retirement Obligations

The company accounts for asset retirement obligations and conditional asset retirement obligations in according with SFAS 143, FIN 47 and US GAAP.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of Risk

The Company maintains its domestic cash in several commercial banks in Coeur d’Alene, Idaho. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. The Company also maintains cash in a Mexican bank. The Mexican accounts, one denominated in dollars and one denominated in pesos, are considered to be un-insured.

Derivative Instruments

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (hereinafter “SFAS No. 133”) as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB No. 133”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140.” See Recent Accounting Pronouncements.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts to hedge existing risks.

The Company has issued convertible debt and accounts for that debt according to SFAS 133 and subsequent pronouncements. Consequently, management recognizes the convertible debt contract as a derivative instrument and accounts for the derivative according to generally accepted accounting principles in the U.S.

The Company issued convertible debentures with warrants attached in the first and second quarter of 2006 as detailed in Note 7.

7

Earnings Per Share

The Company has adopted Statement of Financial Accounting Standards No. 128, which provides for calculation of “basic” and “diluted” earnings per share.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Exploration Costs

In accordance with accounting principles generally accepted in the United States of America, the Company expenses exploration costs as incurred.

Fair Value of Financial Instruments

The Company’s financial instruments, as defined by Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments,” include cash, marketable securities, investment in stocks, purchase options, purchase warrants, receivables, payables and accrued expenses. Cash, receivables, payables and accrued expenses are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximate fair value at June 30, 2006 and 2005. Marketable securities, investments in stocks, purchase options and purchase warrants are accounted for by market prices when available, or by other valuation methods described in these notes when market prices are not available.

Foreign Currency Transactions

The Company created a Mexican subsidiary during 2004 for the purpose of exploration and exploitation of silver bearing minerals in Mexico. The Company records in United States dollars the assets and liabilities of its Mexico subsidiary according to generally accepted accounting principles. The Company translates into United States dollars the revenues, expenses, gains and losses of its Mexican subsidiary at the transaction date and records them according to generally accepted accounting principles. Management has concluded that for the purposes of financial reporting, the functional currency of the Mexican subsidiary is the United States dollar. Consequently, management uses the temporal method of foreign currency translation.

Going Concern

In the most recent audit of the Company’s financial statements the auditors expressed substantial doubt about the Company’s ability to continue as a going concern. Management has plans in place to raise substantial capital to meet the expected operating cash needs and the capital budget for the remainder of the fiscal year, 2006.

Inventories

Metals inventories are carried at the lower of net realizable value or average unit cost. Production costs include the cost of direct labor and materials, depreciation, amortization, and overhead costs relating to mining and processing activities. Materials and supplies inventories are valued at the lower of average cost or net realizable value. Net realizable value is determined by market conditions and the cost to bring inventory to production. Sterling de Mexico had an inventory

8

adjustment for the month of June when average unit cost exceeded net realizable value. The inventories balances at June 30, 2006 and December 31, 2005 represented supplies inventory in Mexico, minerals inventory in Mexico and silver coins inventory in Idaho.

Mineral Development Costs

The Company will capitalize property acquisition costs for undeveloped mineral interests that have significant potential to develop an economic ore body. The Company will amortize the capital costs based on proven and probable ore reserves if an economic ore body is developed. If an economic ore body is not discovered, previously capitalized costs are expensed in the period in which it is determined that the property does not contain an economic ore body. Costs to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on a unit of production basis over proven and probable reserves. Gains and losses on the sales or retirement of assets are recorded as other income or expense.

Prepaid Expenses

The Company’s current prepaid expenses primarily consist of prepaid insurance premiums, specialty equipment and prepaid lease payments which are paid for up to a year in advance. Prepaid lease payments for periods beyond one year are considered other non-current assets. Non-current assets are primarily comprised of the Sunshine Mine lease and the Barones lease which was prepaid in 2004 and is being amortized over the 20 year lease term.

Minority Interest

The Company owns 99% of its Mexico subsidiary, Sterling Mining de Mexico S.A. de C.V. The 1% minority in the subsidiary is owned by an individual. A minority interest is not shown on the balance sheet because there is a negative value to the capital account of the minority interest holder. Additionally, the minority holder is not expected to make additional capital contributions.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary after elimination of inter-company accounts and transactions. The majority-owned subsidiary of the Company is named above.

Property and Equipment

Property and equipment is recorded at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Mineral property is depleted, based on estimates of ore reserves.

Provision for Taxes

Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.

9

Note 3: Marketable Securities and Investments

The Company’s investment portfolio consists primarily of small-cap mining stocks, options and warrants.

The Company’s investments in securities are classified as either trading, held to maturity, or available-for-sale in accordance with Statement of Financial Accounting Standards No. 115. During the three months ended June 30, 2006 and 2005, the Company did not own any securities classified as trading or held to maturity, but did own securities classified as available-for-sale. Available-for-sale securities consist of equity securities not classified as trading securities or as securities to be held to maturity.

Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the average cost method and are included in earnings. The Company determines the gain or loss on investment securities held as available-for-sale, based upon the accumulated cost bases of specific investment accounts.

On the Company’s balance sheet, short-term available for sale securities are classified as “marketable securities.” Long-term available-for-sale securities and other investments are classified as “investments.”

Options and warrants are recorded at fair market value, calculated using a conventional Black Scholes pricing model. Assumptions made in estimating the fair value include the risk-free interest rate, volatility and expected life. For the three months ended June 30, 2006 the volatility ranged from 29% to 165%. Expected life used was the number of days to expiration. The risk-free interest rate used was the Federal Reserve Boards risk-free rate most closely corresponding to the option or warrant lifetime. Management used risk free rates between 5.12% and 5.29% for the periods presented.

10

The changes in marketable securities, long-term investments, and investments-other during the three and six months ended June 30, 2006 are as follows:

	Marketable Securities			Investments- Long Term			Investments- Other		Total
Fair Market Value at December 31, 2005	$	288,718		$	381,539		$	343,314	$	1,013,568
Plus Purchases		133,967			11,475			—		145,442
Less Proceeds from Sales		(54,219	)		(2,100	)		—		(56,319	)
Plus Gain on Sales		38,128			1,905			—		40,032
Plus Unrealized Gains		239,882			15,598			181,706		447,701
Fair Market Value at March 31, 2006		646,472			406,512			525,020		1,578,005
Plus Purchases		117,468			8,150			5,643		131,261
Less Proceeds from Sales		(66,439	)		—			—		(66,439	)
Plus Gain on Sales		17,333			—			—		17,333
Plus Unrealized Gains		(306,823	)		39			27,143		(279,641	)
Fair Market Value at June 30, 2006	$	408,011		$	414,701		$	557,806	$	1,380,518

At June 30, 2006 the total cost basis of marketable securities and investments was $1,476,984.

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Note 4: Income Tax

Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.

At June 30, 2006, the Company had net deferred tax assets, calculated at an expected rate of 34%, of approximately $4,280,000, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2006.

The Company’s deferred tax assets are estimated as follows:

	June 30, 2006			December 31, 2005
Net operating loss carryforward	$	12,589,000		$	9,970,000
Deferred tax asset	$	4,280,000		$	3,390,000
Deferred tax asset valuation allowance	$	(4,280,000	)	$	(3,390,000	)

12

At June 30, 2006, the Company has net operating loss carryforwards of approximately $12,589,000, which expire in the years 2016 through 2025. The change in the allowance account from December 31, 2005 to June 30, 2006, was approximately $890,000.

Note 5: Inventories

The Company uses the First-In-First-Out Method of inventory valuation.

Inventories in the United States consist of silver coins, rounds and bullion. Inventories in Mexico consist primarily of silver in precipitate form. Other components of inventory are gold in precipitate form as well as copper and thiosulfite used in the processing of mineral bearing ore. At June 30, 2006 and December 31, 2005 the Company reported the following inventories:

	June 30, 2006		December 31, 2005
United States
Coins, rounds and bullion	$	30,775	$	46,647
US Total		30,775		46,647
Mexico
Silver and gold precipitate		204,618		145,521
Supplies and other inventory		39,940		42,221
Mexico Total		244,558		205,628
Consolidated Total	$	275,333	$	252,275

At June 30, 2006 and December 31, 2005, the precipitate in Mexico was either on-site, in transit, or at the refinery.

Note 6: Commitments and Contingencies

Mineral Leases

The Company has secured leases of a number of mineral properties. Each of the leases is subject to lease payments as shown in the table below.

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Mineral Lease	Production Royalties Payable (1)	2006 Annual Lease Fees
Barones Concession (2)	Yes	$	—
Chester Claim Group (3)	Yes		7,200
J.E. Prospect	Yes		7,500
Merger Mines Claim Group	Yes		2,500
Metropolitan Mines Claim Group	Yes		12,000
Mineral Mountain Claim Group	Yes		3,600
Montana Revett Claim Group (4)	Yes		—
San Acacio Concession (5)	Yes		150,000
Sunshine Mine and Infrastructure, ARI lease (6)	Yes		120,000
Jestec	Yes		15,000
Rock Creek-Idaho	Yes		4,500

(1) All leases are subject to production royalties.

(2) $375,000 in cash and $100,000 in the Company’s common stock were prepaid in 2004 to apply to the life of the Barones lease of 225 months. There are no annual lease fees.

(3) The Chester Claim Group lease also requires an annual payment of 50,000 shares of the Company’s common stock, which were issued in the first quarter.

(4) Montana Revett Claim Group annual lease fee of $20,000 commences on June 1, 2007.

(5) The 2006 San Acacio lease payment of $150,000 was made in full in June.

(6) The Company makes monthly payments of $10,000. Production royalties are not payable to lessor, but are payable to third parties.

The total value of shares issued for leases and lease amendments for the three and six months ended June 30, 2006 were $105,500 and $1,005,000, respectively. The total number of shares of common stock issued for leases, lease amendments for the three and six months ended June 30, 2006 were 25,000 and 275,000 respectively.

Other Leases

The Company entered into a lease for office space in Coeur d’Alene, Idaho for $1,711 per month through November 2006 and increasing to $1,763 from December 2006 through November 2007.

The Company’s obligations under mineral agreements and office space operating lease agreements as of June 30, 2006 are as follows:

Year Ending:
December 31, 2006	$	96,690
December 31, 2007		373,635
December 31, 2008		385,311
December 31, 2009		392,800
December 31, 2010		392,800
Total minimum lease payments	$	1,641,236

14

The Company acquired six patented mining claims in April of 2006 from the New Jersey Mining Company in exchange for $120,000 cash. In the agreement, New Jersey Mining Company conveyed to the Company the real property and all other rights, duties and obligations as set forth in the Camp Agreement of 1978. There are no recurring payments, work commitments or royalty obligations associated with these claims.

In May of 2006 the Company acquired the option to purchase land adjacent to the Sunshine Mine. The Company paid $10,000 cash and 5,000 shares for the purchase option and has no ongoing payments for the option.

Compliance with Environmental Regulations

The Company is subject to a variety of federal, state and local statues, rules and regulations designed to protect the quality of the water and air, and threatened or endangered species, in the vicinity of many of its mining operations. These regulations include “permitting” or pre-operating approval requirements designed to ensure the environmental integrity of a proposed mining facility, operating requirements to mitigate the effects of discharges into the environment during mining operations, and reclamation or post-operation requirements designed to remediate the lands affected by a mining facility. The Company is investigating the necessary environmental requirements and any bonding necessary to comply with the regulations.

Other Taxes

The Company assumed certain property taxes in arrears as part of the Company’s obligation in the lease of the Sunshine Mine. The Company has paid property taxes in arrears for the years 1999 through 2003. Estimated tax liabilities including penalties and interest outstanding are shown below.

Tax Year:
2004	$	31,887
2005		37,762
2006		19,200
Accrued Penalties and Interest		7,841
Balance, June 30, 2006	$	96,690

Note 7: Notes Payable

During the second quarter of 2006, the Company issued one debenture for a total of $300,000. The debenture included a provision for the conversion of the debt to a total of 58,594 shares of

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the Company’s common stock. The debenture had twelve-month warrants attached with an exercise price of $5.00 for an additional 58,594 shares of the Company’s common stock. The Company discounted the debentures payable for the fair market value of the warrants, $137,256 and for the fair market value of the conversion provision of the debt and the associated derivative liability of $94,436. The Company is amortizing the derivative liability, net of interest paid, over the 18 month life of the debentures. Amortization expense for the debenture for the quarter was $16,686.

During the first quarter of 2006 the Company issued two debentures for a total of $575,000. The debentures included provisions for the conversion of the debt to a total of 230,000 shares of the Company’s common stock. The debentures also had $3.50 warrants attached for an additional 230,000 shares of the Company’s common stock. The Company discounted the debentures payable for the fair market value of the warrants, $69,000 and for the fair market value of the conversion provision of the debt and the associated derivative liability of $280,600. The Company is amortizing the derivative liability, net of interest paid, over the 18 month life of the debentures. Amortization expense for the derivative was $20,725 for the first quarter of 2006 and $47,353 for the second quarter.

The Company issued the debentures to an investor who subsequently became a director of the Company. As a director, the investor is now a related party.

Note 8: Common Stock, Options and Warrants

During the second quarter of 2006, the Company issued 1,158,608 shares of common stock as follows: 435,000 shares for $1,100,000 in cash; 40,000 shares for lease expense and equipment; and 665,108 shares upon the exercise of $0.75 per share stock options that were granted in June of 2003. 17,500 warrants were exercised during the quarter for $70,000 and 572,500 warrants, valued at $722,287, were granted at a weighted average exercise price of $6.41.

During the first quarter of 2006, the Company issued 817,218 shares of common stock as follows: 549,268 shares for $1,360,000 in cash; 250,000 shares for lease expense; and 18,000 upon the exercise of $0.75 per share stock options that were granted in June of 2003. No warrants were exercised during the first quarter and 586,718 warrants were granted. The warrants were valued at $282,549 at March 31, 2006 and the weighted average exercise price of the warrants is $4.18

In February of 2006, the Company entered into a subscription agreement with a foreign investor for the purchase of 500,000 shares of common stock and 500,000 common stock purchase warrants exercisable at a price of $4.75 that expire April 10, 2008. The aggregate purchase price for the securities is $1,250,000 and the first installment of $625,000 was received with the second installment due April 10, 2006. In connection with the transaction, the Company agreed to pay an overseas consultant who assisted with the financing a fee payable in shares and warrants identical to the warrants sold to the investor in the amount of 25,000 shares and 25,000 warrants on the first installment of the subscription and an additional 25,000 shares and 25,000 warrants for the final installment in April 2006.

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Note 9: Loss per Common Share

The Company is authorized to issue 40,000,000 shares of common stock, $0.05 par value per share, of which 20,453,245 shares were issued at June 30, 2006. The weighted average shares of common stock outstanding at June 30, 2006 were 20,105,300.

The Company has adopted Statement of Financial Accounting Standards No. 128, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Although there were common stock equivalents outstanding June 30, 2006, they were not included in the calculation of earnings per share because they would have been considered anti-dilutive.

As of June 30, 2006, the Company had issued and outstanding 125,000 stock options at a weighted average exercise price of $4.95, 2,072,035 warrants at a weighted average exercise price of $6.41, and convertible debt that could be converted to 288,594 shares of common stock at an average conversion price of $3.03. Earnings would be fully diluted by 2,485,629 shares if the Company had earnings to report.

Note 10: Business Segments

The Company began reporting two business segments during 2004. One segment is the exploration segment in the United States of America. The Company engages in the acquisition and exploration of mineral properties in the U.S.A. in this segment. The Company’s other segment, acquired in 2004, is the Mexico exploration segment. The Company acquired the Mexican operation in 2004 and began reporting two segments subsequent to the acquisition. Due to this change in the composition of reportable segments, all prior periods have been restated.

The Mexico segment includes the Company’s 99% owned subsidiary Sterling Mining De Mexico, S.A. De C.V. The Mexico segment engages in the acquisition exploration and operation of mineral properties in Mexico. The Company’s objective in each segment is to place those properties that can be operated at a profit into production.

The following table presents information about reportable segments for the three and six months ended June 30, 2006 and 2005.

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	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Revenues:
United States	$	37,133		$	6,930		$	47,951		$	14,427
Mexico		279,376			—			549,082			—
Total	$	316,509		$	6,930		$	597,033		$	14,427
Income (loss) from operations
United States	$	(1,628,431	)	$	(1,238,443	)	$	(2,611,252	)	$	(2,323,097	)
Mexico		(236,681	)		(34,301	)		(251,712	)		(64,464	)
Total	$	(1,865,112	)	$	(1,272,744	)	$	(2,862,964	)	$	(2,387,561	)
Net Income (Loss)
United States	$	(1,424,624	)	$	(1,236,099	)	$	(2,618,578	)	$	(2,381,717	)
Mexico		(213,668	)		(34,301	)		(246,305	)		(66,091	)
Total	$	(1,638,292	)	$	(1,270,400	)	$	(2,864,883	)	$	(2,447,808	)
Identifiable Assets at June 30, 2006
United States							$	5,429,085		$	3,034,397
Mexico								643,772			279,773
Total							$	6,072,857		$	3,314,170
Capital Expenditures:
United States	$	1,012,597		$	2,263		$	1,148,902		$	3,603
Mexico		113,408			—			149,814			—
Total	$	1,126,005		$	2,263		$	1,298,716		$	3,603

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Note 11: Significant Customers

In the past, Sterling de Mexico, the Mexican subsidiary, has sold its precipitate to two refineries. During the three months ended June 30, 2006 all sales were to one refinery, Met-Mex Penoles.

Note 12: Subsequent Events

The Company entered into subscription agreements in July of 2006 for the purchase of a total of 280,303 shares of common stock and 280,303 common stock purchase warrants. The aggregate price of the securities was $915,000. 100,000 warrants have an exercise price of $4.71, 150,000 warrants have an exercise price of $4.97 and 30,303 warrants have an exercise price of $5.06. All the warrants expire in July of 2008.

The Company entered into two subscription agreements to take place in August and September, 2006. The August subscription agreement will be for 150,000 shares of common stock and 150,000 common stock purchase warrants for an aggregate price of $495,000. The September subscription agreement will be for 200,000 shares of common stock and 200,000 common stock purchase warrants for an aggregate price of $660,000. The warrants have a term of two years and an exercise price of 125% of the closing share price on the day the financing is received.

In connection with the above transactions the Company agreed to pay an overseas consultant who is assisting with the financing a fee payable in shares and warrants with the same terms as the warrants sold to the investors.

Item 2: Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Overview

The Company’s operating mine is the Barones silver tailings project in Mexico. At the Barones silver tailings project in Mexico, silver production was 23,618 ounces of silver and 53 ounces of gold in the second quarter of 2006 compared to no ounces of silver or gold in the second quarter of 2005. Production was down for the quarter, primarily due to a two week suspension of leaching during the quarter caused by a lack of water necessary in the leaching process. The Barones project began operating in the third quarter of 2005. Total cash cost per ounce in the second quarter of 2006 was $11.18 per ounce. The high cost per ounce for the quarter resulted from the interruption in production as well as the cost of re-establishing the water supply to the vats.

During the quarter the Company purchased and began the installation of a crusher at the Barones plant to increase metal recoveries.

In Idaho the Company is rehabilitating the Sunshine Mine and its goal is to begin production in late 2007 or early 2008. The rehabilitation and development of the Sunshine Mine during the second quarter of 2006 included advancing the Sterling Tunnel Project. The project advanced 891 project feet during the second quarter and 1,018 project feet in the six months ended June 30, 2006. Expenditures on the tunnel were $752,415 in the second quarter and $878,705 for the six months ended June 30, 2006. The 5,700 foot tunnel will connect with the Silver Summit tunnel and provide exploration drill stations, ventilation, escape way and power distribution

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flexibility for the mine. The Company commenced an underground diamond drilling program in the Silver Summit Tunnel during the quarter and is studying the results to guide future exploration.

The Company has exploration projects in Idaho, Montana and Mexico. During the second quarter of 2006 Sterling Mining Company continued exploration on its Mexican properties in the state of Zacatecas, Mexico. Evaluation of the Diamond drilling on La Esperanza and El Tesorito properties located in the Ojo Caliente district was completed. Additional drilling was recommended for both properties. At La Esperanza reverse circulation drilling is recommended to block a potential small, near surface, low grade gold silver deposit that can be mined by open pit methods. At El Tesorito the main vein was well delineated with moderate silver values. More diamond drilling was recommended to evaluate possible secondary enrichment at deeper levels. Drill sites for three diamond drill holes were selected for drilling at a later date, at La Aventurera, La Encarnacion and El Griego veins.

At the San Acacio Property the Company has retained an outside consulting firm to assist in an on-going scoping study on the project. The Company is conducting certain geological evaluations including sampling of near surface material and rehabilitation of the Purisima Tunnel.

The results of the Company’s operations are significantly affected by the market prices of silver which may fluctuate widely and are affected by many factors beyond the Company’s control, including, without limitation, interest rates, expectations regarding inflation, currency values, governmental decisions regarding the disposal of precious metals stockpiles, global and regional political and economic conditions, and other factors. The average prices of silver (London Final) and gold (London Final) for the three months ended June 30, 2006 were $12.25 and $628 per ounce, respectively. The market prices of silver and gold on August 4, 2006 were $12.68 per ounce and $655.50 per ounce, respectively.

Management’s Discussion and Analysis includes references to total cash costs per ounce of silver produced. Total cash costs per ounce represent a non- U.S. generally accepted accounting principles (“GAAP”) measurement that management uses to monitor and evaluate the performance of its mining operations. A reconciliation of total cash costs per ounce to U.S. GAAP “Production Expenses” is also provided herein and should be referred to when reading the total cash cost per ounce measurement.

During the quarter the Board of Directors appointed Roger A. VanVoorhees as a director of the Company. Mr. Van Voorhees is 60 years old, graduated with a B.S. degree from Western Michigan University and has business and investment interests in the hospitality, real estate, oil and gas, and metal mining industries. As a holder of more than 5% of the Company’s stock, Mr. Van Voorhees is a related party.

Comparative Results of Operations

For the three and six months ended June 30, 2006 compared to three and six months ended June 30, 2005

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Revenues

Sales of metal from continuing operations in the second quarter and first six months of 2006 consisted of sales of silver and gold to the refinery in Zacatecas, Mexico and coin revenues in the USA from the sale of coins, rounds and bullion and from contract and lease income. Total sales for the quarter were $316,509 in 2006 and $6,930 in 2005. Total sales for the six months ended June 30, 2006 were $597,033 in 2006 and $14,427 in 2005. Sales in the second quarter in Mexico were $279,376 in 2006 and none in 2005. Sales for the six months ended June 30 in Mexico were $549,082 in 2006 and none in 2005. Sales in the second quarter in the USA were $37,133 in 2006 and $6,930 in 2005. Sales for the six months ended June 30 in the USA were $47,951 in 2006 and $14,427 in 2005.The increase in sales in 2006 versus 2005 was due to silver production beginning at the Barones Plant in the third quarter of 2005.

Costs and Expenses

Both sales and production costs applicable to sales have increased dramatically compared to a year ago. This is due to the start of operations at the Barones tailings plant in Mexico within the last year. Production costs and cost per ounce were higher in the second quarter than they were in the first quarter due to the temporary shortage of water at the plant, discussed above.

The Company reported “Production Costs Applicable to Sales” of $303,985 in the second quarter of 2006 and $4,100 in the second quarter of 2005. Cost of revenues for the six months ended June 30 was $528,433 in 2006 and $8,324 in 2005. “Production Costs Applicable to Sales” for the quarter in Mexico was $289,260 in 2006 and none in 2005. “Production Costs Applicable to Sales” for the six months ended June 30 in Mexico was $507,305 in 2006 and none in 2005. The Cost of Revenues for coin sales in the U.S. was $14,726 and $4,100 in the second quarters of 2006 and 2005 respectively. The Cost of Revenues for coin sales in the U.S. was $21,128 and $8,324 for the six months ended June 30 of 2006 and 2005 respectively.

Total operating expenses increased from $1,279,674 in the second quarter of 2005 to $2,181,622 in 2006, reflecting increased activity for the Company. As a result, the loss from operations increased from $1,272,744 in the second quarter of 2005 to $1,865,112 in 2006 and the net loss for the quarter increased from $1,270,400 in 2005 to $1,638,292 in 2006.

For the six months ended June 30 operating expenses increased from $2,401,988 in 2005 to $3,459,997 in 2006. The increase in expenses is primarily attributed to production costs in 2006 exceeding pre-production costs in 2005, and increases in exploration expenses, corporate general and administrative expenses, and professional services. Professional service expenses increased due to legal fees and costs associated with the Company successfully registering with the SEC and passing through the comment period. For the six months ended June 30, loss from operations increased from $2,387,561 in 2005 to $2,862,964 in 2006 and net loss increased from $2,447,808 in 2005 to $2,864,883 in 2006.

Other Income and Expenses

Other income and expense for the quarter resulted in a net gain of approximately $226,820 in 2006 and $2,344 in 2005. The largest component of that income in the second quarter of 2006 was gain on derivative instruments. The largest component of that income in the second quarter of 2005 was gain on the sale of investments.

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Other income and expense for the six months ended June 30 resulted in a net expense of $1,919 in 2006 and a net expense of 60,247 in 2005. The largest component of other income in those six months of 2006 was loss on derivative instruments. The largest component of other income in those six months of 2005 was loss on the sale of investments. Investments have fluctuated due to changing market conditions. The derivative instruments are a result of the convertible debentures the Company issued and the gain and loss on the derivatives is a result of fluctuating market conditions.

Income Taxes

Sterling Mining Company has a substantial net operating loss for U.S. income tax purposes. Sterling de Mexico has a net tax asset of IVA tax refundable in Mexico.

Loss From Continuing Operations

As a result of the above, the Company’s loss from continuing operations amounted to a 1,865,112 in the second quarter of 2006 compared to a loss from continuing operations of 1,272,744 in the second quarter of 2005. Loss from continuing operations for the six months ended June 30, 2006, was $2,862,964 compared to a loss of $2,387,561 for the comparable period in 2005. The largest component of the loss for the interim period of both years was exploration expense which was $1,700,370 for the six-month period in 2006 and $1,597,932 for the six-month period in 2005. In the first six months of 2006 the net loss was reduced by sales revenue of silver and gold in Mexico.

Cash Cost Per Ounce of Silver

During the second quarter of 2006 Sterling de Mexico sold approximately 23,000 ounces of silver and small amounts of other metals for approximately $280,000 in U.S. dollars. Sterling de Mexico’s costs, on a cash basis, are presented in the table below.

Cash costs per ounce of silver represent measurements that are not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provide an indicator of profitability and efficiency as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, is presented below:

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Silver: Cash Costs per Ounce

Sterling de Mexico, 2^nd Quarter 2006

Total Cash Costs	$	264,031
Divided by silver ounces produced		23,618
Total cash cost per ounce produced	$	11.18
Reconciliation to GAAP
Total Cash Costs		264,031
Less: Refining and transportation		(27,993	)
Plus: By-product credits (gold)		18,689
Cost of operations		254,727
Plus: decrease in product inventory		34,533
Cost of sales and other production costs and
depreciation, depletion and amortization (GAAP)	$	289,260

Note: The Company has no cash cost per ounce to report for the three and six months ended June 30, 2005. The Barones tailings plant began producing silver for sale in the third quarter of 2005. Ounces produced prior to June 30, 2005 were treated as pre-production.

Liquidity and Capital Resources

The Company’s cash balance at June 30, 2006 was approximately $1.0 million. During the three and six months ended June 30, 2006, the Company received cash upon the exercise of options and warrants, private placement of common stock and the issuance of convertible debentures. Total cash provided by financing activities was approximately $2.0 million in the second quarter and $3.9 million in the six months ended June 30, 2006.

The Company believes that these cash amounts will be sufficient to meet its operating and capital needs through September of 2006, and the Company intends to raise additional capital to meet its future operating needs through private equity or convertible debt offerings.

The Company’s use of funds has been growing due to increasing exploration activities both in Mexico and at the Sunshine Mine in Idaho. Rehabilitation of the Sunshine Mine has been the primary use of funds for capital expenditures. The acquisition of the crusher for the Barones was the second largest capital expenditure during the quarter. Corporate General and Administrative expense has grown since the second quarter of 2005 as the Company expanded its office and its staff, hiring a CFO, Environmental Quality Manager, Accounting Manager, and others. As the Company grows and prepares for the operation of the Sunshine Mine, management anticipates further capital improvements, equipment purchases and staff increases.

Management has been successful in raising capital through private equity offerings and is seeking additional debt and/or equity funding for future operations. While the Company believes its cash, cash equivalents and short-term investments and cash from operations will be adequate to meet its obligations through September of 2006, there can be no assurances that financing will be available when needed for the remainder of the year.

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The financing requirements of the Company will grow as the Sunshine Mine project advances during the next stages in 2006 and 2007. To achieve internal objectives and timetables will require significantly higher capital to advance the project. A shortfall in funding raised towards this budget or lack of significant cash flow from our Mexican operations, would cause significant delays in our progress to re-open the Sunshine Mine, and determine the feasibility of a second production project in Mexico. There is no assurance the Company will be successful in its fund raising efforts in 2006, or that its Mexican operations can generate significant excess cash to help fund operating expenses.

The capital requirements of the Company’s Mexican operations will be dependent on the profits and cash flow from our Barones operations, results of economic and technical studies on our other projects and any exploration projects the Company may select for advancement.

Contractual Obligations

The Company is obligated under certain contractual arrangements for future cash expenditures. The following table sets forth our contractual obligations for the periods shown:

	Total		Payments due by period
			Less than 1 Year		1-3 Years		3-5 Years		After 5 Year
Convertible Debentures	$	875,000	$	—	$	875,000		—		—
Operating Leases:
Ebisch-Reich	$	55,000	$	7,500	$	12,500	$	15,000	$	20,000
American Reclamation		480,000		120,000		120,000		120,000		120,000
Chester Mining Company		28,800		7,200		7,200		7,200		7,200
Mineral Mountain		14,400		3,600		3,600		3,600		3,600
Merger Mines		12,500		2,500		2,500		2,500		5,000
Timberline Resources		60,000		—		20,000		20,000		20,000
Metropolitan Mines		48,000		12,000		12,000		12,000		12,000
San Acacio		450,000				150,000		150,000		150,000
Total	$	1,148,700	$	152,800	$	327,800	$	330,300	$	337,800

* The holder of the convertible debentures, Roger Van Voorhees, is a director and related party.

Critical accounting policies and estimates

The Company has determined from the significant accounting policies as disclosed in our financial statements, that the following two disclosures are critical accounting policies.

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Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are essential to the financial disclosure process in determining the reserves of ore bearing rock and the future liabilities for remediation and reclamation from mining activities. The Company used recognized outside consultants to determine the essential characteristics of the important determinants concerning the Company’s future actions in moving exploration stage properties through development into production. The estimates that the Company will develop are based upon the experience of these out-side consultants and the Company’s experienced personnel. As the Company proceeds with the re-opening of the Sunshine Mine, all estimates will be reviewed on a timely basis to allow for the reporting of current and valid financial information. Management believes that all of the estimates currently being relied upon are valid and appropriate concerning the value of assets and liabilities. In the past, given the very limited operations of the Company, management has been fairly accurate as to the use of estimates and the timing of any changes.

Management received a reserves estimate for the Barones tailings plant in Mexico in June of 2006. The Company began capitalizing assets at the Barones plant in June and will be depleting those assets over the estimated reserves.

Mineral Exploration and Development Costs

The Company in its inception in 1998 was an exploration Company. The Company began producing silver at the Barones plant in 2005.

In accordance with accounting principles generally accepted in the United States of America, the Company expenses exploration costs as incurred. Significant property acquisition costs for undeveloped mineral interests that have significant potential to develop an economic ore body are capitalized. The Company will amortize the capital costs based on proven and probable ore reserves if an economic ore body is developed. If an economic ore body is not discovered previously capitalized costs are expensed in the period in which it is determined that the property does not contain an economic ore body. Costs to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on units of production basis over proven and probable reserves. Gains and losses on the sales or retirement of assets are recorded as other income or expense.

The Company expects to have reserves in the future on any development it deems commercially viable, but at this time the Company has no current reserves, which can be demonstrated for financial reporting purposes. The essential nature of any reserves acquired or discovered will be estimates based upon ore body information presented to and reviewed by professionals. The enterprise of exploration and mining are subject to substantial uncertainties in development and operations. The Company is attempting to recruit a team of operational professionals with the highest standards for reporting always being in the forethought of management.

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Any estimates arising out of our exploration, development and operational activities will be expected to be reviewed under current internal policies. Our current environment has had only a short period of active operations and management believes that all exploration, development and operating policies are being accurately maintained. Our future operations will be heavily dependent on the market values of precious metals and our estimated costs of production. As these determinants change we would expect analysis by management of both short-term and long-term conditions, which could have a negative impact on the Company’s choices concerning development and operations of its existing and future acquired properties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange, interest rates, and commodity prices. The Company’s operations in Mexico could potentially be affected by a change in the exchange rate of Mexican pesos into American dollars.

Item 4. Controls and Procedures

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by it in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Based on an evaluation of the Company’s disclosure controls and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded at June 30, 2006, that the Company’s disclosure controls and procedures were effective.

Based on an evaluation by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that there was no change in the Company’s internal control over financial reporting during the three months ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

In September 2005, James D. Christianson and a small group of shareholders affiliated with Mr. Christianson filed a lawsuit against two directors of the Company in the United States District Court, Western District of Washington at Tacoma, Case No. CV05-5590 RBL. The original complaint alleged, among other things, that the directors made misrepresentations and omitted information in conjunction with private purchases and sales of Company common stock and stock in other businesses with which the directors are associated. Sterling was not a party to the original complaint.

The plaintiffs requested permission to amend the original complaint to add claims against the Company and others, asserting that the Company and others made misrepresentations and omitted information in conjunction with private purchases and sales of Company common stock, among other allegations. During the second quarter of 2006 the motion was approved. The Company is prepared to vigorously defend the claims against it.

Item 1A. Risk Factors

The Company has the following material changes to report to add to the risk factors previously disclosed in our annual report on Form 10-K/A filed on July, 13, 2006:

The Company continued to incur net losses and has an accumulated deficit of $17,590,043 at June 30, 2006. Unless we obtain additional financing we may not be able to meet our obligations as they come due and may not be able to execute our long-term plans.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended June 30, 2006 the Company issued an aggregate of 1,158,608 shares of common stock for aggregate proceeds of $1,668,831 and for non-cash value of $212,700, as follows:

Four private investors purchased 435,000 shares for aggregate proceeds of $1,100,000. These securities were issued in offshore transactions in reliance upon Regulation S adopted under the Securities Act of 1933. The Company granted the investors 572,500 warrants, valued at $722,287, at a weighted average exercise price of $6.41.

In reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933, the Company issued a total of 723,608 shares as follows:

• 665,108 were issued for proceeds of $498,831 upon the exercise of 75 cent options that were granted in 2003.

• 17,500 shares were issued upon the exercise of warrants for aggregate proceeds of $70,000.

• 1,000 shares were issued for services valued at $5,200

• 40,000 shares were issued for mining leases and agreements and for mining equipment and were valued at $207,500.

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Subsequent to the second quarter of 2006 the Company entered into subscription agreements for the purchase of a total of 280,303 shares of common stock and 280,303 common stock purchase warrants. The aggregate price of the securities was $915,000. 100,000 warrants have an exercise price of $4.71, 150,000 warrants have an exercise price of $4.97 and 30,303 warrants have an exercise price of $5.06. All the warrants expire in July of 2008.

The Company entered into two subscription agreements to take place in August and September, 2006. The August subscription agreement will be for 150,000 shares of common stock and 150,000 common stock purchase warrants for an aggregate price of $495,000. The September subscription agreement will be for 200,000 shares of common stock and 200,000 common stock purchase warrants for an aggregate price of $660,000. The warrants have a term of two years and an exercise price of 125% of the closing share price on the day the financing is received.

The securities sold after June 30, 2006 were issued in offshore transactions in reliance on Regulation S adopted under the Securities Act of 1933. The above securities that will be sold in August and September will be issued in offshore transactions in reliance on Regulation S adopted under the Securities Act of 1933.

In connection with the above transactions the Company agreed to pay an overseas consultant who is assisting with the financing a fee payable in shares and warrants with the same terms as the warrants sold to the investors. The shares issued to the consultant will be issued in reliance Regulation S adopted under the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

The number of shares of common stock on the face of this filing, 20,733,548 differs from the number of shares on the balance sheet, 20,453,245 because of share issuances in July of 2006.

Item 6. Exhibits

Exhibit	Description
10.1	New Jersey Mining, Camp Project Agreement
10.2	Sterling Mining Company Form of Subscription Agreement
10.3	Sterling Mining Company Form of Warrant for Offshore Offering
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer
32.2	Certification of Chief Financial Officer

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STERLING MINING COMPANY
Date: August 14, 2006	By:	/s/ Raymond DeMotte
		Raymond DeMotte, Chief Executive Officer
Date: August 14, 2006	By:	/s/ James N. Meek
		James N. Meek, Chief Financial Officer

29

EX-10.1

Exhibit 10.1

New Jersey Mining Company, Camp Project Agreement

AGREEMENT & ASSIGNMENT

THIS AGREEMENT is entered into this 20^th day of April, 2006 and is by and between STERLING MINING COMPANY, an Idaho corporation of P.O. Box 2838, Coeur d’Alene, Idaho, 83816 (hereinafter referred to as “SMC”), and NEW JERSEY MINING COMPANY of P.O. Box 1019, Kellogg, Idaho, 83837, (hereinafter referred to as “NJMC”).

RECITALS

1. NJMC is the successor in interest by merger to Plainview Mining Company, Inc., said merger having occurred on March 12, 1998.

2. NJMC is a party to that certain Agreement dated July 26, 1978, (“the Camp Agreement”) by and between Coeur d’Alene Mines Corporation, (“COEUR”), now Coeur Silver Valley, Inc. (“CSV”) by reason of an assignment from COEUR, Plainview Mining Company, Inc. hereinafter referred to as New Jersey Mining Company, (“NJMC”), and Merger Mines Corporation (“MERGER”).

3. NJMC conveyed certain patented mining claims to the participants in the above Camp Agreement. Said claims are a part of the property the subject of the Camp Agreement and are held by the participants pursuant to the terms and provisions of the Camp Agreement.

AGREEMENT & ASSIGNMENT - PAGE 1

4. NJMC is desirous of assigning its interest in the Agreement to SMC and selling and conveying all of its real property, assets, rights, duties and obligations, the subject of said Agreement to SMC.

5. SMC is desirous of purchasing NJMC’s interest and all rights associated with and in the Camp Agreement, including the real property owned by NJMC and conveyed by NJMC as required and made a part of the Camp Agreement according to all the terms and provisions of the Camp Agreement.

WITNESSETH:

NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. NJMC hereby grants, bargains, sells and conveys to SMC all of its right, title and interest in the following described real property:

Fourthought	Mineral Survey No. 3281
Plainview Fraction	Mineral Survey No. 3281
Silver Hill	Mineral Survey No. 3281
Toughnut	Mineral Survey No. 3281
Plainview No. 2	Mineral Survey No. 3281
Plainview No. 1	Mineral Survey No. 3281

2. NJMC hereby assigns, sells and conveys to SMC all of its right, title and interest held by NJMC in the Camp Agreement. Said rights include but are not

AGREEMENT & ASSIGNMENT - PAGE 2

limited to the real property set forth above and all other rights, duties and obligations as set forth and contained in the Camp Agreement. NJMC also agrees to provide all data, reports and records of any kind or nature having to do with the Camp Agreement and property.

3. It is agreed that the participants and parties to the Camp Agreement must consent to this Assignment and this Agreement and Assignment will be effective and the consideration set forth herein delivered upon the following events occurring:

A. Delivery to SMC of the Consent to Assignment signed by CSV and MERGER.

B. Delivery of a preliminary title commitment evidencing marketable title to the above patented mining claims.

4. As consideration for NJMC conveying the real property described herein and assigning its interest in the Camp Agreement as described herein, SMC shall pay to NJMC the sum of One Hundred Twenty Thousand Dollars ($120,000.00) upon closing of this transaction.

5. NJMC shall execute the Warranty Deed attached hereto as Exhibit “I” and provide the Consent to Assignment in the form attached hereto as Exhibit “2”, duly and properly executed by CSV and MERGER.

AGREEMENT & ASSIGNMENT - PAGE 3

6. NJMC shall furnish a Preliminary Title Report from a reputable title insurance company within fifteen (15) days of the date of execution of this Agreement and Assignment, evidencing marketable title to said property in fee simple, subject to printed exceptions and easements and covenants of record. The parties shall equally split the cost of said report and pay their share of the cost upon presentment of the report invoice.

A. SMC shall examine said report and advise NJMC in writing, signed by SMC or its attorney, specifying in detail, the objections, if any, SMC makes to the title. Said objections shall be made to NJMC within fifteen (15) days of receipt of the report or the right to so object shall be considered waived.

B. It is further understood and agreed that if, for any reason, NJMC shall fail to so furnish said report within fifteen (15) days, or are unable to meet SMC’s objections as indicated in the aforementioned letter, then SMC shall have the option to declare this Agreement null and void or SMC can elect to waive the objections and proceed with the purchase. If SMC has no objections or waives its objections, NJMC shall, within fifteen (15) days cause a supplemental policy to be issued pending the closing of this transaction. At closing, a Title Insurance Policy shall be delivered to SMC.

C. And furthermore, NJMC shall be allowed thirty (30) days in which to commence action to cure any such defects in the title and SMC hereby agrees that said defect or defects shall be made good and the title perfected as soon as reasonably possible at NJMC’s own expense.

7. SMC agrees to and shall be bound by all of the terms and conditions of the Camp Agreement, a copy of which is attached hereto as Exhibit “3”. NJMC represents and warrants there are no outstanding debts, liens or amounts due and owing by NJMC to the other participants in the Camp Agreement.

AGREEMENT & ASSIGNMENT - PAGE 4

8. Governing Law and Venue. All questions relative to the execution, validity, interpretation and performance of this Agreement and Assignment shall be governed by the laws of the State of Idaho. The parties hereto agree that any action related to this Agreement and Assignment shall be instituted and maintained in the courts of the County of Shoshone, State of Idaho and each party hereto waives the right to change of venue.

9. Waiver and Modification Ineffective Unless in Writing. No waiver, alteration or modification of any of the provisions of this Agreement and Assignment shall be binding unless in writing and signed by a duly authorized representative of both parties. The parties mutually agree that neither party shall employ or offer any employment with any present or former employee of the other for a period of one (1) year from the date of termination of his or her employment with the other party.

10. Validity. If any provision in this Agreement and Assignment shall, for any reason, be held to be in violation of any applicable law and therefore such provision is held to be unenforceable, the invalidity of such specific provision shall not be held to invalidate any other provision herein which shall remain in full force and effect.

AGREEMENT & ASSIGNMENT - PAGE 5

IN WITNESS WHEREOF, SMC and NJMC have duly executed this Agreement and Assignment as of the day and year first above written.

STERLING MINING COMPANY		NEW JERSEY MINING COMPANY
By:	/s/ Raymond De Mott	By:	/s/ Fred W. Brackebusch
	Raymond De Mott, President	Printed Name:	Fred W. Brackebusch
		Title:	President

STATE OF IDAHO	)
	) ss.
County of Shoshone	)

On this 20^th day of May, 2006, before me, the undersigned, a Notary Public in and for the state aforesaid, personally appeared Raymond De Motte, known or identified to me to be the President of Sterling Mining Company, and he executed the foregoing instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial seal the day and year in this certificate first above written.

	/s/ Sharon K. Jacobs
	Notary Public in and for the State of Idaho,
	Residing at:  Wallace
	My Commission expires:	8-16-2010

AGREEMENT & ASSIGNMENT - PAGE 6

STATE OF IDAHO	)
	) ss.
County of Shoshone	)

On this 20^th day of April, 2006, before me, the undersigned, a Notary Public in and for the state aforesaid, personally appeared Fred Brackebusch, known or identified to me to be the President of New Jersey Mining Company, and he executed the foregoing instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Notarial seal the day and year in this certificate first above written.

	/s/ Cary A. Spoor
	Notary Public in and for the State of Idaho,
	Residing at:  Pinehurst
	My Commission expires:	2014

AGREEMENT & ASSIGNMENT - PAGE 7

EX-10.2

Exhibit 10.2

STOCK SUBSCRIPTION AGREEMENT

FOR

STERLING MINING COMPANY

an Idaho corporation

1. SUBSCRIPTION: The undersigned,                                  (the “Subscriber”¹) hereby subscribes for the purchase of                                  (                    ) shares of Common Stock of STERLING MINING COMPANY (the “Company”), an Idaho corporation, in consideration of the sum of                                  ($            ) and              has paid, or              agrees to pay 100% of the total subscription price upon submission of this subscription agreement. Such subscription is subject to the following- terms and conditions:

a. No certificate(s) for shares shall be issued to the undersigned until the entire stock subscription price is paid;

b. The Company reserves the right to reject, reduce or allot all subscriptions received;

c. The Company reserves the right to increase the aggregate number of shares being sold by it;

d. The certificate(s) representing the shares delivered pursuant to this subscription agreement shall bear a legend in the following form:

The shares represented by this certificate have not been registered under the Securities Act of 1933 (“Act”), as amended, or any other applicable federal or state securities act; and are “restricted securities” as defined by Rule 144 of the Act. The shares may not be transferred, sold or otherwise disposed of unless; (1) a registration statement with respect to the shares shall be effective under the Act or any other federal or state securities acts or an exemption from registration requirements under the Act is effective, and (2) the Company shall have received an opinion of Counsel for the Company that no violations of any securities acts will be involved in any transfer.

¹ The Company issued shares of common stock during the second quarter of 2006 as follows: 250,000 shares to an overseas investor with full warrants attached on April 19, 2006; 50,000 shares to an overseas investor with full warrants attached on April 20, 2006; 10,000 shares to an overseas investor with full warrants attached on May 1, 2006; 125,000 shares to an overseas investor with half warrants attached on June 22, 2006

e. If the shares represented by this certificate have been held for a period of at least one (1) year and if Rule 144 of the Securities Act of 1933, as amended (the “Act”), is applicable, then the undersigned may make sales of the shares only under the terms and conditions prescribed by Rule 144 of the Act.

2. REPRESENTATIONS AND WARRANTIES: The undersigned Subscriber hereby represents and warrants to the Company:

a. The undersigned Subscriber understands that the Company’s STOCK HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY;

b. The undersigned Subscriber is not an underwriter and would be acquiring the Company’s stock solely for investment for his or her own account and not with a view to, or for, resale in connection with any distribution with in the meaning of the federal securities act, the state securities acts or any other applicable state securities acts;

c. The undersigned Subscriber understands the speculative nature and risks of investments associated with the Company, and confirms that the stock would be suitable and consistent with his or her investment program and that his or her financial position enable him or her to bear the risks of this investment; and that there is not any public market for the stock subscribed for herein;

d. The stock subscribed for herein may not be transferred, encumbered, sold, hypothecated, or otherwise disposed of to any person, without the prior written consent of the Company, and, at the Company’s discretion a prior opinion of counsel for the Company that such disposition will not violate federal and/or state securities acts. Disposition shall include, but is not limited to acts of selling, assigning, transferring, pledging, encumbering, hypothecating, giving, and any form of conveying, whether voluntary or not;

e. To the extent that any federal, and/or state securities laws shall require, the Subscriber hereby agrees that any stock acquired pursuant to this Agreement shall be without preference as to assets;

f. The Company is under no obligation to register or seek an exemption under any federal and/or state securities acts for any stock of the Company or to cause or permit such stock to be transferred in the absence of any such registration or exemption and that the Subscriber herein must hold such stock indefinitely unless such stock is subsequently registered under federal and/or state securities acts or an exemption from registration is available;

g. The Subscriber has had the opportunity to ask questions of the Company and receive additional information from the Company to the extent that the Company possessed such information, necessary to evaluate the merits and risks of any investment in the Company.

h. The Subscriber has adequate means of providing for his current needs and personal contingencies and has no need to sell the shares in the foreseeable future (that is at the time of the investment, Subscriber can afford to hold the investment for an indefinite period of time); and,

i. The Subscriber has sufficient knowledge and experience in financial matters to evaluate the merits and risks of this investment and further, the Subscriber is capable of reading, and interpreting financial statements.

3. LIMITED POWER OF ATTORNEY: The undersigned Subscriber hereby constitutes and appoints and grants to Ray De Motte, President of the Company, his limited attorney-in-fact and agent to sign for him and act in his name, place and stead, in any and all capacities to execute any or all documents to be filed with the United States Securities and Exchange Commission and any governmental agency, federal, state or otherwise in connection with any securities flags, including, but not limited to: amendments, exhibits, agreements, concerning shareholders granting, said limited attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming, all that each said limited attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

4. STATUS OF PURCHASER:

¨ I am not a member of, or an associate or affiliate of a member of the National Association of Securities Dealers.

¨ I am a member of, or an associate or affiliate of a member of the National Association of Securities Dealers. Attached is a copy of an agreement signed by the principal of the firm with which I am affiliated agreeing to may participation in this investment.

5. MISCELLANEOUS: This Subscription Agreement shall be binding upon the parties hereto, their heirs, executors, successors, and legal representatives. The law of the State of Idaho shall govern the rights of the parties to this Agreement. This Agreement is not assignable without the prior written consent of the Company, and any attempt to assign any rights, duties or obligations which arise under this Agreement without the Company’s prior express written consent shall be void.

The undersigned Subscriber hereby declares and affirms that he or she has read the within and foregoing Subscription Agreement, is familiar with the contents thereof and agrees to abide by there terms and conditions therein set forth, and knows the statements therein to be true and correct.

I hereby consent to the use of my name in any prospectus or registration statement which may be filed in connection with any public offering of the Company’s securities.

IN WITNESS WHEREOF, the parties have executed this Subscription Agreement this                              day of                          at                                 ,                                 .

SUBSCRIBER

Signature

Spouse’s Signature (if applicable)

Address

City, State and Zip Code

Area Code and Telephone Number

ACCEPTED BY:

STERLING MINING COMPANY
an Idaho corporation
BY:
	Ray De Motte, President
	Or
	Gene Higdem, Treasurer

EX-10.3

Exhibit 10.3

Common Stock Purchase Warrant

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

COMMON STOCK PURCHASE WARRANT

STERLING MINING COMPANY

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received,                  (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after                  and on or prior to the close of business on                 , but not thereafter, to subscribe for and purchase from Sterling Mining Company, an Idaho corporation (the “Company”), up to                  shares (the “Warrant Shares”) of Common Stock, par value $0.05 per share, of the Company (the “Common Stock”). The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 1(b).

Section 1. Exercise.

a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after                  and on or before                  by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within five Business Days (a weekday on which banks are open to transact business in the state of Idaho) of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank.

b) Exercise Price. The exercise price of the Common Stock under this Warrant shall be $            , subject to adjustment hereunder (the “Exercise Price”).

c) Mechanics of Exercise.

i. Authorization of Warrant Shares. The Company covenants that all Warrant Shares that may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

ii. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be delivered to the address specified by the Holder in the Notice of Exercise within five Business Days after the date of delivery to the Company of the Notice of Exercise Form, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company.

iii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iv. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share that Holder would otherwise be entitled to purchase upon such exercise, such fractional Warrant Share shall be disregarded and the number of Warrant Shares issuable upon such exercise, in the aggregate, shall be the nearest whole number of Warrant Shares.

Section 3. Certain Adjustments. If the Company, at any time while this Warrant is outstanding subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then after the date of record for effecting such subdivision, the Exercise Price shall be proportionately reduced, or if the Company combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, the Exercise Price shall be proportionately increased.

Section 4. Transfer of Warrant.

a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth herein, this Warrant and all rights hereunder are transferable,

in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with the provisions hereof as to any transfer that may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

c) Holder of Record. The Company may deem and treat the Holder of this Warrant as recorded on the books and records of the Company as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act.

Section 5. Miscellaneous.

a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c) Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation.

d) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the state of Idaho.

e) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

f) Notices. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Warrant shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day and (ii) on the next Business Day after timely delivery to an overnight courier, addressed as follows:

If to the Company:

Sterling Mining Company

P.O. Box 2838

2201 N. Government Way, Suite E

Coeur d’Alene, ID 83814

Attn:    Chief Executive Officer

Tel:      208-666-4070

Fax:      208-676-1629

If to the Holder: To the Holder at the address appearing on the books and records of the Company.

g) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.

h) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

i) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

j) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated:                                 

STERLING MINING COMPANY

By:

Name:

Title:

NOTICE OF EXERCISE

TO: STERLING MINING COMPANY

(1) The undersigned hereby elects to purchase                  Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2) Payment shall take the form of (check applicable box):

¨ cashier’s check; or

¨ wire transfer.

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following:

(4) The undersigned represents and warrants that the undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity:

Signature of Authorized Signatory of Investing Entity:

Name of Authorized Signatory:

Title of Authorized Signatory:

Date:

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

whose address is

Dated:                                 

Holder’s Signature:

Holder’s Address:

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO RULE 13a - 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Raymond DeMotte, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Sterling Mining Company.

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d -15(e)) for the registrant and have:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2006	By:	/s/ RAYMOND DEMOTTE
		Raymond DeMotte
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO RULE 13a - 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James N. Meek, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Sterling Mining Company.

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d -15(e)) for the registrant and have:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2006	By:	/s/ JAMES N. MEEK
		James N. Meek
		Vice-President and Chief Financial Officer

EX-32.1

Exhibit 32.1

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

In connection with the Quarterly Report of Sterling Mining Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Raymond DeMotte, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

a. the Quarterly Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

b. the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Raymond DeMotte

Raymond DeMotte, President and Chief

Executive Officer

August 14, 2006

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sterling Mining Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, James N. Meek, Vice-President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

a. the Quarterly Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

b. the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James N. Meek

James N. Meek, Vice-President and

Chief Financial Officer

August 14, 2006