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.

6

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.

11

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.

13

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

15

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.

16

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.

17

	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

18

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

19

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

20

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.

21

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:

22

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.

23

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.

24

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.

25

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.

26

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.

27

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