Mines Management Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

[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.

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.

COMMISSION FILE NUMBER 000-29786

MINES MANAGEMENT, INC.

(Exact Name of Registrant as Specified in its Charter)


IDAHO		91-0538859
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

905 W. Riverside Avenue, Suite 311

Spokane, Washington

99201

(Address Of Principal Executive Offices)

(Zip Code)

(509) 838-6050

(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. [X] Yes [ ] No

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

Large accelerated filer __

Accelerated filer __

Non-accelerated filer X_

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

At August 10, 2006, 12,899,467 shares of common stock, par value per share $0.01, were issued and outstanding.

SEC 1296 (9-05)

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

MINES MANAGEMENT, INC.

FORM 10-Q

QUARTER ENDED June 30, 2006

INDEX

PAGE

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

RISK AND HEDGING ACTIVITIES

ITEM 4.

CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

ITEM 1a. RISK FACTORS

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.

OTHER INFORMATION

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

Part I – Financial Information

Item 1. Financial statements (unaudited)

Mines Management, Inc. and Subsidiaries

Contents

Page

FINANCIAL STATEMENTS:

Consolidated balance sheets

Consolidated statements of income

Consolidated statements of stockholders’ equity

Consolidated statements of cash flows

Notes to consolidated financial statements

9-17


Mines Management, Inc. and Subsidiaries

Consolidated Balance Sheets

			June 30,	December 31,
			2006	2005

*Assets*

CURRENT ASSETS:
	Cash and cash equivalents		$ 3,793,280	$ 4,648,294
	Interest receivable		132,463	101,380
	Prepaid expenses and deposits		61,000	30,169
		Total current assets	3,986,743	4,779,843

MINERAL PROPERTIES			504,492	504,492

PROPERTY AND EQUIPMENT:
	Mine buildings		39,917	39,917
	Equipment		80,568	80,568
	Office equipment		195,071	185,969
			315,556	306,454
	Less accumulated depreciation		124,060	101,470
			191,496	204,984

INVESTMENTS:
	Certificates of deposit		4,213,994	4,158,692
	Available-for-sale securities		49,658	25,146
			4,263,652	4,183,838




			$ 8,946,383	$ 9,673,157

See accompanying notes to consolidated financial statements.




Consolidated Balance Sheets

				June 30,	December 31,
				2006	2005

*Liabilities and Stockholders’ Equity*

CURRENT LIABILITIES:
	Accounts payable			$ 50,834	$ 130,655
	Due to officer			2,398	2,398
	Severance currently payable			-	20,000
	Payroll taxes payable			20,477	18,048
			Total current liabilities	73,709	171,101



COMMITMENTS



STOCKHOLDERS’ EQUITY:
	Common stock – 100,000,000 shares, $0.01 par value, authorized;
		12,849,467 and 12,469,510 shares issued and outstanding		128,494	124,695
	Preferred stock – 10,000,000 shares, no par value,
		authorized; -0- shares issued and outstanding		-	-
	Additional paid-in capital			21,619,245	19,705,219
	Accumulated deficit			(1,117,306)	(1,117,306)
	Deficit accumulated during the development stage			(11,796,252)	(9,224,533)
	Accumulated other comprehensive income			38,493	13,981
			Total stockholders’ equity	8,872,674	9,502,056

				$ 8,946,383	$ 9,673,157

See accompanying notes to consolidated financial statements.


Mines Management, Inc. and Subsidiaries

Consolidated Statements of Income
							From Inception
							August 12, 2002
			Three Months Ended		Six Months Ended		Through
			June 30,		June 30,		June 30,
			2006	2005	2006	2005	2006
REVENUE:
	Royalties		$ 2,803	$ 2,931	$ 6,507	$ 5,709	$ 34,876

OPERATING EXPENSES:
	Depreciation		11,421	5,045	22,590	8,882	60,046
	Administrative		140,515	91,410	261,460	394,917	1,376,969
	Legal, accounting, and consulting		125,888	43,271	162,626	66,677	576,430
	Miscellaneous		126	1,418	1,846	3,147	17,650
	Exploration		-	-	-	718	4,696
	Oil and gas operating		-	-	-	-	12,173
	Rent and office		61,810	30,786	121,030	59,447	352,906
	Compensation, directors, officers and staff		175,810	131,227	357,523	269,797	1,691,151
	Taxes and licenses		48,638	9,070	62,503	19,605	148,464
	Telephone		5,538	4,066	10,647	6,218	41,972
	Fees, filing, and licenses		83,755	25,011	246,709	45,461	915,456
	Environmental		83,986	49,584	110,369	83,233	356,132
	Engineering		72,698	176,366	278,046	212,729	1,357,657
	Permitting		388,479	286,688	701,859	351,536	1,849,361
	Commissions		-	-	-	-	68,440
	Stock options granted to officers and employees		392,530	-	392,530	321,030	2,964,401
	Stock options granted for services		11,545	317,335	11,545	528,179	574,114
		Total operating expenses	1,602,739	1,171,277	2,741,283	2,371,576	12,368,018

LOSS FROM OPERATIONS			(1,599,936)	(1,168,346)	(2,734,776)	(2,365,867)	(12,333,142)

OTHER INCOME:
	Interest		83,571	49,552	163,057	99,303	533,432
	Miscellaneous		-	-	-	-	3,458
			83,571	49,552	163,057	99,303	536,890

NET LOSS			$ (1,516,365)	$ (1,118,794)	$ (2,571,719)	$ (2,266,564)	$ (11,796,252)

NET LOSS PER SHARE			$ (0.12)	$ (0.10)	$ (0.20)	$ (0.21)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING			12,825,557	10,929,002	12,713,067	10,738,261

See accompanying notes to consolidated financial statements.


Mines Management, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity Six Months Ended June 30, 2006

									Deficit
									Accumulated	Accumulated
							Additional		During the	Other
			Common Stock		Issuable Common Stock		Paid-in	Accumulated	Development	Comprehensive
			Shares	Amount	Shares	Amount	Capital	Deficit	Stage	Income	Total

BALANCES, AUGUST 12, 2002 (INCEPTION)			5,316,956	53,170	90,000	22,500	1,448,145	(1,117,306)	-	846	407,355

	Common stock issued for cash		5,169,312	51,693			14,346,448				14,398,141
	Common stock issued to directors		375,000	3,750			146,250				150,000
	Common stock issued for services		5,000	50			1,950				2,000
	Issuable common stock issued		90,000	900	(90,000)	(22,500)	21,600				-
	Exercise of stock options		908,088	9,080			70,420				79,500
	Exercise of stock warrants		578,367	5,784			688,234				694,018
	Issuance of stock options						2,962,510				2,962,510
	Issuance of stock for Heidelberg shares		26,787	268			(268)				-
	Revaluation of stock options		-				19,930				19,930
	Comprehensive loss:
		Adjustment to net unrealized gain
		on marketable securities								13,135	13,135
		Net loss							(9,224,533)		(9,224,533)
Comprehensive loss											(9,211,398)

BALANCES, DECEMBER 31, 2005			12,469,510	124,695	-	-	19,705,219	(1,117,306)	(9,224,533)	13,981	9,502,056

	Exercise of stock options		273,374	2,733	-	-	876,516	-	-	-	879,249
	Exercise of stock warrants		105,750	1,058			633,443				634,501
	Issuance of stock options to employees		-		-	-	392,530	-	-	-	392,530
	Issuance of stock options for services		-		-	-	11,545	-	-	-	11,545
	Issuance of stock for Heidelberg shares		833	8	-	-	(8)	-	-	-	-
	Comprehensive loss:
		Adjustment to net unrealized gain
		on marketable securities	-	-	-	-	-	-		24,512	24,512
		Net loss	-	-	-	-	-		(2,571,719)		(2,571,719)
Comprehensive loss											(2,547,207)

BALANCES, JUNE 30, 2006			12,849,467	128,494	-	-	21,619,245	(1,117,306)	(11,796,252)	38,493	8,872,674

See accompanying notes to consolidated financial statements.


Mines Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
										From Inception
										August 12, 2002
						Three Months Ended		Six Months Ended		Through
						June 30,		June 30,		June 30,
						2006	2005	2006	2005	2006
*Increase (Decrease) in Cash and Cash Equivalents*

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss					$ (1,516,365)	$ (1,118,794)	$ (2,571,719)	$ (2,266,564)	$ (11,796,252)
	Adjustments to reconcile net loss to net cash
		used in operating activities:
			Issuance of stock options to employees			392,530	317,335	392,530	849,209	3,526,970
			Issuance of stock options for services			11,545	-	11,545	-	11,545
			Stock received for services			-	-	-	-	(11,165)
			Depreciation			11,421	5,046	22,590	8,883	60,046
			Changes in assets and liabilities:							-
				Interest receivable		(29,349)	(29,518)	(31,083)	(69,642)	(132,463)
				Accounts receivable		-	500	-	-	-
				Prepaid expenses		(46,000)	(45,379)	(30,831)	(33,740)	(60,500)
				Accounts payable		39,662	118,867	(79,821)	110,671	53,232
				Severance payable		-	(20,000)	(20,000)	(35,000)	-
				State income taxes payable		-	-	-	-	(164)
				Payroll taxes payable		15,315	(4,317)	2,429	443	17,297
					Net cash used in operating activities	(1,121,241)	(776,260)	(2,304,360)	(1,435,740)	(8,331,454)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of fixed assets					(3,500)	(22,543)	(9,102)	(30,584)	(249,704)
	Purchase of certificates of deposit					(14,336)	(13,871)	(55,302)	(13,871)	(4,213,994)
	Increase in mineral properties					-	-	-	-	(144,312)
					Net cash used in investing activities	(17,836)	(36,414)	(64,404)	(44,455)	(4,608,010)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from sales of common stock					367,250	511,518	1,513,750	553,518	16,685,409

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						(771,827)	(301,156)	(855,014)	(926,677)	3,745,945
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						4,565,107	1,799,474	4,648,294	2,424,995	47,335
CASH AND CASH EQUIVALENTS, END OF PERIOD						$ 3,793,280	$ 1,498,318	$ 3,793,280	$ 1,498,318	$ 3,793,280

See accompanying notes to consolidated financial statements.

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization:

Mines Management, Inc. (the “Company”) is a publicly held Idaho corporation incorporated in 1947. The Company acquires, explores, and develops mineral properties principally in North America. The Company performed exploration activities in South America in 2002.

Summary of Significant Accounting Policies:

The accompanying consolidated financial statements include the accounts of Mines Management, Inc., and its wholly-owned subsidiaries, Newhi, Inc., Montanore Mineral Corporation, and Montmin Corporation Intercompany balances and transactions have been eliminated. Newhi, Inc., was formed by the Company for the purpose of merger with Heidelberg Silver Mining Company, Inc. In the merger, completed on April 15, 1988, Heidelberg Silver Mining Company, Inc., was merged into Newhi, Inc. To effect the merger, the Company issued 367,844 shares of its previously unissued common stock. Also in connection with this merger, the Company issued 11,117 shares of common stock and paid $4,446 as a finder’s fee. Montanore Mineral Corporation and Montmin Corporation were acquired in conjunction with a stock transfer agreement with Noranda Finance Corporation as described more fully in note 9.

All exploration expenditures are expensed as incurred. Significant property acquisition payments for active exploration properties are capitalized. If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a units of production basis over proven and probable reserves.

Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future net cash flows on an undiscounted basis is less than the carrying amount of the related asset grouping, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future net cash flows on a discounted basis to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates may have a material effect on the Company’s financial position and results of operations. To date no such impairments have been identified.

Property and equipment are stated at cost. Buildings and leasehold improvements are depreciated on the straight-line basis over an estimated useful life of 39 years. Machinery and furniture are generally being depreciated using accelerated methods over estimated useful lives ranging from 5 to 10 years.

Basic and diluted loss per share are computed using the weighted average number of shares outstanding during the periods (12,825,557 and 10,929,002 in the quarter ended June 30, 2006, and 2005, respectively). Stock options and warrants outstanding are antidilutive and are not considered in the computation.

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Summary of Significant Accounting Policies (continued):

Cash and cash equivalents include cash on hand, cash in banks, investments in certificates of deposit with original maturities of 90 days or less, and money market funds.

The Company’s financial instruments as defined by Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, include cash and loans payable. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at June 30, 2006.

Deferred income tax is provided for differences between the bases of assets and liabilities for financial and income tax reporting. A deferred tax asset, subject to a valuation allowance, is recognized for estimated future tax benefits of tax-basis operating losses being carried forward.

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 may differ from those estimates.

The Company has adopted SFAS No. 143, Accounting for Asset Retirement Obligations which establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. According to SFAS No. 143, the fair value of a liability for an asset retirement obligation (ARO) will be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The ARO is capitalized as part of the carrying value of the assets to which it is associated, and depreciated over the useful life of the asset.

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN No. 47), Accounting for Conditional Asset Retirement Obligations, which clarifies that the term conditional asset retirement obligation, as used in SFAS No. 143 refers to a legal obligation to perform an asset retirement activity where the timing or method of settlement are conditional on a future event. Where the obligation to perform the asset retirement activity is unconditional, even though uncertainty exists about the timing or method of settlement, the entity is required to recognize a liability for the fair value of the conditional retirement obligation if reasonably estimable. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate fair value. At June 30, 2006, no asset retirement liabilities have been recorded by the Company.

Certain amounts in the prior-period consolidated financial statements have been reclassified for comparative purposes to conform to current period presentation with no effect on previously reported net loss.

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

Summary of Significant Accounting Policies (continued):

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which revised SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB Opinion 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires measurement and recording to the financial statements of the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide services in exchange for such award. Effective January 1, 2004, the Company adopted SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. As provided for under SFAS No. 148, the Company used the “modified prospective method” of transition. Under that method of transition the costs recognized in the financial statements for the quarters ended June 30, 2006 and 2005, are the same as if they had been based on their fair values at the grant date. The Company recognized stock-based compensation of approximately $404,075 (of which $11,545 was for services performed by outside parties) and $253,400 (of which $253,400 was for services performed by outside parties) for the quarters ended June 30, 2006 and 2005, respectively.

For purposes of calculating the fair value of options, volatility for the two years presented is based on the historical volatility of the Company’s Common Stock over its public trading life. The Company currently does not foresee the payment of dividends in the near term. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Quarter Ended

June 30,

(2006)

(2005)

Weighted average risk-free interest rate

5.16%

3.61%

Weighted average volatility

61.96%

72.87%

Expected dividend yield

Weighted average expected life (in years)

2.00

At June 30, 2006, the Company has four stock option plans, which are described more fully in note 5.

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 2 — STOCKHOLDERS’ EQUITY:

Common Stock:

In 2003, the Company sold 1,152,007 common shares for $1,267,207 ($1.10 per share). In connection with the stock sales, the Company granted warrants to purchase up to 1,152,007 common shares at $1.20 per share through two years from the date of issue. Cumulative warrants exercised relating to this issue at both June 30, 2006, and December 31, 2005, were 1,152,007.

In 2004, the Company sold 1,285,000 common shares for $6,425,000 ($5.00 per share). In connection with the stock sales, the Company granted warrants to purchase up to 511,000 common stock shares at $7.25 per share through five years from the initial exercise date. The Company paid a cash finder’s fee of 7% of the gross offering funds received in the offering. The finder also received 3% warrant compensation or warrants to purchase 192,750 common shares at $7.25 per share through February 18, 2009. These warrants were repriced at $6.00 per share in October 2005, per terms of the 2004 warrant agreement. Cumulative warrants exercised relating to this issue at June 30, 2006, and December 31, 2005, were 145,750 and 40,000, respectively.

In 2005, the Company sold 1,016,667 common shares for $6,100,002 ($6.00 per share). In connection with the stock sales, the Company granted warrants to purchase up to 737,084 common stock shares at $8.25 per share through five years from the initial exercise date. To date, no warrants have been exercised. The Company paid a cash finder’s fee of 7% of the gross offering funds received in the offering. The finder also received a 3.75% warrant compensation or warrants to purchase 228,750 common shares at $8.25 per share through October 20, 2010.

In 2005, the Company sold an additional 40,000 common shares for $240,000 ($6.00 per share).

Preferred Stock:

The Company has authorized 10,000,000 shares of no-par-value preferred stock. Through June 30, 2006, the Company had not issued any of the authorized preferred stock.

NOTE 3 — MINING PROPERTIES:

Mining properties are comprised of acquisition, exploration, and development costs related to the Advance and Iroquois properties in the Northport region of northeastern Washington State and the Montanore property in northwestern Montana, as shown below:

June 30,

December 31,

2006

2005

Montanore

278,519

Advance

2,139

Iroquois

223,834

504,492

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 3 — MINING PROPERTIES (continued):

The Montanore property (formerly the Noxon property) located in northwestern Montana includes 18 mining claims covering 355 acres plus one 5-acre patented mill site. In August 2002, the Company acquired a controlling interest in the Montanore silver copper deposit in Sanders County, Montana. The Company received a quitclaim deed from Noranda Mineral Corp. (Noranda) when Noranda elected to withdraw from the project. The mineral rights acquired by the Company are subject to a $0.20 per ton royalty, and a 5% net profits royalty which would commence after the operator has recovered all of its exploration and development costs. In December 2002, the Company received a quitclaim deed to all intellectual property connected with studies that Noranda carried out on the project.

The Advance property consists of 720 acres of patented mineral rights. Although the Company does not own the overlying surface rights to its patented mineral rights, it does have right of access to explore and mine.

The Iroquois property consists of 64 acres of patented mineral and surface rights and 15 unpatented mining claims containing 300 acres.

NOTE 4 — INVESTMENTS:

The Company owns four $110,416 certificates of deposit and six $107,562 certificates of deposit for a total of $1,087,036. These investments mature in 2008 and earn rates from 3.3% to 3.64%. The Company owns ten $208,599 certificates of deposit and ten $104,097 certificates of deposit for a total of $3,126,960. These investments mature in 2009 and earn rates of 4.21% and 4%, respectively.

The Company owns 45,000 free-trading shares of Bitterroot Resources, Ltd. (BTT), a public Canadian corporation traded on the Toronto Venture Exchange. The shares are held as “available for sale.” This investment is being recorded at fair market value with a corresponding adjustment to stockholders’ equity. The 45,000 shares at June 30, 2006, and December 31, 2005, have an approximate market value of $19,776 and $15,057 U.S. funds, respectively. The Company also owns 196,000 shares of Centram Exploration Ltd., a public Canadian corporation traded on the Toronto Venture Exchange. The shares are held as “available for sale.” The shares were received in 2002 in exchange for administrative services provided by the Company. The 196,000 shares at June 30, 2006, and December 31, 2005, had an approximate market value of $29,882 and $10,089 U.S. funds, respectively.

NOTE 5 — STOCK OPTIONS:

During the year ended December 31, 1998, the stockholders of the Company approved two stock-based compensation plans: a fixed employee stock-based compensation plan and a performance-based plan. Under the fixed plan, the Company may grant options to purchase up to 460,000 shares of common stock with an exercise price not less than the fair market value on the date of grant of the shares. Stock options shall be exercisable within ten years from the date of the grant of the option. Options under the fixed plan vest immediately.

At June 30, 2006, no 1998 nonqualified plan options were outstanding.

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 5 — STOCK OPTIONS (continued):

Under the performance based plan, the Company may grant options to purchase up to 460,000 shares of common stock with an exercise price not less than the fair market value on the date of grant of the shares. Stock options shall be exercisable within ten years from the date of the grant of the option. Options under the incentive plan vest immediately.

At June 30, 2006, no incentive-based plan options were outstanding.

During the year ended December 31, 2003, the stockholders of the Company approved two new stock-based compensation plans – the 2003 Stock Option Plan (which includes both qualified and nonqualified options) and the 2003 Consultant Stock Compensation Plan. Under the 2003 Stock Option Plan, the Company may grant options to purchase up to 1,200,000 shares of common stock. Under the 2003 Consultant Stock Compensation Plan the Company may grant options to purchase up to 400,000 shares of common stock. During 2004, the Company increased the maximum number of common shares available under the 2003 Stock Option Plan and the 2003 Consultant Stock Compensation Plan to 3,000,000 and 700,000 shares, respectively.

Under both 2003 plans the exercise price shall be no less than 100% of the fair market value per share on the date of grant. Stock options shall be exercisable within ten years from the date of the grant of the option. Vesting of the options granted under both plans is at the prerogative of the Board of Directors. Options granted under the plans in 2003 vest immediately except for options issued to Glenn Dobbs, President and Chairman of the Board of Directors. Options issued to Dobbs were 50% vested at year end December 31, 2003, and become fully vested upon completion of certain financing arrangements. The options to Dobbs were fully vested at year end December 31, 2004.

At June 30, 2006, the following 2003 plan options were outstanding:

Remaining

Weighted

Contractual

Exercise

Number of

Average

Life

Number

Prices

Options

Exercise Price

(in years)

Exercisable

1.60

500,000

1.60

1.68

500,000

1.85

100,000

1.85

2.16

100,000

3.95

20,000

3.95

2.98

20,000

4.65

475,000

4.65

2.84

475,000

3.75

220,000

3.75

3.51

120,000

3.93

155,000

3.93

3.59

155,000

4.01

214,000

4.01

3.91

214,000

4.92

15,000

4.92

4.22

5.70

5,000

5.70

3.97

5,000

6.20

175,000

6.20

4.95

175,000

6.34

100,000

6.34

4.46

50,000

Subtotal

1,979,000

$3.73

1,814,000

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 5 — STOCK OPTIONS (continued):

During January 2005, the Company issued 214,000 stock options to an individual to perform marketing services. The options have an exercise price of $4.01 and vest 25% at the time of issuance, 25% in 60 days and the remaining balance on May 28, 2005. The options expire five years from issuance.

During February 2005, the Company issued 205,000 stock options to directors and employees. The options have an exercise price of $3.93 and vest immediately. The options expire five years from issuance.

During June 2005, the Company issued 25,000 stock options to an individual to perform consulting services. The options have an exercise price of $5.70 and vest immediately. The options expire five years from issuance.

During June 2005, the Company issued 25,000 stock options to an individual to perform consulting services. The options have an exercise price of $5.99 per share, representing the share price at the close of trading on June 6, 2005, and vest 40% at the time of issuance (June 6, 2005), and 20% each on June 6 of 2006, 2007, and 2008. The Company has a policy of re-pricing all incentive stock options as market conditions allow. As a result, the above stock option grants on June 6, 2005, were cancelled and replaced by the same number of stock options at an exercise price of $4.92 per share representing the stock price as of the close of trading on September 7, 2005.

During December 2005, the Company issued 100,000 stock options to an officer. The options have an exercise price of $6.34 per share, representing the share price at the close of trading on December 13, 2005, and vest 50% at the time of issuance (December 13, 2005) and 50% on December 13, 2006.

During June 2006, the Company issued 170,000 stock options to officers, directors, and employees and 5,000 stock options to an individual to perform consulting services. The options have an exercise price of $6.20 and vest immediately. The options expire five years from issuance.

Quarter Ended

June 30,

(2006)

(2005)

Weighted average risk-free interest rate

5.16%

3.61%

Weighted average volatility

61.96%

72.87%

Expected dividend yield

Expected lives (in years)

2.00

Weighted average fair value (in dollars)

$2.31

$2.23

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 5 — STOCK OPTIONS (continued):

The following summarizes option activity for the quarter ended June 30, 2006:

Weighted-Average

Exercise Price

Under Option

Per Share

Outstanding at March 31, 2006

1,889,000

$3.53

Granted

175,000

6.20

Exercised

85,000

4.32

Forfeited

Expired

Balance at June 30, 2006

1,979,000

$3.73

Options outstanding at June 30, 2006, have a remaining contractual life of approximately four years.

NOTE 6 — CONCENTRATION OF CREDIT RISK:

The Company maintains its cash and cash equivalents in one financial institution. Balances are insured by the Federal Deposit Insurance Corporation up to $100,000.

NOTE 7 — DEFERRED INCOME TAX:

At June 30, 2006, and December 31, 2005, the Company had deferred tax assets which were fully reserved by valuation allowances. Following are the components of such assets and allowances:

June 30,

December 31,

2006

2005

Deferred tax assets arising from:

Net operating loss carryforwards

1,340,000

959,000

Stock option compensation

530,000

460,000

Accrued severance compensation

2,000

1,870,000

1,421,000

Less valuation allowance

1,870,000

1,421,000

Net deferred tax assets

Mines Management, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 7 — DEFERRED INCOME TAX (continued):

For the periods presented, the effective income tax rate differed from the expected rate because of the effects of annual changes in the deferred tax asset valuation allowance. Changes in the deferred tax asset valuation allowance for the second quarter ended June 30, 2006, and the year ended December 31, 2005, relate only to corresponding changes in deferred tax assets for those periods.

At June 30, 2006, the Company had federal tax-basis net operating loss carryforwards totaling approximately $9,000,000, which will expire in various amounts from 2006 through 2025.

NOTE 8 — COMMITMENTS:

On August 11, 2005, Mines Management was named as a co-defendant in a lawsuit filed by Montana Reserves Company (“MRC”) in the Superior Court of the State of Washington in Spokane County, Washington. Named as co-defendants are Noranda Minerals, Normin Corp., Mines Management, and Newhi, Inc. The action seeks damages in connection with the conveyance of the Montanore property from Noranda to Newhi, and challenges the computation of a net proceeds royalty payable to MRC pursuant to a Royalty Agreement between Noranda and MRC in respect to the Montanore property. Management does not believe that the outcome of this lawsuit will have a material adverse effect.

NOTE 9 — BUSINESS COMBINATION:

On May 31, 2006 Noranda Finance Corporation and Newhi, Inc. executed a stock transfer agreement by which all issued and outstanding shares of capital stock for both Noranda Minerals Corporation and Normin Corporation have been transferred to Newhi, Inc. Noranda Minerals Corporation and Normin Corporation are Delaware corporations registered to do business in Montana. At the same time, Newhi submitted a $30,000 cash bond to the Montana Department of Environmental Quality (DEQ) to replace Noranda’s previous bond. Subsequently, the official names of the companies where changed to Montanore Mineral Corporation and Montmin Corporation, respectively. The names were registered with the Montana Secretary of State in July, 2006. The existing Montana State Hard Rock Permit #00150 and MPDES permit MT-00320279 stayed in place with Montanore Mineral Corporation, formerly known as Noranda Minerals Corporation, which is now owned by Newhi, Inc., a wholly-owned subsidiary of Mines Management, Inc.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Mines Management, Inc. (“MMI” or the “Company”) is on the ground at the Montanore Libby Creek adit site implementing Phase 1 of the adit rehabilitation and reserve delineation program. The acquisition of two Noranda companies, Noranda Minerals Corporation and Normin Corporation, allowed MMI to apply for a minor revision to the still current Hard Rock Mining Permit held by Noranda Mineral Corporation. The minor revision was approved on July 14, 2006 by the Montana DEQ, which allowed the adit to be re-opened for water sampling and treatment design prior to initiating rehabilitation of the adit. MMI has applied to the Montana DEQ for approval of the final two phases of the planned adit extension and evaluation, program. We anticipate receiving the Phase II approval mid-to-late third quarter. The Montanore project continues to be our primary focus: permitting, engineering optimization, reserve enhancement and project funding being emphasized through the end of the year.

Overview

In the second quarter of 2006, the Company

Acquired two U.S. corporations, Noranda Minerals Corporation and Normin Corporation, from Noranda Finance Corporation on May 31, 2006

Maintained strong cash and investment position with $8.2 million on hand at June 30, 2006

Completed the initial mining and milling cost studies, identifying critical areas of focus for project improvement and development

Acquired the Hard Rock Mining Permit #00150 and the MPDES permit MT-0030279

Continued the compilation of the preliminary draft Environmental Impact Statement (“EIS”) for the Montanore Project

Completed S-3 Shelf Registration providing a facility for raising up to $65 million

The Company completed the acquisitions of Noranda Minerals Corporation and Normin Corporation from Noranda Finance Corporation on May 31, 2006. The names were changed to Montanore Minerals Corporation and Montmin Corporations, respectively and the new names registered with the Montana Secretary of State. With these acquisitions came two key permits which allow the company to reopen the Libby Creek adit and, when permit revisions are approved, continue evaluation of the Montenore deposit.

The Company's S-3 shelf registration statement filed with the U.S. Securities and Exchange Commission (SEC) became effective June 27, 2006. This registration permits the Company to offer from time to time, up to $65 million of its common shares, share purchase warrants, convertible debt securities, or any combination of these securities, in one or more offerings over the next three years.

The net cash expenditures for operating activities for the quarter ending June 30, 2006 was $1.1 million. We believe that we have sufficient working capital for the next 18 months of operations.

Permitting and Environmental

During the second quarter of 2006, MMI continued to work with state and federal agencies on the EIS, transmission line, MPDES permit, air quality permit, and other permits necessary for the Montanore Project. Technical documents were prepared and submitted to the agencies in support of their technical review.

MMI submitted technical responses to agency comments received last quarter. Responses addressed tailings dam designs, water quality issues, wildlife, and other similar project issues. In addition, the Lincoln County Commissioners passed a resolution to petition the U.S. Forest Service to relinquish ownership of the Bear Creek Road to the County. The Bear Creek Road would be the primary access to the Montanore mining project. The road was originally constructed with County funds in the late 1880s and as such, the County would like to retain ownership of this road. County ownership provides added flexibility to the Company in road construction and maintenance.

Since the acquisition of Noranda Minerals Corporation and obtaining Hard Rock Mining Permit #00150, MMI initiated detailed planning to re-open the Libby Adit and initiate the evaluation drilling program. MMI submitted a minor revision to the State of Montana to permit the dewatering and rehabilitation of the Libby Adit, construction of a water treatment plant, 3,000 feet of new tunnel construction plus another 4,000 feet of drifting and construction of drill stations. It is anticipated the State will approve this request in the 3^rd quarter of 2006. MMI also submitted a request to the U.S. Forest Service for a road use permit, necessary to use the Libby Creek Road to access the adit all year long. This permit is expected at the same time.

Bonneville Power Authority completed a draft system analysis of grid integrity while providing power for the project. This is a key step in the NEPA process and power contract. The State of Montana has developed several transmission line alternatives routes which are being analyzed in the NEPA process. These alternatives are similar to those developed in 1992 for the EIS.

The EIS contractor completed the hydrologic model that will be used in the NEPA analysis. Other technical issues such as tailings dam design, baseline information, and other elements are currently under review by the agencies. Portions of the EIS are currently in draft form and are being reviewed by resource specialists within the agencies.

MMI continues to meet with the agencies on technical issues and to perform other tasks necessary to advance the permitting activities.

Geology

MMI developed a resource evaluation drilling program based on the last quarter geological review effort. MMI continues to evaluate drill hole assays, geologic faults and fractures with respect to the Montanore deposit. The drilling program was developed based on this information and has the following objectives:

Target first 5 years of reserves

Drill spacing to approximately 400 ft. by 400 ft.

Test increased mineralized zones (B1 and B)

Test continuity of higher grade drill hole intercepts

Support bankable feasibility study

Modify mine plan – increase bulk mining methods used

Engineering

MMI completed a detailed evaluation drilling plan to support permitting and cost estimates. The drilling program will require the following:

Excavate the portal and remove the plug;

Dewater the Libby Adit;

Construction of surface facilities (office, mine dry, shop, water treatment plant, etc.)

Rehabilitate 13,000 feet of the Adit;

Extend the Adit 3,000 feet

Two phases of drilling – approximately 30,000 feet

Underground development – approximately 21,000 feet of drifting

Detailed planning of staffing levels, equipment, power, ventilation, and other equipment could be required to support the evaluation drilling program.

In addition to the drilling program, MMI has started to evaluate supplemental information that would be required to support a bankable feasibility study. Much of this data can supplement current data and will include metallurgical test program, additional geotechnical analysis for mine design criteria, hydrology monitoring, and other critical technical information.

Work continues on geological modeling and computer block modeling of the deposit. The information gained by modeling is important to developing the drilling program. MMI continues to refine geological and technical data in the computer model.

MMI staff is reviewing the Cost Update Study completed by Hatch, Inc. and McIntosh Engineering regarding optimizing capital and operating costs. The majority of the effort is focused on the drilling program and the conceptual mine plan for the extended mineralized zones identified last quarter in both the B1 and B zones. Current metal prices warrant review of these mineralized zones and evaluation of the overall impact to capital costs, sustaining capital, and operation costs.

Financial and Operating Results

Mines Management, Inc. is an exploration stage company with a major silver/copper project, known as the Montanore Project, located in northwest Montana. The Company continues to expense all of its expenditures and has no revenues from mining operations. Financial results of operations include primarily interest income, general and administrative expenses, permitting and engineering expenses, and other miscellaneous.

Quarter Ended June 30, 2006

Mines Management, Inc. reported a net loss for the quarter ended June 30, 2006 of $1.5 million or $0.12 per share compared to $1.1 million loss or $0.10 per share for the second quarter, June 30, 2005. The $0.4 million increased expenditures for the second quarter 2006 compared to second quarter 2005 was mainly attributable to increased activity for the Montanore Project permitting and technical studies and administrative and legal expenses related to the acquisition of Noranda Minerals Corporation. and Normin in late May.

Six Months Ended June 30, 2006

The net loss for the first half of 2006 was $2.6 million or $0.20 per share verses a net loss of $2.3 million or $0.21 for the first half of 2005. The year to date increase through June 30, 2006, versus June 30, 2005, was $0.3 million, again attributable to the Montanore Project, partially offset by warrant and option income during the first quarter of 2006.

As a result of the Noranda Mineral Corporation acquisition the Company received Hard Rock Mining Permit #00150 which was still active with the Montana DEQ. As a result MMI submitted a minor revision to the permit in order to initiate reopening and rehabilitation of the Libby Creek adit and undertake a resource delineation drilling program. The first phase of this two phase evaluation project was approved by the Montana DEQ in July and the Company has started site work and initial testing to remove the plug and reopen. The Company anticipates that the spending for the last half of the year will double from the budgeted $2 to $2.5 million to $4 to $5 million depending on availability of equipment and miners. Montanore Project staffing could increase to 25-30 employees or contract hires by year end pending regulatory approvals. The Company is are currently reviewing financing opportunities and requirements with anticipation of raising additional equity before the end of the year.

Liquidity

For the quarter ending June 30, 2006 the net cash used for operating activities was $1.1 million, which largely consisted of permitting and engineering expenses for the Montanore project. This amount was partially offset by the exercise of warrants and options that generated $0.4 million in proceeds during the quarter. The net decrease in cash on hand at the end of the first quarter 2006 was $0.7 million for the second quarter. Year to date cash used in operating activities was $2.3 million offset by proceeds from sale of stock from either the exercise of warrants or stock options of $1.5 million resulting in a net decrease in cash of $0.8 million.

The Company anticipates spending approximately $2.0 million from cash and investments on hand for each of the two remaining quarters in 2006 to finalize permitting, engineering, the preliminary draft EIS, and the reopening of the Libby Creek adit for the Montanore Project.

Forward Looking Statements

Some information contained in or incorporated by reference into this report may contain forward looking statements. These statements include comments regarding Montanore Project development, re-permitting, financing needs, and the markets for silver and copper. The use of any of the words “development”, “anticipate”, “continues”, “estimate”, “expect”, “may”, “project”, “should”, “believe”, and similar expressions are intended to identify uncertainties. We believe the expectations reflected in those forward looking statements are reasonable. However, we cannot assure that the expectations will prove to be correct. Actual results could differ materially from those anticipated in these forward looking statements as a result of the factors set forth below and other factors set forth and incorporated by reference into this report:

Worldwide economic and political events affecting the supply of and demand for silver and copper

Volatility in the market price for silver and copper

Financial market conditions and the availability of financing on acceptable terms

Uncertainties associated with developing new mines

Variations in ore grade and other characteristics affecting mining, crushing, milling and smelting and mineral recoveries

Geological, technical, permitting, mining and processing problems

The availability, terms, conditions and timing of required governmental permits and approvals

Uncertainty regarding future changes in applicable law or implementation of existing law

The availability of experienced employees

The factors discussed under “Risk Factors” in our Form 10-K for the period ending December 31, 2005

Item 3. Quantitative and Qualitative Disclosures About Market Risk and Hedging Activities

All of our cash balances are held in U.S. dollars and our long term investment CDs are denominated in U.S. dollars in local and national banking institutions. We manage the timing of cash required for review of the Montanore deposit, re-permitting, and engineering of the Montanore Project and for general corporate purposes utilizing our money market account and invest funds not immediately required in investments, currently in certificates of deposit with varying maturities and fixed early retirement costs of three months interest. Our policy is to invest only in government and corporate grade securities rated “investment grade” or better.

The market prices of base and precious metals such as silver and copper fluctuate widely and are affected by numerous factors beyond the control of any mining company. These factors included expectations with regard to the rate of inflation, the exchange rates of the dollar and other currencies, interest rates, global or regional political, economic or banking crises, and a number of other factors. If the market price of silver or copper should decrease dramatically, the value of the Company’s Montanore Project could decline and the Company might not be able to recover its investment in that project. The determination to develop or construct a mine would be made long before the first revenues from production would be received. Price fluctuations between the time that such decisions are made and the commencement of production could affect the economics of the mine.

Item 4. Controls and Procedures

Glenn M. Dobbs, MMI’s President and CEO, and James H. Moore, MMI’s Chief Financial Officer and Treasurer, have evaluated MMI’s disclosure controls and procedures as of June 30, 2006. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that MMI’s disclosure controls and procedures are designed, and were effective as of June 30, 2006 to give reasonable assurances that the information required to be disclosed in the reports that MMI files or submits under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that such information is also accumulated and communicated to MMI’s management, including its Chief Executive Officer and Chief Financial Officer.

There were no changes in MMI’s internal controls or, to the knowledge of the management of MMI, any other changes that materially affect, or are reasonably likely to materially affect, MMI’s internal control over financial reporting. MMI plans to engage an outside firm during 2006 to augment its own internal accounting resources and to provide expertise in applying GAAP to new or complex accounting issues as an integral part of its ongoing system of internal controls over financial reporting.

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

On August 11, 2005, Mines Management was named as a co-defendant in a lawsuit filed by Montana Reserves Company (“MRC”) in the Superior in Spokane County Washington., Named as co-defendants are Noranda Minerals, Normin Corp., Mines Management and Newhi, Inc. The action seeks damages in connection with the conveyance of the Montanore property from Noranda to Newhi, and challenges the computation of a net proceeds royalty payable to MRC pursuant to a Royalty Agreement between Noranda and MRC in respect to the Montanore property. Management does not believe that the outcome of this lawsuit will have a material adverse effect on Mines Management’s business or results of operations.

Item 1a. Risk Factors

There are no material changes from the risk factors as previously discussed in the Company’s Annual Report on Form 10K for the year ending December 31, 2005.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

For the first half of ended June 30, 2006 there were 105,750 common stock purchase warrants exercised at a price of $6.00 per share of common stock for a total of $634,500 that will be used as working capital for ongoing activities. The warrants were issued in a private placement of common stock and common stock purchase warrants that were exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

The following matter was voted upon at the annual meeting of share holders, held June 28, 2006:

Elect one (1) director for a three (3) year term to serve until the 2009 annual meeting of

Shareholders and until his successor is elected and qualified.

The matter voted upon was approved. The voting results were as follows:

Election of Director For Withheld

Russell C. Babcock

7,468,429 46,158

Item 5.

Other Information

None

Item 6.

Exhibits

(a)

Exhibits:

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act)

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act)

SIGNATURES

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


Date :August 11, 2006	/s/ Glenn M. Dobbs By: Glenn M. Dobbs President and Chief Executive Officer

Date: August 11, 2006	/s/ James H. Moore By: James H. Moore Chief Financial Officer