Solitario Zinc Corp. Annual Report 2005

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FY2005 Annual Report · Solitario Zinc Corp.

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SLR2005ARrevise11 4/12/06 2:50 PM Page 1

SOLITARIO RESOURCES CORPORATION
SOLITARIO RESOURCES CORPORATION
2005 Annual Report
2005 Annual Report

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SLR2005ARrevise11 4/12/06 2:50 PM Page 2

PROJECTS

Gold Projects
(cid:1) Tapajos, Brazil
(cid:1) Libertad, Peru

Silver Projects
(cid:2) Pachuca Real, Mexico
(cid:2) Titicayo, Bolivia

Base Metal Projects
(cid:3) Bongará, Peru
(cid:3) Triunfo, Bolivia

Royalties
(cid:4) Yanacocha, Peru

PGM Projects
(cid:5) Pedra Branca, Brazil

Strategic Alliance
(cid:6) Newmont Mining

(cid:2)(cid:2)(cid:2)

(cid:1)
(cid:1)(cid:1)

(cid:5)(cid:5)
(cid:5)

(cid:3)(cid:3)(cid:3)
(cid:4)(cid:4)
(cid:4)

(cid:6)(cid:6)
(cid:6)

(cid:1)
(cid:1)(cid:1)

(cid:3)(cid:3)
(cid:3)
(cid:2)
(cid:2)(cid:2)

SLR2005ARrevise11 4/12/06 2:50 PM Page 3

MESSAGE

Letter to Shareholders,
Even though gold has recently caught the attention of many

investors, 2005 was a watershed year for the metals commodity

complex in general. Gold, silver, platinum, palladium, zinc, lead

and copper all reached multi-year highs during 2005 and extend-

ed these gains into 2006. The chart below presents the 2005 price

performance for these commodities.

Commodity

Price
Dec. 31, 2004
$ 436.00
Gold (oz.)
Silver (oz.)
6.82
$
Platinum (oz.) $ 860.00
Palladium (oz.) $ 184.00
$
0.55
Zinc (lb.)
0.43
Lead (lb.)
$
1.48
Copper (lb.) $

Price
Dec. 31, 2005
513.00
$
8.83
$
965.00
$
258.00
$
0.85
$
0.51
$
2.08
$

Gain

77.00
$
$
2.01
$ 105.00
74.00
$
0.30
$
0.08
$
0.60
$

Gain in
Percent
+ 18%
+ 30%
+ 12%
+ 40%
+ 55%
+ 20%
+ 41%

Unless otherwise noted, all figures in this report are in US$’s.

This bullish commodity market intensified competition from other

exploration companies to acquire quality projects. Nevertheless,

we were able to nearly double the size of our property portfolio to

170,000 hectares (420,000 acres) during 2005 and early 2006. This

does not include the 61,000 hectares (approximately 150,000 acres)

of royalty property we control in the Yanacocha mining district of

Peru. The bottom line reveals that Solitario has built a solid diver-

sified asset base during the past several years.

In 2005, we focused on gold by signing the Newmont Mining

Strategic Alliance agreement to explore for gold in Peru and by our

acquisition of Tapajos region gold projects in Brazil. More recent-

ly,we strengthened our silver exposure by staking the Pachuca Real

silver-gold project in Mexico and signing an option agreement on

the Titicayo silver project in Bolivia. We continue with our prior-

ity commitment to gold with the recent acquisitions of the Pau

d'Arco and Lua projects in the Tapajos region of Brazil.

We are planning the most active drilling campaign in Solitario's

history for 2006. Current plans call for 10,000 meters of drilling

on nine different projects. The chart below shows the projects that

we believe have a high probability of being drill tested in 2006.

Commodity
Gold

Silver

PGM
Zinc-Lead
Gold-Silver/
Lead-Zinc

Project Name
Mercurio
Pau d’Arco
Cisne
Libertad
Pachuca Real
Titicayo
Pedra Branca
Bongará

Project Description
2nd round of drilling
Initial drilling
Initial drilling
Initial drilling
Initial drilling
Initial drilling
Deposit definition
Deposit definition

Country
Brazil
Brazil
Brazil
Peru
Mexico
Bolivia
Brazil
Peru

Triunfo

Initial drilling

Bolivia

On the financial side of the equation, Solitario completed a
Cdn$4.59 million private placement with Newmont Mining
Corporation of Canada Limited, an affiliate company of
Newmont Mining, in February of 2005 in conjunction with
the signing of the Newmont Strategic Alliance agreement. We
also received a dividend of $1,275,000 in mid-2005 from a
$0.21 per share dividend paid by Crown Resources
Corporation on our 6.07 million shares of Crown.

More importantly, as a result of Solitario's ownership of Crown
shares, we will be entitled to receive 1.94 million shares of
Kinross Gold Corporation, the seventh largest gold producer in
the world, upon the completion of the Kinross-Crown merger,
which is expected around mid-year 2006. The Kinross shares
represent the future financial foundation for funding Solitario's
exploration efforts for years to come.

With this backdrop of high metal prices, aggressive drilling
plans and a solid financial footing, 2006 has the potential to be
the most exciting year in Solitario's history. We look forward to
sharing with you the results of our various programs during the
upcoming year.

Sincerely,

Christopher E. Herald
President & Chief Executive Officer

SLR2005ARrevise11 4/12/06 2:50 PM Page 4

BRAZIL

Tapajos Gold Projects

Solitario has conducted an aggressive evaluation/acquisition program of gold prospects

in the Tapajos region of northern Brazil for the past two years. We made field evalua-

tions of more than a hundred prospects during this period. This effort paid off in 2005

with the initial drill testing of the 8,000-hectare Mercurio project where we intersect-

ed strong gold mineralization in multiple core holes.

Mercurio highlights include core holes SB-04 that intersected 12.1 meters grading

12.2 grams per tonne (“g/t”) gold, SB-08 that intersected 3.0 meters of 6.48 g/t gold

and SB-12 that intersected 4.1 meters grading 5.29 g/t gold.

In total, nine of the

12 holes drilled on the Mercurio project intersected strong gold mineralization. A sec-

ond round of core drilling in 2006 is currently in the planning stage for Mercurio.

Significant 2005 Mercurio drilling results are provided in the table below:

We utilize portable drill rigs in the Tapajos

region to allow access to remote drill sites

and to reduce costs.

Mercurio Drill Hole Assay Results
Hole
Prospect
Number
Name
SB-01
Patoa

From
Meters
16.8
57.6
68.6
82.3
63.2
13.7
13.7
60.2
19.8
21.4
146.3
47.3
50.3
60.9
36.8
32.0
39.6
46.5

To
Meters
24.4
60.10
71.7
93.1
67.9
35.6
25.9
70.2
35.1
24.4
152.4
65.6
53.3
67.7
42.7
36.5
56.1
50.6

Interval
Meters / Feet
6.6 / 21.7
2.5 / 8.10
3.1 / 10.3
10.8 / 35.3
4.7 / 15.5
21.9 / 71.7
12.2 / 40.0
10.0 / 32.8
15.3 / 50.2
3.0 /
9.9
6.1 / 20.0
18.3 / 60.0
9.8
3.0 /
6.8 / 22.3
4.4 / 14.4
4.5 / 14.8
16.5 / 54.1
4.1 / 13.4

Gold Grade
g/t
1.18
2.09
1.94
1.27
2.43
6.97
12.22
0.97
0.86
2.03
1.26
1.89
6.48
1.79
4.72
3.36
1.94
5.29

Much of our work still involves

“old fashioned” prospecting - a

combination of science, art and

bushwacking.

SB-02
SB-04
including

SB-06
including

SB-08
including
SB-09
SB-10
SB-11
SB-12
including

West Patoa

Colonia

South Patoa
Tucanarei

No estimate of true width of mineralized intercepts shown above

Other Tapajos Projects

We are enthusiastic about the potential of the newly acquired Cisne and Pau d'Arco gold

properties. At Cisne, we have defined a strong (+100 parts per billion) geochemical gold

anomaly that is 700 meters long and 150 meters wide. Results from a limited trenching

program returned gold values of 1.50 g/t over 32 meters, 2.53 g/t over 12 meters and

0.93 g/t over 13 meters. During 2006, we will conduct geologic mapping, geochemical

sampling and geophysical surveying to assist us in further defining drill targets.

Depending upon the results of this work, drilling may occur in the second half of 2006.

Small-scale surface miners successfully extracted gold from saprolite soils over a nearly con-

tinuous length of 1.5 kilometers on our recently optioned Pau d'Arco property. The gold

grade in this surface mine was reportedly one of the highest in the entire Tapajos region. This

To better define drill targets, power augers

are used to sample saprolite soils up to 10

meters deep.

property is near drill-ready and we anticipate a drilling program beginning around mid-2006.

SLR2005ARrevise11 4/12/06 2:50 PM Page 5

BRAZIL

Mining of saprolite soils by small-scale

surface miners on our newly acquired Pau

d'Arco project has left a linear series of

lakes over a length of 1.5 kilometers.

Pedra Branca
Anglo Platinum completed important new scoping level work during 2005 that con-
tributed to its decision to fund a new Phase III $1.25 million exploration/pre-feasibility
work program on Solitario's Pedra Branca platinum-palladium (“PGM”) project in
Brazil. This $1.25 million work commitment covers a one-year period. Solitario and
Anglo Platinum must negotiate and sign a definitive operating agreement before this
phase of work begins. We hope to have this agreement signed by early summer.

During the past two years,Anglo Platinum funded two drilling campaigns totaling $1.0 mil-
lion. The results of this work, and previous drilling by Solitario, define near-surface PGM-
mineralization in four different deposits. Drilling and scoping work conducted to date indi-
cate potentially economic mineralization at the Esbarro, Curiu, Santa Amaro and Trapia I
deposits. Mineralization in all four deposits occurs at shallow depths within chromitiferous
ultramafic rocks, similar to the prolific PGM-producing Bushveld Complex in South Africa.

More recently, Anglo Platinum completed internal preliminary conceptual assessments
including metallurgical testing that supports continued investment in exploration at Pedra
Branca. A considerable amount of additional exploration and pre-feasibility work will be
required before the decision is made whether or not to conduct a feasibility study.

Anglo Platinum can earn a 51% interest in Pedra Branca by spending a total of $7.0 million
on exploration and development over a five-year period (from the Agreement's inception)
of which Anglo Platinum has funded approximately $1.0 million in the above mentioned
drilling campaigns. Anglo Platinum can earn a further 14% interest (to a total 65% interest)
by completing a bankable feasibility study and arranging 100% project financing.

Highlights of the Phase II drilling program are provided below.

Phase II Pedra Branca Drill Hole Assay Results
Prospect
Name
Esbarro

Hole
Number
ES-35

From
Meters
4.8
20.0
32.0
3.1
1.6
28.5
58.0
1.1
1.1
1.2
0.5
0.5
45.0
0.6
37.7
59.4
108.0
1.8
74.0
81.2

To
Meters
8.1
26.6
36.0
6.1
23.0
54.6
60.0
28.0
12.0
12.0
30.5
8.0
46.7
14.0
39.1
142.0
120.0
34.0
78.0
122.6

2.0 /

Interval
Meters / Feet
3.3 / 10.8
6.6 / 21.6
4.0 / 13.1
9.8
3.0 /
21.4 / 70.2
26.1 / 85.6
6.6
26.9 / 88.2
10.9 / 35.8
10.8 / 35.4
30.0 / 98.4
7.5 / 24.6
5.6
1.7 /
13.4 / 44.0
4.8
82.7 / 271.1
12.0 / 39.4
32.2 / 105.6
4.0 / 13.1
41.4 / 135.8

1.5 /

70.0

128.0

58.0 / 190.2

An aggressive drilling program to

add new resources and discover

new mineralized PGM-bearing

bodies will be undertaken in the

second-half of 2006 at Pedra Branca.

The occurrence of PGM-mineralization is extreme-

ly rare; the Pedra Branca project is considered

one of the best PGM-projects in South America.

Pt
g/t
4.72
0.65
0.33
2.33
0.68
0.53
0.14
1.13
2.21
1.57
0.96
2.60
0.72
0.26
2.68
0.60
1.66
0.82
1.28
0.33

0.52

Pd
g/t
7.11
1.46
0.56
4.47
0.66
1.18
1.02
1.92
3.45
2.05
1.43
3.65
1.52
0.62
3.00
0.84
1.41
0.76
1.92
0.73

1.05

PGM
(+gold)
11.87
2.11
1.01
6.81
1.36
1.79
1.28
3.17
5.85
3.91
2.45
6.45
2.27
0.91
5.76
1.45
3.08
1.61
3.33
1.08

1.72

Curiu

ES-36
ES-38
CU-14

CU-15
Incl.
CU-16
CU-18
including

Santa AmaroSA-08

including
SA-09

TU-04

TU-06

Trapia I

Drill intervals were calculated utilizing a 0.7 g/t PGM+gold cutoff. Mineralized intervals in the
table are all thought to be within 90% of true width, except for the Santa Amaro drill holes, where
the geometry of mineralization is not yet well enough understood to estimate true width.

SLR2005ARrevise11 4/12/06 2:50 PM Page 6

MEXICO

Our initial exploration efforts at Pachuca will

focus on the northwestern part of our huge

property block where persistent silver-bearing

structures have been traced for over 10 kilometers.

Pachuca's historic mine workings

date back over 500 years; inter-

estingly, 80% of the district's 1.4

billion ounces of silver were pro-

duced in the last hundred years.

Our field crews scour the countryside sampling

rocks to give us clues about possible silver

mineralization hidden beneath the surface.

Pachuca Real
Great progress was made in 2005 in identifying and acquiring a portfolio of quality
early stage silver-gold and gold projects in Mexico. The centerpiece of this effort was
the acquisition of 46,350-hectare (114,500 acres) Pachuca Real silver-gold project (see
above map) in the state of Hidalgo in central Mexico. An old adage in precious metal
exploration is that the best place to find gold and silver is to look right next to where
it was found previously. We believe this applies to our Pachuca Real project.

The historic Pachuca mining district has been one of the most prolific silver districts in
the world with substantial gold production. Past production totals at least 1.4 billion
ounces of silver and just over 7.0 million ounces of gold. Much of this production occured
in “bonanza ore shoots” where grades exceeded 1,000 gpt silver and 5 gpt gold. Solitario's
property encompasses about 35 percent of the historic district, but more importantly, cov-
ers over 90% of the potential extensions of the district to the north and northwest.

Our Pachuca Real property has an interesting ownership and exploration history. The
Mexican government held the concessions from 1947 to the early 1990's, whereupon
the concessions were sold to a Mexican company and held by that same company until
2005. Exploration during the past 58 years was restricted to mainly surface work with
a very limited amount of drilling. Initial surface work conducted by Solitario substan-
tiates a number of mineralized structures identified by the Servicio Geológico Mexicano
(“SGM”) that are geologically very similar to those mined in the old district.

The footprint of mineralization in the historic Pachuca district is approximately 15
kilometers long and 10 kilometers wide. Surface work conducted over the years by
SGM, and confirmed by our work, indicates a similar scale of mineralization occurs on
Solitario controlled property to the north and northwest of the historic district.

Our plans for 2006 include an intensive surface exploration program consisting of geo-
logic mapping and geochemical sampling. We are optimistic that this work will gener-
ate a number of strong drill targets that we could drill-test in the second half of 2006.

Other Projects
Three other early-stage exploration projects are held under an option to purchase a 100%
interest in any or all of the properties. These include the Concepcion del Oro gold proj-
ect, the Las Purismas gold project and the Tortugas gold projects. Solitario also controls
a 100% interest in the 10,000-hectare Zinda gold property. We have completed a first-pass
exploration program on these four projects and plan on conducting additional surface
work. Depending on results, one or more of these projects could be drilled in late 2006.

SLR2005ARrevise11 4/12/06 2:51 PM Page 7

Triunfo
The Triunfo polymetallic (gold-silver-lead-zinc) project is located about 35 kilometers
east of the capital city of La Paz, Bolivia, and is held under option with a private
Bolivian party. Exposed mineralization occurs as a structurally controlled zone of veins
and veinlets up to 80 meters wide and at least 400 meters long. The eastern and west-
ern limits along strike and southern limit of width are covered by shallow talus, and are
potentially open to expansion. No drilling has ever been conducted on the property.

Closely spaced sulfide-rich veinlets ranging from 1 mm to 50 cm wide occur primari-
ly parallel to the overall trend of the mineralized zone, but irregularly oriented veinlets
also crosscut the zone at oblique angles. Solitario's systematic channel sampling program
of the outcropping areas indicates a consistently mineralized zone. Sampling of an old
tunnel crossing part of the trend of mineralization supports the observed consistency of
mineralization at surface. The tunnel returned an average grade of 0.43 gpt Au, 24.5 gpt
Ag, 0.67% Pb and 0.29% Zn over its entire 55 meters. An IP-Resisitivity geophysical
survey we conducted in 2004 shows a wider and longer trend of chargeability than indi-
cated by outcropping mineralization, suggesting a larger size potential.

We are planning an initial three-hole core drilling program to test this large low-grade
polymetallic system in mid-2006.

Titicayo
The Titicayo silver prospect is located 175 kilometers south of La Paz and is held under
an option agreement with a private Bolivian party A mineralized structural zone has
been traced on surface for nearly one kilometer in length and 10 to 20 meters in width.
The zone is covered by younger unmineralized volcanics on each end and is conse-
quently open to expansion. Our geologists have interpreted the exposed surface min-
eralization to be “high level,” meaning that the best grades could reside at depth. We
also hope to drill at Titicayo sometime in mid-2006.

BOLIVIA

The Triunfo project represents a large-scale

target that is ready for drill testing.

Detailed rock chip sampling at Triunfo

revealed significant concentrations of

gold, silver, zinc and lead both on

surface and in a mining tunnel.

The Titicayo silver-bearing vein system is at least

one-kilometer long and 10 to 20 meters wide.

SLR2005ARrevise11 4/12/06 2:51 PM Page 8

PERU

The smaller ridge in the foreground is the

exposed portion of the Libertad vein.

Outcrops of the Libertad vein were

geologically mapped in detail to

reveal subtle clues to where high-

grade gold mineralization may be

located in the subsurface.

Strategic Alliance with Newmont

In early 2005, Solitario signed a Strategic Alliance agreement with Newmont Overseas

Exploration Limited (“Newmont”), a subsidiary of Newmont Mining Corporation, the

world’s second largest gold producer. Newmont also agreed to provide, through its affiliate

company Newmont Mining Corporation of Canada Limited, a Cdn$4.59 million private

placement into Solitario to fund Strategic Alliance exploration. This is proving to be an

exciting opportunity for Solitario to expand its grassroots exploration program in South

America and to utilize Newmont’s extensive South American database and advanced explo-

ration technology. The Strategic Alliance demonstrates Newmont's confidence in our

experienced and successful South American exploration team.

Since signing the Strategic Alliance with Newmont, we have accelerated our grassroots

exploration program in Peru. The current Strategic Alliance area consists of 10,000-

square kilometers in southern Peru. Newmont has provided valuable technical data,

guidance and technology to assist Solitario in its efforts to explore for gold within the

Strategic Alliance area.

Under the terms of the Strategic Alliance agreement, Solitario will own 100% of any prop-

erty acquired (“Alliance Property”) within the Strategic Alliance area, subject to a maxi-

mum sliding scale net smelter return royalty of 2% in favor of Newmont, depending on the

processing method. Newmont retains the right to joint venture any Alliance Property after

Solitario has expended a minimum of US$400,000 on such property and completed a min-

imum drilling program. If Newmont elects to joint venture an Alliance Property,it can earn

a 51% interest by spending 200% of the costs Solitario had incurred on the property.

Newmont can elect to earn a further 24% interest (to 75%) by taking the Alliance Property

through a bankable feasibility study and providing 100% project financing for construction.

Solitario would repay its 25% share of project costs after feasibility through production cash

flow. In addition to Newmont’s right to joint venture Alliance Properties, Newmont has

the Right of First Offer to joint venture other Solitario projects in South America.

Libertad

Our first Alliance Property is the Libertad project in southern Peru. A geologic map

with the results of chip-channel geochemical sampling is provided on the next page.

The Libertad mineralized zone has been traced on surface for nearly 400 meters and

averages about 25 meters wide. The mineralization is covered by soil and gravels along

Traces of the Libertad vein can be seen

both sides of its strike extensions.

hundreds of meters away from outcrops in

frost-heaved soils in the high-altitude

“altiplano” of southern Peru.

The zone is characterized by quartz veins,

silicification and clay alteration.

Geochemical sampling indicates fairly consistent gold mineralization averaging slight-

ly less than one-gram per tonne. The most intriguing aspect of the Libertad mineral-

ization is that the geologic textures suggest that we may be at the top of a significant

gold system that could be much higher grade at depth.

SLR2005ARrevise11 4/12/06 2:51 PM Page 9

PERU

The Libertad vein is covered by swampy

areas in two directions, suggesting the

length of the vein could be considerably

longer than our geologic mapping indicates.

Our current plans call for a detailed geophysical survey over the main zone and sus-

pected on-strike extensions. Following analysis of the results of the geophysical survey,

we expect to drill the property in the second half of 2006.

Yanacocha Royalty

Solitario owns a net smelter return royalty (“NSR-Royalty”) on approximately 61,000

hectares (150,000 acres) of mineral rights situated immediately north of Newmont-

Buenaventura's Minera Yanacocha gold mine, South America's largest gold mine. The

NSR-Royalty is indexed to the gold price and processing method that is utilized to

produce gold and various other metals.

For heap leach ores, at today's prices

(+$500/oz. gold), the NSR-Royalty for gold is 2.75%. For ores that are milled, in a

non-flotation mill at today’s gold price, the NSR-royalty for gold would be 2.0%.

Newmont conducted extensive surface exploration work and a limited three-hole

drilling program on our NSR-Royalty property in 2005. Drill hole CHI-001 inter-

sected 13.5 meters grading 2.5 gpt gold, 76 gpt silver and 0.8% lead (drill depths: 202-

215.5 meters). CHI-002 intersected 3.3 meters grading 23 g/t silver (drill depths: 9-

12.3 meters), and CHI-03 was barren. Newmont plans to continue its surface explo-

This view is the first hole Solitario

drilled on our Yanacocha property

in 1994. During the next several

years, we expect Newmont will

accelerate its exploration program

on Solitario's royalty property.

Even after mining over 20 million ounces of

gold at the nearby Yanacocha mine during

the past 12 years, Newmont geologists are

still finding new areas of anomalous gold

mineralization at surface.

ration and drilling programs on Solitario's royalty property for 2006.

SLR2005ARrevise11 4/12/06 2:51 PM Page 10

PERU

With zinc prices hovering near $1.00 pound,

we are planning a robust 20-hole drilling

program for 2006.

Bongará
In 2006 we plan to re-initiate drilling on our 100%-owned high-grade, zinc-lead
Bongará project in northern Peru. We discovered Bongará in 1996 and joint ventured
it with Cominco Ltd. in early 1997. Cominco drilled 80 core holes in Bongará's Florida
Canyon deposit between 1997 and 2000 (see the chart below for drilling highlights).
This drilling program defined a well-mineralized carbonate-hosted zone approximately
two-kilometers by two-kilometers in dimension. As successful as this drilling was, how-
ever, low zinc prices in 2001 (about $0.45 per pound) resulted in Cominco terminating
its option to earn an interest after spending approximately $15.7 million on the project.

Bongará Drill Hole Assay Results
Hole
Number
FC-01
FC-12
FC-17
FC-23

From
Meters
168.3
90.9
142.5
22.1
79.9
58.9
129.0
142.0
436.1
241.2
393.2
308.0
90.4
228.6

To
Meters
174.9
97.9
201.3
58.8
88.6
63.6
132.6
147.1
443.9
252.2
397.2
312.6
95.5
232.8

FC-24
FC-28
FC-36
FC-41
FC-58
FC-65
FC-66
FC-77
FC-80

Interval
Meters / Feet
6.6 / 21.6
7.0 / 23.0
58.8 / 192.7
36.7 / 120.2
8.7 / 28.5
4.7 / 15.4
3.6 / 11.8
5.1 / 16.7
7.8 / 25.6
11.0 / 36.1
4.0 / 13.1
4.6 / 15.1
5.1 / 16.7
4.2 / 13.8

Percent
Zinc
16.3
28.4
11.9
4.5
21.1
15.2
21.2
27.0
14.7
8.0
10.8
11.3
10.8
8.2

Percent
Lead
6.2
3.4
2.7
1.0
2.0
0.0
0.0
3.2
0.1
0.8
2.3
5.4
0.7
2.8

Since 2000, we continued to maintain the core property position at Bongará while
awaiting zinc prices more in line with historical norms. Today, with zinc prices over
$1.00 per pound (and lead at about $0.55) it is time to advance this exceptional high-
grade zinc property.

We are currently permitting a twenty-hole infill drilling program with the objective of
delineating a three-million tonne resource averaging 11% zinc and 2% lead. We believe
that if this program's goals are achieved, a comprehensive feasibility-stage program aug-
mented with surface and underground access to the deposit will be justified. The pro-
posed program of infill drilling focuses on a small area approximately 200 by 700
meters in size representing about five percent of the known extent of mineralization.

The specific target of this drill program consists of two stratiform layers of mineralization,
the Milagros and Karen zones. Based on previous drilling results, and assuming only stra-
ta-bound mineralization is intersected, expected zinc + lead grades for the Milagros and
Karen zones in the target area are 15% and 11%, respectively, over corresponding mining
thicknesses of 5.6 m and 7.4 m (minimum mining height assumed to be 4 m).

While we plan additional drilling at Bongará, a number of zinc producing companies
have expressed an interest in possible joint ventures on the project. If a favorable agree-
ment can be negotiated, we would consider this alternative, as long as a firm 2006
drilling commitment is made.

Bongará is a high-grade zinc-

lead deposit that could be one of

the world's largest new zinc

discoveries.

44 out of 80 core holes drilled in a four-

square kilometer area of Florida Canyon

intersected strong zinc mineralization.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 1

MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERTIONS

MD&A

The following discussion should be read in conjunction with the
information contained in the consolidated financial statements
and notes thereto included elsewhere in this report. Our
financial condition and results of operations are not necessarily
indicative of what may be expected in future years.

Business Overview and Summary
We are a precious and base metals exploration company with
exploration mineral interests in Peru, Mexico, Bolivia and
Brazil.We are conducting exploration activities in all of those
countries.We were incorporated in the state of Colorado on
November 15, 1984 as a wholly owned subsidiary of Crown
Resource Corp. of Colorado ("CRCC"). CRCC is a wholly-
owned subsidiary of Crown Resources Corporation ("Crown").
As a result of the issuance of shares subsequent to 1984,
CRCC's ownership of our shares was reduced to 37.1% as of
July 26, 2004. On July 26, 2004, Crown completed a spin-off of
its holdings of our shares to its shareholders, whereby each
Crown shareholder received 0.2169 shares of our common
stock for each Crown share they owned. As part of the spin-off,
Crown retained 998,306 of our shares, of which it retains
36,004 shares as of March 15, 2006, for the benefit of Crown's
warrant holders who will receive those shares when the warrant
holders exercise their warrants. Crown has disclaimed any
beneficial ownership interest in those retained shares. In addition
Crown retained 93 of our shares, from fractional shares, which it
intends to sell. After the disposition of our shares retained for
warrant holders and fractional shares, Crown will no longer own
any of our shares. Because we owned 6,071,626 shares of
Crown we received $1,275,000 from a dividend Crown paid in
July of 2005 of $0.21 per share and as part of the spin-off, we
received 1,317,142 shares of our own common stock, which
were retired on August 11, 2004, and have the status of
authorized but unissued shares of common stock.

We have a significant investment in Crown at December 31,
2005, which consists of 6,071,626 shares of Crown common
stock or approximately 13.2% of the outstanding Crown
common shares. Crown announced in November 2003 that
it had executed an acquisition agreement, whereby Kinross
will acquire all of the outstanding shares of Crown at an
exchange rate (as amended) of 0.32 shares of Kinross
common stock for each share of Crown common stock. This
merger has been extended five times and we have no control
over whether the merger will be completed. Assuming the
pending merger between Kinross and Crown is completed,
we have estimated that as of March 15, 2006 our holdings of
Crown common stock would convert into shares of Kinross
common stock with a value of approximately $19.1 million
based upon the exchange ratio of 0.32 shares of Kinross
common stock for each share of Crown common stock and
Kinross' closing market price of $9.81 per share. A significant
fluctuation in the market value of Kinross common shares
could have a material impact on our investment in Crown,
the market price of our common stock and our liquidity and
capital resources.

Our principal expertise is in identifying mineral properties with
promising mineral potential, acquiring these mineral properties
and exploring them to an advanced stage. Currently we have no

mineral properties in development. We currently own 10
mineral property projects under exploration and we own our
Yanacocha royalty interest. Our goal is to discover economic
deposits on our mineral properties and advance these deposits,
either on our own or through joint ventures, up to the
development stage (development activities include, among other
things, the completion of a feasibility study, the identification of
proven and probable reserves, as well as permitting and preparing
a deposit for mining). At that point we would attempt to either
sell our mineral properties or pursue their development, either
on our own or through a joint venture with a partner that has
expertise in mining operations.

In analyzing our activities, the most significant aspect relates to
results of our exploration activities and those of our joint venture
partners on a project-by-project basis. When our exploration
activities, including drilling, sampling and geologic testing
indicate a project may not be economic or contain sufficient
geologic or economic potential we may impair or completely
write-off the project. Another significant factor in the success or
failure of our activities is the price of commodities. For
example, when the price of gold is up, although the value of our
gold-bearing mineral interests increases, it becomes more difficult
and expensive to locate and acquire new gold-bearing mineral
properties with potential to have economic deposits.

The potential sale, joint venture or development of our mineral
properties will occur, if at all, on an infrequent basis. Accord-
ingly, while we conduct exploration activities, we need to
maintain and replenish our capital resources. We have met our
need for capital in the past through issuance of common stock,
usually through private placements, or the sale of our interest in a
property and more recently as part of a strategic alliance with
major mining companies. We have reduced our exposure to the
costs of our exploration activities through the use of joint
ventures. We anticipate these practices will continue for the
foreseeable future depending on what happens with our
investment in Crown.

Recent Developments
On July 26, 2005, Solitario received $1,275,000 from a dividend
of $0.21 per share on its 6,071,626 shares of Crown.

During the fourth quarter of 2005, we decided to withdraw
from our agreement on the Odin project, which was acquired in
the third quarter of 2005 after completing initial exploration
activities, including drilling of the project. We recorded a $2,000
impairment related to the Odin project.

During the third quarter of 2005, Solitario completed the acquisition
of seven new exploration projects. Solitario capitalized $7,000 for
initial staking and concession costs paid to the government on two
projects in Peru which are subject to the Strategic Alliance (see
discussion of the Strategic Alliance below), $12,000 for initial lease
and option payments on two projects in Brazil and $33,000 for initial
lease and option payments on three projects (with a total of six
separate properties) in Mexico. Solitario will conduct exploration
activities on these newly acquired properties during 2006. Any
additional costs incurred for subsequent lease payments or
exploration activities will be expensed as incurred.

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MD&A

The La Tola project, located in Southern Peru, had previously been
the subject of a joint venture between Solitario and Newmont
Peru, Limited (“Newmont Peru”). On June 22, 2005, Newmont
Peru informed Solitario that it had elected to terminate its option
to earn an interest in the La Tola project and Solitario recorded an
$18,000 impairment related to the La Tola project.

Also in June 2005, Solitario completed its initial 1,220-meter
drilling commitment on the Windy Peak gold project in
Nevada, USA. After reviewing the results of this program, on
June 28, 2005 Solitario elected to terminate its option to earn
an interest from Silverthorn Exploration, Inc., a private Nevada
corporation, and recorded a $10,000 impairment related to the
Windy Peak project.

On November 17, 2004, we signed a Letter of Intent to form a
strategic alliance with Newmont Overseas Exploration Limited
(“Newmont Exploration”), to explore for gold in South America.
Included in the Letter of Intent was a commitment from
Newmont Mining Corporation of Canada, Limited (“Newmont
Canada”) to purchase 2.7 million shares of Solitario
(approximately 9.9% equity interest) for Cdn$4.59 million. The
Letter of Intent also committed us to spend approximately
$3,773,000 over the next four years on gold exploration in regions
(“Alliance Projects”) that are mutually agreed upon by Newmont
Exploration and us. The first Alliance Project area is located in
southern Peru and is approximately 10,000 square kilometers in
size. If we acquire properties within Alliance Project areas and
meet certain minimum exploration expenditures, Newmont
Exploration will have the right to joint venture acquired properties
and earn up to a 75% interest by taking the project through
feasibility and financing Solitario’s retained 25% interest into
production. Newmont Exploration may elect to earn a lesser
interest or no interest at all, in which case it would retain a 2% net
smelter return royalty. Newmont Exploration also has a right of
first offer on any non-alliance Solitario property acquired after the
signing of the definitive Alliance Agreement, that we may elect to
sell an interest in, or joint venture. As of December 31, 2005, we
have expended $335,000 of the total commitment of $3,773,000.

Concurrent with the signing of the strategic alliance Letter of
Intent, was the signing of a second Letter of Intent by us and
Newmont Peru, to amend Solitario’s net smelter return
(“NSR”) royalty on a 150,000-acre property located
immediately north of the Newmont Mining-Buenaventura’s
Minera Yanacocha Mine, the largest gold mine in South
America. In addition to amending the NSR royalty schedule,
the Letter Agreement committed Newmont Peru to a long-term
US$4.0 million work commitment on Solitario’s royalty property
and provides Solitario access to Newmont Peru's future
exploration results on an annual basis. Both the Strategic
Alliance and Yanacocha royalty amendment and work
commitment Letter Agreements were subject to the companies
signing a definitive agreement and various regulatory approvals.

On January 18, 2005, we signed the definitive agreements for the
Strategic Alliance, Newmont Canada’s 2.7 million-share purchase
of Solitario common stock and the Yanacocha NSR-royalty
amendment and work commitment agreements with Newmont
Peru. The terms of the definitive agreement were the same as
those within the two Letters of Intent.

Results of Operations
Comparison of the year ended December 31, 2005 to the year
ended December 31, 2004
We had net loss of $2,080,000 or $0.08 per basic and diluted
share for the year ended December 31, 2005 compared to net
loss of $2,925,000 or $0.12 per basic and diluted share for the
year ended December 31, 2004. As explained in more detail
below, the primary reason for the decrease in net loss during
2005 compared to the net loss during 2004 was the receipt of a
dividend from Crown during 2005 of $1,275,000, and the
recognition of a $1,704,000 unrealized loss on derivative
instruments primarily related to our holdings of Crown warrants
during 2004 while only recording a $20,000 unrecorded loss on
derivative instruments in 2005. However these decreases were
partially mitigated by an increase in exploration expense to
$2,072,000 in 2005 from $1,088,000 in 2004. Finally we
recorded deferred tax expense of $257,000 during 2005,
primarily related to the Crown dividend, compared to a deferred
tax benefit of $935,000 during 2004 primarily as a result of our
pre-tax loss of $3,860,000.

During the year ended December 31, 2005 we recorded an
unrealized loss on derivative instruments of $20,000 related to our
holdings of TNR Gold Corp. (“TNR”) warrants compared to an
unrealized loss of $1,704,000 during 2004 primarily related to
our Crown warrants. Because we exercised our Crown warrants
on July 12, 2004 there were no unrealized gains or losses related
to our Crown warrants recorded during 2005. The Crown
warrants represented the right to receive 2,057,143 Crown shares,
were exercisable into Crown shares at any time prior to October
2006 at exercise prices between $0.60 and $0.75 per share and
were classified as derivative instruments. Accordingly, any increase
or decrease in the market value of our Crown warrants has been
included in the consolidated statement of operations as unrealized
gain or loss on derivative instruments. The fair value of our
Crown warrants decreased to $3,849,000 at July 12, 2004,
compared to $5,591,000 at December 31, 2003, primarily as a
result of the decrease in the value of Crown's common stock,
which decreased from $2.52 per share at December 31, 2003 to
$1.95 per share at July 12, 2004, just prior to exercise. On July
12, 2004, we exercised all of our Crown warrants on a cashless
basis and received a total of 1,973,626 shares of Crown common
stock from the exercise of these warrants. Assuming the
completion of the acquisition of Crown by Kinross, these Crown
common shares will be converted into Kinross shares.

During 2005 we recorded interest income of $52,000 compared
to interest income of $193,000 during the same period in 2004.
The interest income recorded during 2005 consisted of payments
on cash and cash equivalent deposit accounts. During 2004 we
recorded interest of $192,000 related to our investment in
Crown Senior Notes, which were converted in July 2004. Upon
conversion of our Crown Senior Notes we received 75,367
shares of Crown common stock for interest, which were paid at
the conversion rate of $0.35 per share when the market price of
the shares was $1.88 per share. As a result we recorded $117,000
additional interest over the interest income we would have
received had the interest been paid in cash upon the conversion
of the Senior Notes during the third quarter of 2004. If the
Crown and Kinross merger is completed, we expect our interest

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MD&A

income will be comparable in 2006 as we convert Kinross stock
into cash as needed to fund our planned exploration activities.

Our net exploration expense increased to $2,072,000 during
2005 compared to $1,088,000 in 2004. During 2005 we
focused our exploration efforts on reconnaissance exploration in
Peru, Brazil and Mexico, portions of which led to the addition
of certain exploration projects, discussed above. Additionally, we
increased our exploration activities associated with the Strategic
Alliance upon the signing of the Alliance Agreement in January
2005, discussed above under “Recent Developments.”
Accordingly, our gross exploration costs increased to $2,172,000
in 2005 from $1,499,000 in 2004. The exploration expenses
were offset by joint venture reimbursements by Anglo Platinum
on our Pedra Branca project of $100,000 during 2005 and
$411,000 during 2004. In addition to our work at Pedra
Branca the increase in our gross exploration costs primarily
consisted of drilling, sampling and exploration in our Alliance
Project areas as well as increased efforts to add new prospects as
well as to evaluate and advance our existing exploration
properties and targets. As a result of this exploration and
evaluation we decided to drop or reduce our interests in three
properties during 2005; La Tola in Peru,Windy Peak in Nevada
and Odin in Brazil. We acquired seven projects during 2005
and we anticipate continuing to acquire mineral properties,
either through staking, joint venture or lease, in Latin America
during 2006 and have budgeted our related net exploration
expenditure to be approximately $3,307,000 for 2006. The
primary factors in our decision to increase exploration
expenditures in 2006 relate to the increase in capital resources
expected from the anticipated completion of the Crown-
Kinross merger, the completion of the Strategic Alliance and
related private placement in January 2005 and increased
exploration opportunities in Brazil and Mexico. This budget is
subject to reduction, should the Crown - Kinross transaction be
delayed or not completed in 2006.

We had $29,000 of depreciation and amortization expense
during 2005 compared to $119,000 in 2004. During 2004,
depreciation and amortization expense up to April 2004
included $117,000 of amortization of mineral interests.
Beginning January 1, 2002, we amortized our mineral interests in
exploration properties over their expected lives of three to five
years. The remaining depreciation and amortization expense
related to furniture and fixtures which included depreciation on
additions of $126,000 during 2005 for computers, trucks and
other equipment, which replaced much of our previous
equipment most of which had become fully depreciated by the
end of 2004. We anticipate our 2006 depreciation and
amortization costs will be similar to our 2005 amount.

General and administrative costs were $576,000 during 2005
compared to $629,000 in 2004. The largest change in general
and administrative costs related to a decrease in legal and
accounting costs, which decreased to $122,000 during 2005
compared to $303,000 in 2004. The primary reason for the
increased cost in 2004 is related to work on completing a
Form 10 registration statement with the United States
Securities and Exchange Commission (the “SEC”) during
2004 as well as costs related to being a U.S. reporting issuer,

which occurred when our Form 10 registration statement
became effective in February 2004. In addition we recorded
currency gains of $62,000 during 2005 compared to currency
gains of $30,000 primarily related to currency gains on our
larger 2005 Canadian cash deposits as well as a result of a
general decline in the United States dollar relative to our
deposits in Latin America during 2005 compared to 2004.
These decreases were offset by increased administrative and
staff costs in Latin America to $123,000 in 2005 compared to
$102,000 in 2004 as well as increased staff and travel costs with
the increase in exploration activity during 2005 compared to
2004. We also increased our costs for shareholder relations and
printing and distribution of our annual report to $131,000 in
2005 from $93,000 in 2004. We anticipate an increase in
general and administrative costs in the future if the Crown and
Kinross merger is completed and the management services
agreement is terminated as discussed below under “Related
Party Transactions.”

Management fee expense increased to $423,000 during 2005
compared to $390,000 in 2004. The increase in management
fees is related to increased managerial time spent by Crown on
our activities during 2005 compared to 2004. Under the
modified management agreement Solitario pays Crown for
services by payment at 25% of Crown's corporate administrative
costs for executive and technical salaries, benefits and expenses,
50% of Crown's corporate administrative costs for financial
management and reporting salaries, benefits and expenses and
75% of Crown's corporate administrative costs for investor
relations salaries, benefits and expenses. In addition, we
reimburse Crown for direct out-of-pocket expenses. If the
Crown and Kinross merger is completed we anticipate the
management services contract will be terminated, which will
eliminate our management fee expense, but increase our general
and administrative costs, as discussed below under “Related
Party Transactions.”

On July 28, 2004, we exchanged 500,000 shares of TNR
common stock for 500,000 shares of TNR common stock that
were not available to be publicly traded in Canada until
November 28, 2004 and a warrant to purchase an additional
500,000 shares of TNR common stock for Cdn$0.16 per share
for a period of two years. The transaction has been accounted
for as a sale of our previously owned TNR shares and an
acquisition of the new TNR shares and warrants. We recorded a
loss on sale of marketable equity securities of $73,000 during the
third quarter of 2004. During 2003, we recorded a charge of
$26,000 to earnings related to decline in the value of our TNR
shares, which we considered other than temporary. The TNR
shares are classified as marketable equity securities and the TNR
warrants are recorded at fair value based on quoted prices and
classified as derivative instruments and changes in the fair value
of the warrants are included in gain/loss on derivative
instruments in the consolidated statement of operations.
Solitario recorded a decrease in the value of its TNR warrants as
of December 31, 2005 of $20,000 to loss on derivative
instruments in the consolidated statement of operations
compared to an increase of $38,000 recorded to gain on
derivative instruments in 2004.

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MD&A

During 2005, we recorded income tax expense of $257,000
compared to an income tax benefit of $935,000 during 2004.
The increase in net tax expense is related to the expected United
States taxable income, including the $1,275,000 Crown dividend
during 2005, described above, as well as a reduction in the non-
deductible gain on derivative instrument from $1,704,000 in
2004 compared to $20,000 in 2005. In addition we provide a
valuation allowance for our foreign net operating losses, which are
primarily related to our exploration activities in Peru, Mexico,
Bolivia and Brazil. We anticipate we will continue to provide a
valuation allowance for these net operating losses until we are in a
net tax liability position with regards to those countries where we
operate or until it is more likely than not that we will be able to
realize those net operating losses in the future.

During 2004, we sold an investment in marketable equity
securities for $16,000, and recorded a gain on such sale of
$14,000. We also exchanged 500,000 shares of TNR common
stock for 500,000 shares of TNR common stock that could not be
publicly traded in Canada until November 28, 2004 and a warrant
to purchase 500,000 shares of TNR and recorded a loss of $73,000
on the exchange. There were no similar items during 2005.

We regularly perform evaluations of our assets to assess the
recoverability of our investments in these assets. All long-lived
assets are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an
asset may not be recoverable utilizing guidelines based upon
future net cash flows from the asset as well as our estimates of the
geologic potential of early stage mineral property and its related
value for future sale, joint venture or development by us or
others. During 2005 we recorded $30,000 of property
impairments, related to our La Pampa,Windy Peak and Odin
projects, compared to $64,000 of mineral property impairments
during 2004, related to our San Pablo, Legacy Ridge, La Pampa,
and Sapalache projects.

Comparison of the year ended December 31, 2004 to the year
ended December 31, 2003
We had net loss of $2,925,000 or $0.12 per basic and diluted
share for the year ended December 31, 2004 compared to net
income of $3,354,000 or $0.14 per basic and diluted share for
the year ended December 31, 2003. As explained in more detail
below, the primary reason for the decrease to a net loss during
2004 compared to net income during 2003 was the recognition
of a $1,704,000 unrealized loss on derivative instruments
primarily related to our holdings of Crown warrants during
2004, compared to an unrealized gain on derivative instruments
of $5,438,000 in 2003. Additionally, net exploration expense
increased to $1,088,000 during 2004 compared to $418,000
during 2003 and general and administrative costs increased to
$629,000 during 2004 compared to $404,000 during 2003,
primarily as a result of legal and accounting costs associated with
filing our Form 10 registration statement with the U.S. Securities
and Exchange Commission (the “SEC”). We also recorded a
$64,000 loss on sale of marketable equity securities primarily
related to an exchange of 500,000 shares of TNR Gold Corp.
(“TNR”) common stock for 500,000 shares of TNR common
stock and a warrant to purchase 500,000 shares of TNR during
the third quarter of 2004. We recorded a deferred tax benefit of
$935,000 primarily as a result of our pre-tax loss of $3,860,000.

During the year ended December 31, 2004, we recorded an
unrealized loss on derivative instruments of $1,704,000 primarily
related to our holdings of Crown warrants compared to an
unrealized gain of $5,438,000 during 2003. We exercised our
Crown warrants on July 12, 2004. The warrants were exercisable
into Crown shares at any time prior to October 2006 at exercise
prices between $0.60 and $0.75 per share. The warrants could
be net settled and were classified as derivative instruments.
Accordingly, any increase or decrease in the market value of our
Crown warrants has been included in the consolidated statement
of operations as unrealized gain or loss on derivative instruments.
The fair value of our Crown warrants decreased to $3,849,000 at
July 12, 2004, compared to $5,591,000 at December 31, 2003,
primarily as a result of the decrease in the value of Crown's
common stock, which decreased from $2.52 per share at
December 31, 2003, to $1.95 per share at July 12, 2004, just
prior to exercise. On July 12, 2004, we exercised all of our
Crown warrants on a cashless basis and received a total of
1,973,626 shares of Crown common stock from the exercise of
these warrants.

During 2004 we recorded interest income of $193,000
compared to interest income of $272,000 during the same
period in 2003. During 2004 we recorded $192,000 of interest
income related to our investment in Crown Senior Notes, which
were converted in July 2004. Upon conversion of our Crown
Senior Notes we received 75,367 shares of Crown common
stock for interest, which were paid at the conversion rate of
$0.35 per share when the market price of the shares was $1.88
per share. As a result we recorded $117,000 additional interest
over the interest income we would have received had the interest
been paid in cash upon the conversion of the Senior Notes
during the third quarter of 2004. During the year ended
December 31, 2003 we recorded $212,000 of interest on Crown
Senior Notes including $112,000 of interest relating to additional
interest due to interest being paid in Crown shares rather than
being paid in cash. We also received $30,000 of interest income
on our investment in Crown Subordinated B Notes, which were
converted to shares of Crown common stock in November
2003, including $4,000 of interest relating to additional interest
due to interest being paid in Crown shares rather than being paid
in cash. Remaining interest income related to interest income
on our cash balances.

Our net exploration expense increased to $1,088,000 during
2004 compared to $418,000 in 2003. During 2004 we focused
our exploration efforts on our Legacy Ridge project in Nevada,
La Tola project in Peru, our Triunfo and San Pablo projects in
Bolivia, as well as on our previously explored Pedra Branca
project in Brazil. Additionally, we increased our activities related
to evaluations of properties for potential acquisition, including
evaluation of data and site visits, in two new geographic areas, the
Tapajos region in northern Brazil and Mexico. Accordingly, our
gross exploration costs increased to $1,499,000 in 2004 from
$875,000 in 2003. The exploration expenses were offset by joint
venture reimbursements by Anglo Platinum on our Pedra Branca
project of $411,000 during 2004 and $457,000 during 2003.
In addition to our work at Pedra Branca the increase in our gross
exploration costs primarily consisted of drilling, sampling and
exploration at our Legacy Ridge project in Nevada as well as

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increased efforts to add new prospects as well as to evaluate and
advance our existing exploration properties and targets. As a
result of this exploration and evaluation we decided to drop our
interests in four properties during the third quarter of 2004: San
Pablo in Bolivia, Legacy Ridge in Nevada, La Pampa in Peru and
Sapalache in Peru.

We had $119,000 of depreciation and amortization expense
during 2004 compared to $488,000 in 2003. During 2004,
depreciation and amortization expense up to April 2004
included $118,000 of amortization of mineral interests, compared
to $466,000 of mineral interest amortization in 2003. Beginning
January 1, 2002, we amortized our mineral interests in
exploration properties over their expected lives of three to five
years. The remaining depreciation and amortization expense
related to furniture and fixtures most of which became fully
depreciated by the end of 2004.

General and administrative costs were $629,000 during 2004
compared to $404,000 in 2003. The largest increase in general
and administrative costs related to an increase in legal and
accounting costs, which increased to $303,000 during 2004
compared to $186,000 in 2003. The primary reason for the
increase is related to work on completing a Form 10 registration
statement with the United States Securities and Exchange
Commission (the “SEC”) during 2004 as well as costs related to
being a U.S. reporting issuer, which occurred when our Form 10
registration statement became effective in February 2004. In
addition, during 2004, we increased staff and travel costs with the
addition of the U.S. property in Nevada and the increased
exploration effort in Peru, Brazil and Bolivia. We also increased
our costs for shareholder relations and printing and distribution
of our annual report to $93,000 in 2004 from $50,000 in 2003.
The remaining general and administrative costs for travel,
consulting, and shareholder meetings were comparable between
2004 and 2003.

Management fee expense increased to $390,000 during 2004
compared to $351,000 in 2003. As there were no changes in
the Management Agreement the increase in management fees is
related to an increase in managerial time spent by Crown on our
activities during 2004 compared to 2003. Under the modified
management agreement Solitario pays Crown for services by
payment at 25% of Crown's corporate administrative costs for
executive and technical salaries, benefits and expenses, 50% of
Crown's corporate administrative costs for financial management
and reporting salaries, benefits and expenses and 75% of Crown's
corporate administrative costs for investor relations salaries,
benefits and expenses. In addition, we reimburse Crown for
direct out-of-pocket expenses.

$26,000 to earnings related to decline in the value of our TNR
shares, which we considered other than temporary. The TNR
shares are classified as marketable equity securities held for sale
and the TNR warrants are recorded at fair value based on
quoted prices and classified as derivative instruments and changes
in the fair value of the warrants are included in gain (loss) on
derivative instruments in the consolidated statement of
operations. Solitario recorded an increase in the value of its
TNR warrants as of December 31, 2004 of $38,000 to gain on
derivative instruments in the consolidated statement of
operations.

Included in asset write-downs during 2004 were $64,000 of
property write-downs related to our San Pablo, Legacy Ridge, La
Pampa, and Sapalache projects. There were no property or
mineral interest write-downs during 2003. However during
2003 we wrote down an investment in marketable equity
securities for an other than temporary decline of $26,000.

Liquidity and Capital Resources
Due to the nature of the mining business, the acquisition, and
exploration of mineral properties requires significant
expenditures prior to the commencement of development and
production. In the past, we have financed our activities through
the sale of securities, joint venture arrangements, and the sale of
interests in our properties. To the extent necessary, we expect to
continue to use similar financing techniques; however, there is no
assurance that such financing will be available to us on acceptable
terms, if at all.

We had working capital of $4,189,000 at December 31, 2005
compared to working capital of $3,245,000 as of December 31,
2004. Our working capital at December 31, 2005 consists of our
cash and equivalents and marketable equity securities, primarily
consisting of the current portion of our investment in 6,071,626
shares of Crown common stock of $3,491,000, less related
deferred taxes of $1,476,000.

On July 26, 2005, we received $1,275,000 from a dividend of
$0.21 per share on its 6,071,626 shares of Crown.

Our marketable equity securities are classified as available-for-sale
and are carried at fair value, which is based upon market quotes
of the underlying securities. At December 31, 2005 and 2004,
we owned 6,071,626 shares of Crown common stock from the
conversion of our Crown Senior Notes, the exercise of our
Crown warrants and interest on our Crown Senior notes paid in
shares of Crown common stock. The Crown shares are recorded
at their fair market value of $13,965,000 and $12,143,000 at
December 31, 2005 and December 31, 2004, respectively. In
addition we own other marketable equity securities with a fair
value of $94,000 and $112,000 as of December 31, 2005 and
December 31, 2004, respectively. At December 31, 2005, we
have classified $10,568,000 of our marketable equity securities as
a long-term asset. Changes in the fair value of marketable equity
securities are recorded as gains and losses in other comprehensive
income in stockholders’ equity. During the year ended
December 31, 2005, we recorded a gain in other comprehensive
income on marketable equity securities of $1,804,000, less
related deferred tax expense of $704,000. In addition during the
year ended December 31, 2004, we sold marketable equity

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MD&A

securities for proceeds of $16,000 resulting in a gain of $14,000,
which included the recognition of $6,000 of previously
unrealized gain on marketable equity securities in other
comprehensive income. During the year ended December 31,
2004, we exchanged 500,000 shares of TNR common stock for
500,000 shares of TNR common stock that were not available to
be publicly traded in Canada until November 28, 2004 and a
warrant to purchase 500,000 shares of TNR and recorded a loss
of $73,000 on the exchange, which included previously
unrealized loss on marketable equity securities of $70,000. There
were no similar transactions in 2005. Any change in the market
value of the shares of Crown common stock could have a
material impact on our liquidity and capital resources. The price
of shares of Crown common stock has varied from a high of
$2.34 per share to a low of $1.37 per share during the year
ended December 31, 2005.

Assuming the pending merger between Kinross and Crown is
completed, we have estimated that as of March 15, 2006 our
holdings of Crown common stock would convert into shares of
Kinross common stock with a value of approximately $19.1
million based upon the exchange ratio of 0.32 shares of Kinross
common stock for each share of Crown common stock and
Kinross' closing market price of $9.81 per share. Although no
specific plans have been formulated by our Board, we intend to
liquidate a portion of our Kinross shares over the next one to
three years to reduce our exposure to a single asset, taking into
consideration our cash and liquidity requirements, tax
implications, the market price of gold and the market price of
Kinross stock. Although our Kinross shares would be issued
pursuant to an effective registration statement under the U.S.
Securities Act of 1933 (the “Securities Act”), due to our status as
a Crown affiliate, sales of our Kinross shares must be made in
accordance with the requirements of Rule 145(d) under the
Securities Act, which could limit or restrict sales of our Kinross
shares during the next one to two years. Any funds received
from the sale of Kinross shares would be used primarily to fund
exploration on our existing properties, for the acquisition and
exploration of new properties and general working capital.

If the Crown and Kinross merger is not completed we anticipate
we will use existing funds to continue to explore our existing
exploration projects. We anticipate we have enough cash and
working capital to meet our operating and net exploration
requirements through the first quarter of 2007.

As a result of recording an unrealized gain of $6,356,000 during
2004 on marketable equity securities in other comprehensive
income, related primarily to our holdings of Crown stock,
Solitario estimated that its deferred tax liabilities exceeded its
realizable deferred tax assets by $3,582,000 at December 31, 2005.

On January 18, 2005, pursuant to a Stock Purchase Agreement,
we agreed to sell to Newmont Canada 2,700,000 newly issued
shares of our Common Stock for Cdn$1.70 per share or
Cdn$4,590,000 in the aggregate or approximately $3,773,000.
We sold the Common Stock in a private offering in reliance on
an exemption from registration pursuant to Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. Newmont Canada received restricted stock in the
offering. We have used a portion of the proceeds of this offering

to perform exploration as contemplated under an Alliance
Agreement with Newmont Exploration and will continue to do
so during 2006.

As previously noted, under the Management Agreement we
currently reimburse Crown for certain expenses, including
management salaries and benefits, rent, insurance and investor
relations costs and certain other expenses paid by Crown on our
behalf. Assuming the completion of the Crown-Kinross merger,
we will no longer operate under the Management Agreement.
This change will result in an increase in general and
administrative costs related to salaries and benefits for employees,
rent, audit and legal fees, shareholder relations costs, travel and
office expenses. In the event that the Crown-Kinross transaction
is not completed, we anticipate that we would continue to
operate under the Management Agreement with Crown. See
“Related Party Transactions” below for further discussion.

Cash Flows
Net cash used in operations during the year ended December
31, 2005 decreased to $1,572,000 compared to $2,209,000 for
2004 primarily as a result of the $1,275,000 Crown dividend
received during the third quarter of 2005, which was offset by
increased exploration expense related to increased exploration
activities during 2004. In addition, during 2005 we recorded net
receipt of our joint venture receivable of $299,000.

Net cash (used in) provided from investing activities decreased
from cash provided by investing activities of $27,000 during the
year ended December 31, 2004, primarily from the collection of
our note receivable of $112,000, to cash used in investing
activities of $178,000 during the year ended December 31, 2005,
resulting from additions for mineral properties and other assets.

Net cash provided from financing activities was $3,794,000
during the year ended December 31, 2005 compared to $985,000
during 2004 primarily due to the issuance of 2,700,000 shares of
our common stock to Newmont Canada (approximately 9.9%
equity interest) for net proceeds of $3,773,000 pursuant to the
Private Placement. See “Recent Developments” above. The
remaining cash provided in 2005 and all of the cash provided in
2004 related to cash payments from the exercise of 32,500 and
1,121,000, respectively, of our stock options.

Contractual Obligations
As of December 31, 2005, we have no outstanding long-term
debt, capital or operating leases or other purchase obligations.

However, we do have annual concession and lease payments
required to maintain our current interests in mineral properties.
While these payments are not fixed obligations since we can
abandon the mineral properties after meeting a minimum work
commitment at any time without penalty or further payments,
these payments are required in order to maintain our interests.
We estimate these payments to be approximately $378,000 for
2006 if we elect to continue with our participation in all of our
properties and do not take on additional contractual obligations.
Approximately $37,000 of these annual payments are
reimbursable to us by our joint venture partners. We may be
required to make further payments in the future if we elect to

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exercise our options under those contracts. Our existing mineral
property agreement at the El Triunfo Property commits us to
exploration expenditures of $200,000 in 2006 in order to
maintain our option to purchase.

Additionally, we currently do not lease any facilities, however, we
have co-signed the facilities leased by Crown for their Wheat
Ridge, CO office. Assuming completion of the Crown
transaction with Kinross, we estimate our facility lease costs will
be approximately $30,000 per year, related to the Wheat Ridge,
CO facility.

We currently have deferred tax liabilities recorded in the amount
of $3,582,000. These deferred tax liabilities primarily relate to
our unrealized holding gains on our Crown shares. If the Crown
transaction with Kinross is completed, we expect that a portion
of these deferred tax liabilities may become currently payable as
we sell the resultant Kinross shares.

Joint Ventures
On January 18, 2005, we signed a Strategic Alliance Agreement
with Newmont Exploration, to explore for gold in South
America. Prior to the definitive agreement, we had signed a
Letter of Intent on November 17, 2004, with Newmont
Exploration. Concurrent with the signing of the Alliance
Agreement, Newmont Canada purchased 2.7 million shares of
Solitario (approximately 9.9% equity interest) for Cdn$4,590,000.
As part of the Alliance Agreement we are committed to spend
$3,773,000 over the four years from the date of the Alliance
Agreement on gold exploration in regions (“Alliance Projects”)
that are mutually agreed upon by Newmont Exploration and us.
We have spent $335,000 as of December 31, 2005 of this
commitment. If we acquire properties within Alliance Project
areas and meet certain minimum exploration expenditures,
Newmont Exploration will have the right to joint venture
acquired properties and earn up to a 75% interest by taking the
project through feasibility and financing Solitario’s retained 25%
interest into production. Newmont Exploration may elect to
earn a lesser interest or no interest at all, in which case it would
retain a 2% net smelter return royalty. Newmont Exploration also
has a right of first offer on any non-alliance Solitario property,
acquired after the signing of the Alliance Agreement, that we may
elect to sell an interest in, or joint venture.

Concurrent with the signing of the Strategic Alliance Letter of
Intent, was the signing of a second Letter of Intent by us and
Newmont Peru, to amend Solitario’s net smelter return
(“NSR”) royalty on a 150,000-acre property located
immediately north of the Newmont Mining-Buenaventura’s
Minera Yanacocha Mine, the largest gold mine in South
America. In addition to amending the NSR royalty schedule,
the Letter Agreement committed Newmont Peru to a long-term
US$4.0 million work commitment on Solitario’s royalty property
and provides Solitario access to Newmont Peru's future
exploration results on an annual basis. Both the strategic alliance
and Yanacocha royalty amendment and work commitment Letter
Agreements were subject to the companies signing a definitive
agreement and various regulatory approvals.

On July 12, 2004, we signed an agreement (the “WP
Agreement”) with Silverthorn Exploration, Inc. (“Silverthorn”),

MD&A

a private Nevada exploration company, to earn up to an 80%
interest in the Windy Peak property. To earn an 80% interest in
the property, the WP Agreement called for us to make payments
to Silverthorn of $100,000 and spend $5,300,000 on exploration
and development over a five-year period. On June 28, 2005,
Solitario elected to terminate its option to earn an interest from
Silverthorn and recorded a $10,000 impairment related to the
Windy Peak project.

On January 28, 2003, we entered into an agreement with Anglo
American Platinum Corporation, Ltd. (“Anglo Platinum”)
whereby Anglo Platinum may earn a 51% interest in the Pedra
Branca Project by spending $7 million on exploration at Pedra
Branca over a four-year period. Anglo Platinum agreed to a
minimum expenditure of $500,000 during the first six months of
the agreement. Anglo Platinum can earn an additional 9%
interest in Pedra Branca (for a total of 60%) by completing a
bankable feasibility study. Anglo Platinum can also earn an
additional 5% interest in Pedra Branca (for a total of 65%) by
arranging for financing to put the project into commercial
production. Anglo Platinum completed its initial six-month
$500,000 exploration expenditure in July 2003. A First
Amendment to the agreement was signed in July 2004 to provide
Anglo Platinum a ten-month Phase II work commitment period
to spend an additional $500,000 on exploration. Drilling for the
Phase II commitment was completed in late 2004. In November
2005 Anglo Platinum notified Solitario of its election to proceed
with the next $1.25 million in exploration over a one-year
period. Before proceeding with this commitment Solitario and
Anglo Platinum must negotiate and sign a definitive operating
agreement by May 16, 2006. Should this agreement fail to be
signed or if Anglo Platinum declines to continue for some other
reason, Solitario will retain 100% of the Pedra Branca Project. We
have recorded a joint venture receivable from Anglo Platinum
related to the Pedra Branca Project of $299,000 at December 31,
2004, which was paid during 2005.

Our exploration activities, funding opportunities and joint
ventures may be materially affected by commodity prices and
fluctuations. Commodity market prices are determined in world
markets and are affected by numerous factors beyond our control.

Exploration Activities
A significant part of our business involves the review of
potential property acquisitions and continuing review and
analysis of properties in which we have an interest, to determine
the exploration and development potential of the properties. In
analyzing expected levels of expenditures for work
commitments and property payments, our obligations to make
such payments fluctuate greatly depending on whether, among
other things, we make a decision to sell a property interest,
convey a property interest to a joint venture, or allow our
interest in a property to lapse by not making the work
commitment or payment required.

In acquiring our interests in mining claims and leases, we have
entered into agreements, which generally may be canceled at our
option. We are required to make minimum rental and option
payments in order to maintain our interest in certain claims and
leases. Our final 2005 mineral property rental and option

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payments were approximately $243,000. In 2006 we estimate
mineral property rental and option payments to be
approximately $379,000. Approximately $37,000 of these annual
payments are reimbursable to us by our joint venture partners.

Critical Accounting Estimates
Mineral properties, net
We classify our interest in mineral properties as Mineral
Properties, net (tangible assets) pursuant to Emerging Issues Task
Force (“EITF”) 04-2. Prior to adoption of EITF 04-2 in April
2004, we classified our interests in mineral properties as intangible
assets, Mineral Interests, net. Our mineral properties represent
mineral use rights for parcels of land we do not own.All of our
mineral properties relate to exploration stage properties and the
value of these assets is primarily driven by the nature and amount
of economic minerals believed to be contained, or potentially
contained, in such properties. Prior to the adoption of EITF 04-
2, we amortized the excess cost of our mineral interests over their
estimated residual value over the lesser of (i) the term of any
mineral interest option or lease or (ii) the estimated life of the
mineral interest, which was our estimated exploration cycle. We
amortized our mineral interests over a three-to-eight year period
based upon facts and circumstances for each mineral interest on a
property-by-property basis. We no longer amortize our mineral
properties pursuant to the adoption of EITF 04-2.

Impairment
We regularly perform evaluations of our investment in mineral
properties to assess the recoverability and/or the residual value of
its investments in these assets. All long-lived assets are reviewed
for impairment whenever events or circumstances change, such
as negative drilling results or termination of a joint venture,
which indicate the carrying amount of an asset may not be
recoverable, utilizing established guidelines based upon
discounted future net cash flows from the asset or upon the
determination that certain exploration properties do not have
sufficient potential for economic mineralization as a result of our
analysis of exploration activities including surveys, sampling and
drilling. We recorded a $30,000 and $64,000 write-down of our
mineral properties during the years ended December 31, 2005
and 2004, respectively.We may record future impairment if
certain events occur, including loss of a venture partner, reduced
commodity prices or unfavorable geologic results from sampling,
assaying, surveying or drilling, among others.

Marketable equity securities
Our investments in marketable equity securities are classified as
available-for-sale and are carried at fair value, which is based
upon quoted prices of the securities owned. The cost of
marketable equity securities sold is determined by the specific
identification method. Changes in market value are recorded in
accumulated other comprehensive income within stockholders'
equity, unless a decline in market value is considered other than
temporary, in which case the decline is recognized as a loss in the
consolidated statement of operations. At December 31, 2005, we
have recorded unrealized holding gains of $9,922,000, net of
deferred taxes of $3,792,000, related to our marketable equity
securities. During 2003 we wrote down an investment in
marketable equity securities for an other than temporary decline
of $26,000. There were no similar items in 2004 or 2005.

Derivative instruments
Our Crown warrants had a net settlement feature and
accordingly, we classified the warrants as derivative instruments
up to July 12, 2004 when we exercised all of them on a cashless
basis as discussed above in results of operations. We recorded our
investment in the Crown warrants at their estimated fair value
based upon a Black-Scholes pricing model. As of December 31,
2005, we own warrants for the purchase of 1,000,000 shares of
TNR Gold Corp. (“TNR”), which we received in exchanges
for TNR shares during 2004 and 2003. The TNR warrants are
recorded at fair market value based upon quoted prices and
classified as derivative instruments. We recognize any increase or
decrease in the fair value of warrants as a gain or loss on
derivative instruments in the consolidated statement of
operations. We recorded a decrease in the value of our TNR
warrants of $20,000 for the year ended December 31, 2005. We
recorded a decrease in the fair value of our Crown warrants of
$1,742,000 for the year ended December 31 2004 and an
increase in the fair value of our Crown warrants of $5,438,000
for the year ended December 31, 2003, and an increase in the
value of our TNR warrants of $38,000 for the year ended
December 31, 2004.

Income taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of deferred taxes
related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes.
Deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses
and tax credits that are available to offset future taxable income
and income taxes, respectively. A valuation allowance is provided
if it is more likely than not that some or all of the deferred tax
assets will not be realized. Currently we believe our deferred
tax assets, exclusive of our Yanacocha royalty asset, are
recoverable. Recovery of these assets is dependent upon our
expected gains on the Crown securities we own. If these values
are not realized, we may record additional valuation allowances
in the future.

Related Party Transactions
Crown provides management and technical services to us under
a management and technical services agreement originally signed
in April 1994 and modified in April 1999, December 2000 and
July 2002. Under the modified agreement we are billed by
Crown for services at 25% of Crown's corporate administrative
costs for executive and technical salaries, benefits and expenses,
50% of Crown's corporate administrative costs for financial
management and reporting salaries, benefits, expenses and 75% of
Crown's corporate administrative costs for investor relations
salaries, benefits and expenses. In addition, we reimburse Crown
for direct out-of-pocket expenses. These allocations are based
upon the estimated time and expenses spent by Crown
management and employees on both Crown activities and our
activities. Management believes these allocations are reasonable
and the allocations are periodically reviewed by management and
approved by independent Board members of both Crown and

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Solitario. Management service fees are billed monthly, due on
receipt and are generally paid within 30 days. Management
service fees incurred by us were $423,000, $390,000, and
$351,000 for the years ended December 31, 2005, 2004 and
2003, respectively.

On July 28, 2004, we exchanged 500,000 shares of TNR
common stock for 500,000 shares of TNR common stock that
were not able to be publicly traded in Canada until November
28, 2004 and a warrant to purchase an additional 500,000 shares
of TNR common stock for Cdn$0.16 per share for a period of
two years. The transaction has been accounted for as a sale of
our previously owned TNR shares and an acquisition of the new
TNR shares and warrants. We recorded a loss on sale of
marketable equity securities of $73,000 during the year ended
December 31, 2004. As of December 31, 2005, we own
warrants for the purchase of 500,000 shares of TNR, which we
received in exchange for TNR shares during 2004. The TNR
warrants are recorded at fair market value based upon quoted
prices and classified as derivative instruments. We recorded a loss
on derivative instruments of $20,000 and $38,000 for the
decrease in the value of our warrants during the years ended
December 31, 2005 and 2004, respectively. There were no gains
and losses recorded for the fair value of the TNR warrants in
2003. Christopher E. Herald, Solitario’s CEO, is a member of the
Board of Directors of TNR.

On July 26, 2004, Crown completed a spin-off of our shares to
its shareholders, whereby each Crown shareholder received
0.2169 shares of our common stock for each Crown share they
owned. As part of the spin-off, Crown retained 998,306 of our
shares for the benefit of Crown’s warrant holders who will
receive those shares when the warrant holders exercise their
warrants. Crown has disclaimed any beneficial ownership
interest in those retained shares. In addition Crown retained 93
shares, from fractional shares, which it intends to sell. After the
disposition of the shares retained for warrant holders and
fractional shares, Crown will no longer own any of our shares.
As part of the spin-off we received 1,317,142 shares of its own
common stock, which were retired on August 11, 2004, and have
the status of authorized but unissued shares of common stock.

In October 2001, we invested in two 10% convertible secured
promissory notes ("Senior Notes") totaling $1,000,000 out of
$3,600,000 Senior Notes issued by Crown. The first Senior
Note (the "Solitario Note") of $350,000 had a conversion price
of $0.2916 per share and the second Senior Note of $650,000
had a conversion price of $0.35 per share. The independent
Board members of Crown and Solitario approved the investment
in the Notes. We were paid $50,000 in cash as interest income
under the Senior Notes for the year ended December 31, 2004.
We were paid 249,718 and 182,440, respectively, Crown shares as
interest income under the Senior Notes for the years ended
December 31, 2003 and 2004. On July 14, 2004, we converted
our $1,000,000 face value of Crown Senior Notes into
3,132,509 shares of Crown common stock, which included
75,367 shares issued for accrued interest through the date of
conversion on the Notes. We recorded $949,000, the net book
value of Crown Senior Notes, as marketable equity securities for
the Crown shares received upon conversion of the Senior Notes.

As part of the investment in the Senior Notes, we also received
two warrants. The first warrant gave us the right to purchase
1,857,143 shares of Crown for $0.75 through October 2006 and
the second warrant gave us the right to purchase 1,200,000
shares of Crown at $0.60 through October 2006. The fair value
of the warrants at the time of issuance, $110,000, was recorded as
a discount to the Senior Notes. This discount was being
amortized over the life of the Senior Notes as additional interest
income. On July 12, 2004, we exercised the two Crown
warrants on a cashless exercise basis per the terms of the
warrants.We received a total of 1,973,626 shares of Crown
common stock from the exercise of these warrants. The fair
value of the warrants, based upon a quoted bid price, was
$3,849,000 at July 12, 2004, just prior to exercise and $5,591,000
at December 31, 2003. We recognized any increase or decrease
in the fair value of the warrants as an unrealized gain or loss on
derivative instruments in the consolidated statement of
operations. We recorded an increase in the value of TNR
warrants of $20,000 and $38,000 for the years ended December
31, 2005 and 2004, respectively.We recorded a decrease in the
value of the Crown warrants of $1,742,000 for the year ended
December 31, 2004, and an increase in the value of the Crown
warrants of $5,438,000 for the year ended December 31, 2003.
We recorded $3,849,000, the net book value of our Crown
warrants, as marketable equity securities for the Crown shares
received upon exercise of our Crown warrants.

We entered into a Voting Agreement dated as of April 15, 2002
among Zoloto Investors, LP ("Zoloto") and Crown. Zoloto and
Solitario are both shareholders of Crown (the "Signing
Shareholders"). Pursuant to the Voting Agreement, Zoloto and
Solitario agreed that each will vote its owned shares during the
term of the Voting Agreement for the election of three designees
of Zoloto and one designee of ours (the "Designee Directors")
to the Board of Directors of Crown. The Signing Shareholders
agreed that any shares received by either Signing Shareholder
would be subject to the Voting Agreement during its term and
any successor, assignee or transferee of shares from either Signing
Shareholder would be subject to the terms of the Voting
Agreement during its term. The Voting Agreement terminates
on June 25, 2006. As of December 31, 2005, the Signing
Shareholders collectively held 16,443,548 shares or 35.7% of the
outstanding Crown shares.

We entered into a stockholder and voting agreement with
Kinross, along with several Crown directors, Crown executive
officers and entities affiliated with these directors and officers
(collectively the “Signatories”), pursuant to which the Signatories
agreed, among other things to cause to be voted, all of the shares
of Crown common stock owned by them, as set forth in the
stockholder and voting agreement, as well as all shares of Crown
common stock acquired by them, as set forth in the stockholder
and voting agreement, in favor of the approval of the plan of
merger, and against the acquisition of Crown by any person
other than Kinross. As of December 31, 2005, 18,639,640 shares
of Crown common stock were subject to the stockholder and
voting agreement, representing approximately 40.5% of the
outstanding shares of Crown common stock entitled to vote at
the Crown special meeting.

changes and corrections of errors made in fiscal years beginning
after December 31, 2005. We have not yet adopted SFAS No.
154 and we have not determined what effect, if any, its adoption
will have on our consolidated financial position or results of
operations or cash flows.

In December 2004, the FASB issued a revision to SFAS No. 123,
“Share Based Payments” (“SFAS No. 123R”) which establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. SFAS
No. 123R requires public entities to measure the cost of
employee services received in exchange for an award of equity
instruments based upon the grant-date fair value of the award
and that the cost is recognized over the period during which an
employee is required to provide service in exchange for the
award, which is generally the vesting period. The grant-date fair
value of employee share options and similar instruments will be
measured using option-pricing models adjusted for any unique
characteristics of those instruments. SFAS No. 123R eliminates
the alternative to use Accounting Principle Board Opinion No.
25,Accounting for Stock Issued to Employees (“Opinion No.
25”) intrinsic value method of accounting that was provided in
SFAS No. 123 as originally issued. SFAS No. 123R also requires
entities to estimate the number of instruments for which the
requisite service is expected to be rendered and requires the
recording of incremental cost for any modification of the terms
or conditions of an award at the time of modification based
upon the difference of the fair value of the modified award and
the fair value of the award immediately before the modification.
SFAS No. 123R is effective as of the beginning of the first
interim or annual period that begins after December 15, 2005.
We adopted SFAS No. 123R, as revised, on January 1, 2006 and
we estimate we will recognize non-cash option expense of
$3,000 during 2006 as a result of adoption of SFAS 123R.

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As of December 31, 2005, we own 6,071,626 shares of Crown
common stock or approximately 13.2% of the outstanding shares
of Crown. These shares of Crown common stock have been
recorded in our investment in marketable equity securities using
the cost method. As of December 31, 2005, the fair market
value of these shares was $13,965,000.

Assuming the successful acquisition of Crown by Kinross, the
Management Agreement will be terminated and we will contract
directly with Crown management and directly pay all
administrative expenses. If we terminate the Management
Agreement, we have estimated our annual general and
administrative costs would be approximately $400,000 to
$500,000 higher as a result of increases in salaries and benefits,
rent, audit and legal fees, administrative costs, and shareholder
relations costs with such increases in general and administrative
costs partially offset by an estimated reduction in annual
management fees of approximately $200,000. In the event that
the Kinross transaction is not completed, we anticipate that we
would continue to operate under the Management Agreement
with Crown.

Christopher E. Herald, and Mark E. Jones, III are directors of both
Crown and us. Christopher E. Herald, James R. Maronick and
Walter H. Hunt are officers of both Crown and us.

Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No.
133 and 140" ("SFAS No. 155"). SFAS No. 155 resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." SFAS No. 155 will become
effective for the first fiscal year after September 15, 2006. The
impact of SFAS No. 155 will depend on the nature and extent
of any new derivative instruments entered into after the effective
date. We have not yet determined what effect, if any, the
adoption of SFAS No. 155 will have on our financial position,
results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting
Changes and Error Corrections" ("SFAS No. 154") which
replaces Accounting Principles Board Opinion No. 20,
"Accounting Changes" ("Opinion No. 20") and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 requires retrospective application to
prior period application of changes in accounting principle,
unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154
defines "retrospective application" as the application of a different
accounting principle to prior accounting periods as if that
principle had always been used or as the adjustment of previously
issued financial statements to reflect a change in the reporting
entity and SFAS No. 154 defines "restatement" as the revising of
previously issued financial statements to reflect the correction of
an error. SFAS No. 154 carries forward without change the
guidance in Opinion No. 20 for reporting the correction of an
error in previously issued financial statements and changes in
accounting estimate. SFAS No. 154 is effective for accounting

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 11

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

REPORTS

To the Board of Directors and Stockholders of
Solitario Resources Corporation
Wheat Ridge, Colorado
We have audited the consolidated balance sheets of Solitario
Resources Corporation (a Colorado corporation) as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash
flows for each of the two years in the period ended December
31, 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation.We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Solitario Resources Corporation as of
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for the each of the two years in
the period ending December 31, 2005 in conformity with
accounting principles generally accepted in the United States
of America.

Ehrhardt Keefe Steiner & Hottman P.C.
March 10, 2006
Denver, Colorado

To the Board of Directors and Stockholders of
Solitario Resources Corporation
Wheat Ridge, Colorado
We have audited the accompanying consolidated statements of
operations, stockholders’ equity, and cash flows of Solitario
Resources Corporation and subsidiaries (the “Company”) for the
year ended December 31, 2003. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances but not
for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of
Solitario Resources Corporation and subsidiaries for the year ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

Deloitte & Touche, LLP
Denver, Colorado
March 10, 2004

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 12

STATEMENTS

Consolidated Balance Sheets

(in thousands except share and per share amounts)

December 31,
2005

December 31,
2004

Assets
Current assets:

Cash and cash equivalents
Joint venture receivable
Investments in marketable equity securities, at fair value
Investment in derivative instruments, at fair value
Prepaid expenses and other
Total current assets

Mineral properties, net
Investments in marketable equity securities, at fair value
Other assets

Total assets

Liabilities and Stockholders' Equity
Current liabilities:

Accounts payable
Due to Crown Resources Corporation
Deferred income taxes

Total current liabilities

Deferred income taxes

Commitments and contingencies (Notes 2 and 6)

Stockholders' equity:

2,120
—
3,491
18
36
5,665

2,675
10,568
129
19,037

69
45
1,362
1,476

2,220

76
299
3,036
38
17
3,466

2,653
9,219
32
15,370

142
79
—
221

2,633

Preferred stock, $0.01 par value, authorized 10,000,000 shares (none

issued and outstanding at December 31, 2005 and 2004)
Common stock, $0.01 par value, authorized, 50,000,000 shares

(27,459,492 and 24,726,992 shares issued and outstanding at
December 31, 2005 and 2004, respectively)

Additional paid - in capital
Accumulated deficit
Accumulated other comprehensive income

Total stockholders' equity

Total liabilities and stockholders' equity

—

275
25,909
(16,973)
6,130
15,341
19,037

247
22,132
(14,893)
5,030
12,516
15,370

On behalf of the Board:

Christopher E. Herald
Director

Daniel Leonard
Director

See Notes to Consolidated Financial Statements.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 13

Consolidated Statements of Operations

(in thousands except per share amounts)

Costs, expenses and other:

Exploration expense, net

Depreciation and amortization

General and administrative

Management fees to Crown

Unrealized loss (gain) on derivative instruments

Asset write - downs

Loss on sale of assets

Dividend income from Crown

Interest and other (net)

(Loss) income before income taxes

Income tax (expense) benefit

Net (loss) income

Basic and diluted (loss) earnings per common share

Basic and diluted weighted average shares outstanding

STATEMENTS

For the year ended December 31,
2004

2003

2005

2,072

1,088

576

423

—

(1,275)

(52)

(1,823)

(257)

(2,080)

(0.08)

27,311

119

629

390

418

488

404

351

1,704

(5,438)

—

(193)

(3,860)

935

(2,925)

(0.12)

25,190

—

(272)

4,023

(669)

3,354

0.14

23,638

See Notes to Consolidated Financial Statements.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 14

STATEMENTS

Consolidated Statements of Stockholders’ Equity

(in thousands
except share amounts)

Common Stock

Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total

Balance at December 31, 2002

23,407,134

234

$ 21,189

$ (15,322)

176

$ 6,277

Shares issued:

Option exercise

Private placement, net

16,000

1,500,000

Comprehensive income:

Net income

Net unrealized gain on

marketable equity
securities (net of
tax of $607)

Comprehensive income

—

1,295

—

1,310

—

3,354

—

3,354

—

979

—

979

4,333

Balance at December 31, 2003

24,923,134

249

22,498

(11,968)

1,155

11,934

Shares issued:

Option exercise

1,121,000

974

—

985

Deferred taxes on
option exercises

Cancellation of shares

(1,317,142)

Comprehensive income:

Net loss

Net unrealized gain

on marketable equity
securities (net of
tax of $2,481)

Comprehensive income

—

(13)

—

188

(1,528)

—

(2,925)

—

188

(1,541)

(2,925)

—

3,875

—

3,875

950

Balance at December 31, 2004

24,726,992

247

22,132

(14,893)

5,030

12,516

Shares issued:

Cash

Option exercise

Deferred taxes on
option exercises

Comprehensive loss:

Net loss

Net unrealized gain

on marketable equity
securities (net of
tax of $704)

Comprehensive loss

2,700,000

32,500

—

3,746

—

3,773

(2,080)

—

(2,080)

—

1,100

—

1,100

(980)

Balance at December 31, 2005

27,459,492

275

$ 25,909

$ (16,973)

6,130

$ 15,341

See Notes to Consolidated Financial Statements.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 15

Consolidated Statements of Cash Flows

(in thousands)

Operating activities:

Net (loss) income
Adjustments:

Unrealized loss (gain) on derivative instruments
Depreciation and amortization
Asset write-downs
Deferred income taxes
Loss on asset and equity security sales
Interest income received in stock
Interest income from amortization of note discount
Other
Changes in operating assets and liabilities:

Prepaid expenses and other current assets
Accounts payable
Due to Crown Resources Corporation

Net cash used in operating activities

Investing activities:

Additions to mineral interests and other
Other assets
Proceeds from sale of marketable equity securities
Collection on note receivable
Investment in Crown Resources Corporation

promissory notes and warrants
Net cash (used in) provided by investing activities

Financing activities:

Issuance of common stock

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

Supplemental disclosure of cash flow information:

Deferred taxes on stock option exercises charged

to additional paid—in capital

Treasury stock received in spin—off from Crown Resources

Corporation as treasury stock

Cancellation of treasury stock
Non - cash proceeds on the sale of marketable equity securities
Conversion of Crown notes receivable to shares of

STATEMENTS

For the year ended December 31,
2004

2003

2005

(2,080)

(2,925)

3,354

20
29
30
257
—
—
—
—

279
(73)
(34)
(1,572)

(52)
(126)

—
—

—

(178)

3,794
3,794

2,044
76
2,120

1,704
119
64
(935)
59
(142)
(12)
—

(284)
89
54
(2,209)

(76)
(25)
16
112

—
27

985
985

(1,197)
1,273
76

188

$
$

—
—
— $

1,541
(1,541)
57

(5,438)
488
—
669
—

(207)
(22)
26

(6)
27
(48)
(1,157)

(10)
—
—
111

(400)
(299)

1,324
1,324

(132)
1,405
1,273

—

—
—
—

Crown common stock

—

400

See Notes to Consolidated Financial Statements.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 16

NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 12/31/05, 04 AND 03

1. Business and Summary of Significant Accounting Policies:
Business and company formation
Solitario Resources Corporation ("Solitario" or the "Company")
engages principally in the acquisition and exploration of mineral
interests. At December 31, 2005, Solitario's mineral interests are
located in Brazil, Bolivia, Peru and Mexico. Solitario was incorporated
under the laws of the state of Colorado on November 15, 1984, as a
wholly-owned subsidiary of Crown Resource Corp. of Colorado,
("CRCC") which is a wholly-owned subsidiary of Crown Resources
Corporation (“Crown”). Prior to 1993, we had no activity. As of
December 31, 2005, we have 27,459,492 common shares outstanding.

Prior to July 26, 2004 CRCC owned 9,633,585 shares of our
common stock or approximately 37.1%. On July 26, 2004, Crown
completed a spin-off of its holdings of our shares to its shareholders,
whereby each Crown shareholder received 0.2169 shares of our
common stock for each Crown share they owned. As part of the
spin-off, Crown retained 998,306 of our shares, of which it retains
36,004 shares as of March 15, 2006, for the benefit of Crown’s
warrant holders who will receive those shares when the warrant
holders exercise their warrants. Crown has disclaimed any beneficial
ownership interest in those retained shares. In addition Crown
retained 93 of our shares, from fractional shares, which it intends to
sell. After the disposition of our shares retained for warrant holders
and fractional shares, Crown will no longer own any of our shares.
Because we owned 6,071,626 shares of Crown we received a
dividend of $1,275,000 on July 26, 2005 from a $0.21 per share
dividend paid by Crown and, as part of the spin-off, we received
1,317,142 shares of our own common stock, which were retired on
August 11, 2004, and have the status of authorized but unissued
shares of common stock.

Solitario has a significant investment in Crown at December 31,
2005, which consists of 6,071,626 shares of Crown common stock
or approximately 13.2% of the outstanding Crown common shares.
Crown announced in November 2003 that it had executed an
acquisition agreement, whereby Kinross Gold Corporation
("Kinross") will acquire all of the outstanding shares of Crown at an
exchange rate of 0.32 shares of Kinross common stock for each
share of Crown common stock. This merger has been extended five
times and Solitario has no control over whether the merger will be
completed. Assuming the pending merger between Kinross and
Crown is completed, Solitario has estimated that as of March 15,
2006 its holdings of Crown common stock would convert into
shares of Kinross common stock with a value of approximately $19.1
million based upon the exchange ratio of 0.32 shares of Kinross
common stock for each share of Crown common stock and Kinross'
closing market price of $9.81 per share. A significant fluctuation in
the market value of Kinross common shares could have a material
impact on Solitario's investment in Crown, the market price of its
common stock and its liquidity and capital resources.

Financial reporting
The consolidated financial statements include the accounts of
Solitario and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting
principles"), and are expressed in US dollars.

In performing its activities, Solitario has incurred certain costs for
mineral properties. The recovery of these costs is ultimately

dependent upon either the sale of mineral property interests or the
development of economically recoverable ore reserves, the ability of
Solitario to obtain the necessary permits and financing to
successfully place the properties into production, and upon future
profitable operations, none of which is assured.

Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and 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. Some of the more significant
estimates included in the preparation of Solitario's financial
statements pertain to the recoverability of mineral properties and
their future exploration potential, the ability of Solitario to realize its
deferred tax assets and the fair value of Solitario’s investment in
Crown shares included in marketable equity securities.

Cash equivalents
Cash equivalents include investments in highly liquid money-market
securities with original maturities of three months or less when
purchased.

Mineral properties
On January 1, 2002, Solitario adopted Statement of Financial
Accounting Standards ("SFAS") No. 141,“Business Combinations”
and SFAS No. 142, "Goodwill and Other Intangible Assets," which,
among other things, required the reclassification of Solitario's mineral
properties as mineral interests (intangible assets) and the amortization
of those assets over their expected useful lives. Solitario's mineral
property interests represent mineral use rights for parcels of land not
owned by Solitario. At January 1, 2002, Solitario reclassified
$3,680,000 from Mineral Properties, net to Mineral interests, net.
The excess of the cost of each of its interests in mineral properties
over the estimated residual value was amortized from January 1,
2002 through April 1, 2004 over the lesser of (i) the term or the
length of any mineral interest option or lease, or (ii) the estimated
life of the mineral interest, which approximates Solitario's estimated
exploration cycle. Solitario amortized its mineral interests over a
three-to-eight year period based upon facts and circumstances for
each mineral interest on a property-by-property basis including
Solitario's current intentions for the property and Solitario's history
with similar properties. On April 30, 2004 the Financial Accounting
Standards Board amended SFAS No. 141 and SFAS No. 142 to
provide that certain mineral use rights, conveyed by leases and
concessions, are tangible assets and that mineral use rights should be
accounted for based on their substance. This amendment was
effective for the first reporting period beginning after April 29, 2004,
with early adoption permitted. Solitario adopted the amendment
on April 1, 2004 and reclassified its interests in mineral properties
classified as Mineral Properties, net to Mineral interests, net in its
consolidated balance sheets and ceased amortizing exploration stage
mineral property interests prior to the commencement of
production. Solitario recorded $117,000 and $466,000 of
amortization of its mineral property interests for the years ended
December 31, 2004 and 2003.

Solitario expenses all exploration costs incurred on its mineral
properties, other than acquisition costs, prior to the establishment of
proven and probable reserves. Solitario regularly performs
evaluations of its investment in mineral properties to assess the
recoverability and/or the residual value of its investments in these

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 17

NOTES

assets. All long-lived assets are reviewed for impairment whenever
events or circumstances change which indicate the carrying amount
of an asset may not be recoverable, utilizing established guidelines
based upon discounted future net cash flows from the asset or upon
the determination that certain exploration properties do not have
sufficient potential for economic mineralization. During the years
ended December 31, 2005 and 2004, Solitario recorded impairments
of $30,000 and $64,000 of its mineral properties, respectively. There
were no mineral property impairments in 2003.

Solitario's net capitalized mineral properties of $2,675,000 and
$2,653,000 at December 31, 2005 and 2004, respectively, related to
gross land, leasehold and acquisition costs of $3,698,000 and
$3,676,000 at December 31, 2005 and 2004, respectively, less
accumulated amortization of $1,023,000 at December 31, 2005 and
2004. Solitario has not identified any proven and probable reserves
related to its mineral properties. The recoverability of these costs is
dependent on, among other things, the successful identification of
proven and probable reserves, as well as the potential to develop, sell
or joint venture its interests in the properties.

Derivative instruments
At December 31, 2003, Solitario owned Crown warrants, which
entitled Solitario the right to purchase Crown common stock, had a
net settlement feature and accordingly, Solitario classified the Crown
warrants as derivative instruments. Solitario recorded its investment
in these warrants at their estimated fair value, based upon quoted
prices of $5,591,000 at December 31, 2003. In July 2004, Solitario
exercised all of its Crown warrants and at December 31, 2004
Solitario did not own any Crown warrants. Solitario recognized any
increase or decrease in the fair value of the warrants up to the date of
their exercise as a gain or loss on derivative instruments in the
consolidated statement of operations. As of December 31, 2005
Solitario owns warrants for the purchase of 500,000 shares of TNR
Gold Corp. (“TNR”), which it received during 2004. The TNR
warrants are recorded at fair market value based upon quoted prices
and discounts and classified as derivative instruments. Solitario
recorded an decrease in the value of its TNR warrants of $20,000 for
the year ended December 31, 2005 and recorded an increase of
$38,000 for the year ended December 31, 2004. Solitario recorded a
decrease in the fair value of its Crown warrants of $1,742,000 for the
year ended December 31, 2004 and an increase in the fair value of
the warrants of $5,438,000 for the year ended December 31, 2003.

Marketable equity securities
Solitario's investments in marketable equity securities are classified as
available-for-sale and are carried at fair value, which is based upon
quoted prices of the securities owned. The cost of marketable
equity securities sold is determined by the specific identification
method. Changes in market value are recorded in accumulated
other comprehensive income within stockholders' equity, unless a
decline in market value is considered other than temporary, in which
case the decline is recognized as a loss in the consolidated statement
of operations. Solitario had marketable equity securities with fair
values of $14,059,000 and $12,255,000, respectively, and cost of
$4,137,000 at December 31, 2005 and 2004. Solitario has recorded
other comprehensive income for unrealized holding gains of
$9,922,000 and $8,118,000, respectively, net of deferred taxes of
$3,792,000 and $3,088,000, respectively, at December 31, 2005 and
2004 related to our marketable equity securities. During 2003 we
wrote down an investment in marketable equity securities for an
other than temporary decline of $26,000. There were no similar
items in 2004 or 2005.

The following table represents changes in marketable equity
securities:

Gross cash proceeds
Gross non-cash proceeds
Cost
Gross gain on sale

included in earnings
during the period

Gross loss on sale

included in earnings
during the period

Write-down of

marketable equity
securities

Unrealized holding

gain arising during
the period included
in other comprehensive
income, net of tax

Reclassification

adjustment for net
losses included in
earnings during the
period, net of tax

2005

$ -
-
-

2004
$ 16,000
57,000
132,000

2003

$ -
-
-

14,000

(73,000)

(26,000)

1,100,000

3,864,000

953,000

39,000

26,000

Foreign exchange
The United States dollar is the functional currency for all of
Solitario's foreign subsidiaries. Although Solitario's exploration
activities have been conducted primarily in Brazil, Bolivia, Peru and
Mexico, payments under substantially all of the land, leasehold, and
exploration agreements of Solitario are denominated in United
States dollars. Solitario expects that a significant portion of its
required and discretionary expenditures in the foreseeable future will
also be denominated in United States dollars. Foreign currency
gains and losses are included in the results of operations in the
period in which they occur.

Income taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of deferred taxes
related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred
tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses and tax
credits that are available to offset future taxable income and
income taxes, respectively. A valuation allowance is provided if it is
more likely than not that some portion or all of the deferred tax
assets will not be realized.

Earnings per share
The calculation of basic and diluted earnings (loss) per share is based
on the weighted average number of common shares outstanding
during the years ended December 31, 2005, 2004 and 2003.
Potentially dilutive shares related to outstanding common stock
options of 2,240,000, 2,273,000, and 3,488,000 for the years ended
December 31, 2005, 2004 and 2003, respectively, were excluded
from the calculation of diluted earnings (loss) per share because the
effects were anti-dilutive.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 18

NOTES

Employee stock compensation plans
Solitario accounts for certain awards under its 1994 Stock Option
Plan (the “Plan”) in accordance with Accounting Principles Board
Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees.” Under Solitario’s stock option plans, the exercise price
of stock options issued to employees equals the quoted market price
of the stock on the grant date. As a result of repricing of its options
in 1999, Solitario accounts for all grants which have been repriced as
variable awards and records increases and decreases in compensation
expense during the period based upon changes in the quoted market
price of Solitario’s stock in accordance with FASB Interpretation No.
44 “Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB No. 25).” There was no
compensation expense recorded during the years ended December
31, 2005, 2004 and 2003 as a result of variable plan accounting.As of
December 31, 2005 and 2004, there were no remaining options that
are subject to variable plan accounting.The Plan had a ten-year
duration and terminated during 2004. No further options may be
granted pursuant to the Plan as of December 31, 2005.

Pro forma information has been computed as if Solitario had
accounted for its stock options under the fair value method of SFAS
No. 123 "Accounting for Stock-Based Compensation." The fair
values of these options were estimated at the date of grant using a
Black-Scholes option pricing model. As there were no options
issued during 2005 and 2004, the following assumptions were used
for 2003: risk-free interest rate of 3.31%; dividend yield of 0 percent;
volatility factor of the expected market price of Solitario's common
stock of 65%; and a weighted average expected life of the options of
3.9. The weighted average fair value of the options granted was
estimated at $0.28 per share in 2003.

Had Solitario accounted for its stock options under the fair value
method of SFAS No. 123, the following results would have been
reported:

(in thousands, except
per share amounts)
Net income (loss),
as reported

Deduct total stock-

based compensation
expense determined
under fair value
based method for all
rewards, net of related
tax effects
Pro forma net
income (loss)

Earnings (loss) per share:
Basic and diluted
as reported
Basic and diluted

2005

2004

2003

$ (2,080)

$ (2,925)

$ 3,354

(8)

(24)

(54)

$ (2,088)

$ (2,949)

$ 3,300

(0.08)

(0.12)

$ 0.14

pro forma

(0.08)

(0.12)

$ 0.14

Segment reporting
Solitario operates in one business segment, minerals exploration. At
December 31, 2005, all of Solitario's operations are located in Peru,
Bolivia, Brazil and Mexico as further described in Note 2 to these
consolidated financial statements.

Included in the consolidated balance sheet at December 31, 2005
and 2004 are total assets of $2,944,000 and $2,716,000, respectively,

related to Solitario's foreign operations, located in Bolivia, Brazil,
Peru and Mexico. Included in mineral properties, net in the
consolidated balance sheet at December 31, 2005 and 2004 are net
capitalized costs related to the Pedra Branca Property, located in
Brazil, of $2,568,000. We are not aware of any foreign exchange
restrictions on Solitario’s subsidiaries located in foreign countries.

Recent accounting pronouncements
In February 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133
and 140" ("SFAS No. 155"). SFAS No. 155 resolves issues addressed
in SFAS No. 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets."
SFAS No. 155 will become effective for the first fiscal year after
September 15, 2006. The impact of SFAS No. 155 will depend on
the nature and extent of any new derivative instruments entered into
after the effective date. Solitario has not yet determined what effect
if any, the adoption of SFAS No. 155 will have on its financial
position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections" ("SFAS No. 154") which replaces
Accounting Principles Board Opinion No. 20, "Accounting
Changes" ("Opinion No. 20") and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements." SFAS No.
154 requires retrospective application to prior period application of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect
of the change. SFAS No. 154 defines "retrospective application" as
the application of a different accounting principle to prior
accounting periods as if that principle had always been used or as the
adjustment of previously issued financial statements to reflect a
change in the reporting entity and SFAS No. 154 defines
"restatement" as the revising of previously issued financial statements
to reflect the correction of an error. SFAS No. 154 carries forward
without change the guidance in Opinion No. 20 for reporting the
correction of an error in previously issued financial statements and
changes in accounting estimate. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 31, 2005. Solitario has not yet adopted
SFAS No. 154 and has not determined what effect, if any, its
adoption will have on Solitario's consolidated financial position or
results of operations or cash flows.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 19

NOTES

rendered and requires the recording of incremental cost for any
modification of the terms or conditions of an award at the time of
modification based upon the difference of the fair value of the
modified award and the fair value of the award immediately before
the modification. SFAS No. 123R is effective as of the beginning of
the first interim or annual period that begins after December 15,
2005. Solitario adopted SFAS No. 123R, as revised, on January 1,
2006 and estimates it will recognize non-cash option expense of
$3,000 during 2006 as a result of adoption of SFAS 123R.

2. Mineral Properties:
Solitario's mineral properties consist of use rights related to
exploration stage properties, and the value of such assets is primarily
driven by the nature and amount of economic mineral ore believed
to be contained, or potentially contained, in such properties. The
amounts capitalized as mineral properties include concession and
lease or option acquisition costs. Capitalized costs related to a
mineral property represent its fair value at the time it was acquired,
either as an individual asset purchase or as a part of a business
combination. Solitario has no production (operating) or
development stage mineral properties nor any interests in properties
that contain proven or probable reserves. Solitario's exploration stage
mineral properties represent interests in properties that Solitario
believes have exploration potential that is not associated with any
other production or development stage property. Solitario's mineral
use rights generally are enforceable regardless of whether proven and
probable reserves have been established.

The following represents Solitario's investment in mineral
properties:

(in thousands)

Mineral interests
Accumulated amortization
Net mineral interests

December 31,

2005
$ 3,698

(1,023)

$ 2,675

2004
$ 3,676
(1,023)
$ 2,653

As discussed in Note 1, the amortization of mineral interests
commenced January 1, 2002, upon the adoption of SFAS No. 142
and we no longer amortize our mineral properties as of April 1,
2004, in accordance with EITF 04-2. Amortization expense related
to mineral interests in 2004 and 2003 was $117,000 and $466,000,
respectively. We recorded a reduction of accumulated amortization
of $25,000 during 2004 in connection with property impairments.

Peru
Solitario holds exploration concessions or has filed applications for
concessions covering approximately 13,300 hectares in Peru. These
applications are subject to normal administrative approvals and the
mineral interests are subject to an annual rental of $3.00 per hectare
(approximately 2.477 acres per hectare) in June of each year, with
2,200 hectares subject to an additional $6.00 per hectare surcharge as
the concessions are more than 10 years old.

Bongará
Solitario acquired the initial Bongará exploration concessions in 1993.
The current holdings consist of a 100% interest concessions covering
approximately 6,000 hectares in northern Peru (the "Bongará
project"). Solitario initiated an effort in early 2005 to secure a new
joint venture partner to explore and develop the project.

Yanacocha
On April 26, 2000, Solitario completed a transaction with an affiliate
of Newmont Mining Corporation ("Newmont Peru") and sold its

interest in its Yanacocha project for $6 million and a sliding scale net
smelter return royalty ("NSR") that varies with the price of gold.
The NSR royalty applies to any commercial production on
exploration concessions covering approximately 60,000 hectares. In
January 2005, Solitario and Newmont Peru amended the NSR
royalty schedule so that the royalty rate was not only based on the
price of gold, but also considered the method of gold and copper
extraction and the national Peruvian NSR royalty rate schedule that
was enacted in 2004. Newmont Peru, through its subsidiaries and
affiliates, also agreed to a $4.0 million work commitment on
Solitario’s royalty property over the next eight years.

La Tola Gold Property
In October 2003, we acquired the La Tola project in southern Peru
to explore for gold and possibly silver. The project is located in
southern Peru and originally consisted of 14 concessions totaling
11,030 hectares. In April 2004, Solitario signed a Letter Agreement
with Newmont Peru, whereby Newmont Peru could earn a 51%
interest in the La Tola property by completing $7.0 million of
exploration over four years and an additional 14% interest by
completing a feasibility study and by arranging 100% project
financing. On June 22, 2005, Newmont Peru informed Solitario
that it had elected to terminate its option to earn an interest in the
La Tola project and Solitario recorded an $18,000 impairment
related to the La Tola project. Solitario retains six claims covering
4,700 hectares. Solitario is evaluating what additional work, if any, to
conduct at the La Tola Property.

Newmont Strategic Alliance
On January 18, 2005, Solitario signed a Strategic Alliance Agreement
with Newmont Overseas Exploration Limited (“Newmont
Exploration”), a subsidiary of Newmont Mining Corporation, to
explore for gold in South America. Concurrent with the signing of
the Alliance Agreement, Newmont Mining Corporation of Canada,
Limited ("Newmont Canada") purchased 2.7 million shares of
Solitario common stock (or approximately 9.9% of Solitario's issued
and outstanding shares) for Cdn$4,590,000 or $3,773,000. Solitario
has committed to spend $3.78 million over the next four years on
gold exploration in regions (“Alliance Projects”) that are mutually
agreed upon by Newmont Exploration and Solitario. The first two
Alliance Project areas are located in southern Peru and total
approximately 10,000 square kilometers in size. If Solitario acquires
properties within Alliance Project areas and meets certain minimum
exploration expenditures, Newmont Exploration will have the right
to joint venture acquired properties and earn up to a 75% interest by
taking the project through feasibility and financing Solitario’s retained
25% interest into production. Newmont Exploration may elect to
earn a lesser interest or no interest at all, in which case it would retain
a 2% net smelter return royalty. Newmont Exploration also has a
right of first offer on any non-alliance Solitario property, acquired
after the signing of the Alliance Agreement, that Solitario may elect
to sell an interest in, or joint venture. As of December 31, 2005, we
have expended $335,000 of the total commitment of $3,773,000.

Two properties were acquired within the Alliance Project area
during 2005. The Libertad Gold property is located in the Arequipa
Department of southern Peru approximately 100 kilometers from
the city of Arequipa.Two claims owned by Solitario, comprising
1,400 hectares are located along a local unpaved road that is open
year round. In September 2005 Solitario staked two claims at the
Pillune Property totaling 1,200 hectares in the Arequipa Department
of southern Peru. Solitario paid $8,000 in acquisition costs for these
two Alliance properties.

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 20

NOTES

Brazil
Pedra Branca
In October 2000, Solitario recorded $3,627,000 in mineral interest
additions for the Pedra Branca project in connection with the
acquisition of Altoro Gold Corp. (“Altoro”).

Solitario holds a 100% interest in 47 concessions totaling 45,365
hectares in its Pedra Branca platinum-palladium (PGM) Project
located in Ceará State, Brazil. Solitario acquired Pedra Branca as
part of its acquisition of Altoro. Eldorado Gold Corporation holds a
2% net smelter return royalty on 10,000 hectares of Solitario’s
property position.

On January 28, 2003, Solitario entered into an agreement with
Anglo Platinum whereby Anglo Platinum may earn a 51% interest
in the Pedra Branca Project, by spending $7 million on exploration
at Pedra Branca over a four-year period. Anglo Platinum agreed to a
minimum expenditure of $500,000 during the first six months of
the agreement. Anglo Platinum can earn an additional 9% interest
in Pedra Branca (for a total of 60%) by completing a bankable
feasibility study. Anglo Platinum can also earn an additional 5%
interest in Pedra Branca (for a total of 65%) by arranging for
financing to put the project into commercial production. In July
2004, Solitario signed the First Amendment to the Pedra Branca
Letter Agreement that provided Anglo Platinum a ten-month period
(to May 26, 2005) to complete its Phase II $500,000 work
commitment, and extended subsequent work commitments by one-
year. Anglo Platinum met its minimum required expenditure for the
first six-month period and its second ten-month work commitment.
In November 2005 Anglo Platinum notified Solitario of its election
to proceed with the next $1.25 million in exploration over a one-
year period. Before proceeding with this commitment Solitario and
Anglo Platinum must negotiate and sign a definitive operating
agreement by May 16, 2006. Should this agreement fail to be
signed or if Anglo Platinum declines to continue for some other
reason, Solitario will retain 100% of the Pedra Branca Project.

Other Brazil projects
The Mercurio Gold project is located in Para State in northern
Brazil approximately 250 km south of the town of Itaituba. It
consists of 173 claims covering 16,200 hectares. An agreement dated
March 14, 2005, with the underlying claim and surface rights holder
provides for transfer of a 100% interest of the mineral estate to
Solitario and payment of approximately $350,000 over a period of
60 months. The owner retains a 1.5% net smelter return that is
subject to purchase by Solitario for approximately $1,000,000.

In June of 2005 Solitario signed an agreement with the operator to
acquire a 100% interest in the Odin gold property in the state of
Para, Brazil. This agreement provided for payments to the operator
of $276,000 over a period of four years. The operator would have
maintained a 1% royalty on gold production subject to a buyout of
$1,000,000. Four holes were drilled on the property. In December
2005, Solitario decided to withdraw from the agreement and
Solitario has recorded a $2,000 impairment for the property.

Bolivia
Triunfo
In August 2003, Solitario signed an Option Agreement to acquire a
100% interest in the Triunfo gold-silver-lead-zinc property in west-
central Bolivia. The agreement was amended in March 2004. Terms
of the Option Agreement call for escalating payments totaling
$170,000 over a four-year period to the underlying owners. The
first, second and third payments to the owners of $10,000, $12,500

and $12,500, respectively, have been made. A 100% interest in the
property can be acquired at any time within a five-year timeframe
for a one-time payment of $1.0 million. Solitario has completed the
first year $100,000 work commitment as part of its five-year $2.3
million work commitment.

Mexico
In September 2005, Solitario signed an agreement with a private
Mexican mineral concession holder to option a 100% interest in the
918 hectare Pozos gold property near the city of San Luís de la Paz
in the state of Guanajuato, Mexico. As of December 31, 2005,
Solitario is conducting surface exploration work to determine if a
future drilling program is warranted.

In September 2005, Solitario signed an agreement with a private
Mexican mineral concession holder allowing Solitario to enter into
lease options on four separate properties located throughout central
Mexico. The Concepcion del Oro gold property is located near the
city of Mazapil in the state of Zacatecas and consists of 35
concessions totaling approximately 1,420 hectares. The Hedionda
gold property is located near the city of Allende in the state of
Guanajuato and consists of six concessions totaling 620 hectares.
The Las Tortugas gold property is located near the city of
Chiquilistlan in the state of Jalisco and consists of four concessions
totaling 400 hectares. The Las Purismas gold property is located
near the city of Tepic in the state of Navarit and consists of six
concessions totaling 600 hectares. At the end of the six-month
period, Solitario may elect to option any or all of the four
properties. Solitario is evaluating which, if any of these properties
we will elect to option. Additionally, this agreement provides for
payments to the same Mexican National in the case that certain
property were acquired within the Pachuca District of Hidalgo
State. The El Cura claim of 13,600 hectares was acquired subject to
this provision.

In August 2005, Solitario received title to the Zinda concession near
the city of Morelia in the state of Michoacan, Mexico. Solitario paid
$5,000 in concession fees (plus tax) to the Mexican government for
the 10,000-hectare concession. As of December 31, 2005, Solitario
is conducting surface exploration work to determine if a future
drilling program is warranted.

United States
Windy Peak Gold-Silver Project, Nevada
On July 12, 2004, Solitario signed an agreement (the “WP
Agreement”) with Silverthorn Exploration, Inc. (“Silverthorn”), a
private Nevada exploration company, to earn up to an 80% interest
in the Windy Peak property. To earn an 80% interest in the
property, the WP Agreement called for Solitario to make payments
to Silverthorn of $100,000 and spend $5,300,000 on exploration
and development over a five-year period. On June 28, 2005,
Solitario elected to terminate its option to earn an interest from
Silverthorn and recorded a $10,000 impairment related to the
Windy Peak project.

Exploration expense
The following items comprised exploration expense:

(in thousands)
Geologic, drilling and assay
Field expenses
Administrative
Joint venture reimbursement
Total exploration expense

2005
$ 923
727
522
(100)
$ 2,072

2004
$ 770
479
250
(411)
$ 1,088

2003
$ 488
237
150
(457)
$ 418

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 21

NOTES

3. Related party transactions:
Crown provides management and technical services to Solitario under a
management and technical services agreement originally signed in April
1994 and modified in April 1999, December 2000 and July 2002.
Under the modified agreement Solitario is billed by Crown for services
at 25% of Crown's corporate administrative costs for executive and
technical salaries, benefits and expenses, 50% of Crown's corporate
administrative costs for financial management and reporting salaries,
benefits, expenses and 75% of Crown's corporate administrative costs for
investor relations salaries, benefits and expenses. In addition, Solitario
reimburses Crown for direct out-of-pocket expenses. These allocations
are based upon the estimated time and expenses spent by Crown
management and employees on both Crown activities and Solitario
activities. Management of Solitario believes these allocations are
reasonable and the allocations are periodically reviewed by Solitario
management and approved by independent Board members of both
Crown and Solitario. Management service fees are billed monthly, due
on receipt and are generally paid within 30 days. Management service
fees incurred by Solitario were $423,000, $390,000, and $351,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.

On July 28, 2004, Solitario exchanged 500,000 shares of TNR Gold
Corp. ("TNR") common stock for 500,000 shares of TNR common
stock that were not available to be publicly traded in Canada until
November 28, 2004 and a warrant to purchase an additional 500,000
shares of TNR common stock for Cdn$0.16 per share for a period of
two years. The transaction was accounted for as a sale of Solitario’s
previously owned TNR shares at the fair market value on July 28, 2004
of $57,000 and an acquisition of the new TNR shares and warrants.
Solitario recorded a loss on sale of marketable equity securities of
$73,000 during the year ended December 31, 2004. The TNR shares
are classified as marketable equity securities held for sale.As of December
31, 2005, Solitario owns warrants for the purchase of 500,000 shares of
TNR, which it received in exchange for TNR shares during 2004. The
TNR warrants are recorded at fair market value based upon quoted
prices and classified as derivative instruments. Solitario recorded a loss on
derivative instruments of $20,000 and $38,000 for the increase in the
value of its warrants during the years ended December 31, 2005 and
2004, respectively. There were no gains and losses recorded for the fair
value of the TNR warrants in 2003. Christopher E. Herald, Solitario’s
CEO, is a member of the Board of Directors of TNR.

On July 26, 2004, Crown completed a spin-off of Solitario shares to its
shareholders, whereby each Crown shareholder received 0.2169 shares
of Solitario common stock for each Crown share they owned. As part
of the spin-off, Crown retained 998,306 of Solitario shares for the
benefit of Crown’s warrant holders who will receive those shares when
the warrant holders exercise their warrants. Crown has disclaimed any
beneficial ownership interest in those retained shares. In addition
Crown retained 93 shares, from fractional shares, which it intends to
sell. After the disposition of the shares retained for warrant holders and
fractional shares, Crown will no longer own any of Solitario shares. As
part of the spin-off Solitario received 1,317,142 shares of its own
common stock, which were retired on August 11, 2004, and have the
status of authorized but unissued shares of common stock.

In October 2001, Solitario invested in two 10% convertible secured
promissory notes ("Senior Notes") totaling $1,000,000 out of
$3,600,000 Senior Notes issued by Crown. The first Senior Note (the
"Solitario Note") of $350,000 had a conversion price of $0.2916 per
share and the second Senior Note of $650,000 had a conversion price
of $0.35 per share. The independent Board members of Crown and
Solitario approved the investment in the Notes. Solitario was paid

$50,000 in cash as interest income under the Senior Notes for the
year ended December 31, 2004. Solitario was paid 249,718, and
182,440 Crown shares, respectively with market values on the date of
issuance of $207,000 and $74,000, respectively, as interest income
under the Senior Notes for the years ended December 31, 2003 and
2002. On July 14, 2004, Solitario converted $1,000,000 face value of
Crown Senior Notes into 3,132,509 shares of Crown common stock,
which included 75,367 Crown shares, with a market value of
$142,000 on the date of issuance, for accrued interest through the date
of conversion on the Notes. Solitario recorded $949,000, the net
book value of Crown Senior Notes, as marketable equity securities for
the Crown shares received upon conversion of the Senior Notes.

As part of the investment in the Senior Notes, Solitario also received
two warrants. The first warrant gave Solitario the right to purchase
1,857,143 shares of Crown for $0.75 through October 2006 and the
second warrant gave Solitario the right to purchase 1,200,000 shares
of Crown at $0.60 through October 2006. The fair value of the
warrants at the time of issuance, $110,000, was recorded as a discount
to the Senior Notes. This discount was being amortized over the life
of the Senior Notes as additional interest income. On July 12, 2004,
Solitario exercised the two Crown warrants on a cashless exercise basis
per the terms of the warrants. Solitario received a total of 1,973,626
shares of Crown common stock from the exercise of these warrants.
The fair value of the warrants, based upon a quoted bid price, was
$3,849,000 at July 12, 2004, just prior to exercise and $5,591,000 at
December 31, 2003. Solitario recognized any increase or decrease in
the fair value of the warrants as an unrealized gain or loss on derivative
instruments in the consolidated statement of operations. Solitario
recorded a decrease in the value of TNR warrants of $20,000 and
$38,000 for the years ended December 31, 2005 and 2004,
respectively. Solitario recorded a decrease in the value of the Crown
warrants of $1,742,000 for the year ended December 31, 2004 and an
increase in the value of the Crown warrants of $5,438,000 for the year
ended December 31, 2003. Solitario recorded $3,849,000, the net
book value of our Crown warrants, as marketable equity securities for
the Crown shares received upon exercise of our Crown warrants.

Solitario entered into a Voting Agreement dated as of April 15, 2002
among Zoloto Investors, LP ("Zoloto") and Crown. Zoloto and
Solitario are both shareholders of Crown (the "Signing
Shareholders"). Pursuant to the Voting Agreement, Zoloto and
Solitario agreed that each will vote its owned shares during the term
of the Voting Agreement for the election of three designees of
Zoloto and one designee of ours (the "Designee Directors") to the
Board of Directors of Crown. The Signing Shareholders agreed that
any shares received by either Signing Shareholder would be subject
to the Voting Agreement during its term and any successor, assignee
or transferee of shares from either Signing Shareholder would be
subject to the terms of the Voting Agreement during its term. The
Voting Agreement terminates on June 25, 2006. As of December
31, 2005, the Signing Shareholders collectively held 16,443,548
shares or 35.7% of the outstanding Crown shares.

Solitario entered into a stockholder and voting agreement with Kinross,
along with several Crown directors, Crown executive officers and
entities affiliated with these directors and officers (collectively the
“Signatories”), pursuant to which the Signatories agreed, among other
things to cause to be voted, all of the shares of Crown common stock
owned by them, as set forth in the stockholder and voting agreement, as
well as all shares of Crown common stock acquired by them, as set forth
in the stockholder and voting agreement, in favor of the approval of the
plan of merger, and against the acquisition of Crown by any person

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 22

NOTES

other than Kinross. As of December 31, 2005, 18,639,640 shares of
Crown common stock were subject to the stockholder and voting
agreement, representing approximately 40.5% of the outstanding shares
of Crown common stock entitled to vote at the Crown special meeting.

As of December 31, 2005, Solitario owns 6,071,626 shares of Crown
common stock or approximately 13.2% of the outstanding shares of
Crown. These shares of Crown common stock have been recorded
in its investment in marketable equity securities using the cost
method. As of December 31, 2005, the fair market value of these
shares was $13,965,000.

Christopher E. Herald, and Mark E. Jones, III are directors of both
Crown and Solitario. Christopher E. Herald, James R. Maronick
and Walter H. Hunt are officers of both Crown and Solitario.

4. Income Taxes:
Solitario's income tax expense (benefit) consists of the following as
allocated between foreign and United States components:

(in thousands)
Deferred:

United States
Foreign

Operating loss and
credit carryovers:
United States
Foreign

Income tax

2005

2004

2003

$ 31
-

$ (645)
(51)

$ 2,207
(164)

226

(290)
51

(1,538)
164

expense (benefit)

$ 257

$ (935)

$ 669

Consolidated income (loss) before income taxes includes losses from
foreign operations of $2,476,000, $1,457,000, and $1,092,000 in 2005,
2004 and 2003, respectively. During 2005 and 2004, Solitario recognized
income tax deductions of $28,000 and $483,000, respectively, from the
exercise of nonqualified stock options. Stockholders’ equity has been
credited in the amount of $11,000 and $188,000, respectively, for the
income tax benefit of these deductions. During 2005, 2004 and 2003,
Solitario recognized other comprehensive income related to unrealized
gains on marketable equity securities of $1,804,000, $6,356,000 and
$1,586,000, respectively. Other comprehensive income has been charged
$704,000, $2,481,000 and $607,000, respectively, for the income tax
expense associated with these gains.

The net deferred tax assets/liabilities in the December 31, 2005 and
2004 consolidated balance sheets include the following components:

(in thousands)
Deferred tax assets:

Net operating loss (NOL) carryovers
Capital loss carryovers
Royalty
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:

Unrealized gain on derivative securities
Exploration costs
Unrealized gains on marketable
equity securities
Other

Total deferred tax liabilities

Net deferred tax liabilities

2005

2004

$ 5,516

1,560
55
(4,363)
2,768

1,599
870

3,869
12
6,350
$ 3,582

$ 5,101
21
1,560
26
(3,754)
2,954

1,551
870

3,166

5,587
$ 2,633

At December 31, 2005, Solitario has classified $1,362,000 of its
deferred tax liability as current, related to the current portion of its
investment in Crown common stock.

A reconciliation of expected federal income taxes on income (loss)
from operations at statutory rates, with the expense (benefit) for
income taxes is as follows:

(in thousands)
Expected income tax
expense (benefit)
Non-deductible foreign

expenses

Foreign tax rate differences
State income tax
Expiration of loss

carryovers

Change in valuation

allowance

Other
Income tax expense

2005

2004

2003

$ (620)

$ (1,310)

$ 1,368

202
25
33

72
7
(122)

(60)
1
338

542

609
8

422
(4)

(1,530)
10

(benefit)

$ 257

$ (935)

$ 669

During 2005 and 2004, the valuation allowance was increased by
$609,000 and 422,000, respectively, primarily as a result of increases
in net operating loss carryforwards, for which it was more likely than
not that the deferred tax benefit would not be realized. During
2003, the valuation allowance was reduced by $1,530,000 to reflect
the projected utilization of net operating loss carryforwards for
which no income tax benefit was previously provided.

At December 31, 2005, Solitario has unused US Net Operating Loss
("NOL") carryovers of $4,726,000 which begin to expire
commencing in 2010. Solitario also has foreign NOL carryovers at
December 31, 2005 of $10,863,000 that begin to expire four years
after the first year in which taxable income arises. In connection
with the Bankruptcy of Crown and Solitario's acquisition of Altoro
Gold Corp., Solitario had a greater than fifty percent change in
ownership as defined in Section 382 of the Internal Revenue Code.
Pursuant to Section 382, the amount of future taxable income
available to be offset by Solitario's carryovers is limited to
approximately $614,000 per year.

5. Fair Value of Financial Instruments:
For certain of Solitario's financial instruments, including cash and
cash equivalents, the carrying amounts approximate fair value due to
their short maturities. Solitario's marketable equity securities are
carried at their estimated fair value based on quoted market prices.

The fair value of the Crown shares was $13,965,000 and
$12,143,000 at December 31, 2005 and 2004, respectively. The fair
value of the TNR shares was $94,000 and $112,000 at December
31, 2005 and 2004, respectively.

The fair value of the TNR warrants was $18,000 and $38,000 at
December 31, 2005 and 2004. Solitario recognizes any increase or
decrease in the fair value of the warrants as a gain or loss on
derivative instruments in the consolidated statement of operations.

6. Commitments and Contingencies:
In acquiring its interests in mineral claims and leases, Solitario has
entered into lease agreements, which may be canceled at its option
without penalty. Solitario is required to make minimum rental and

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 23

NOTES

option payments in order to maintain its interests in certain claims
and leases. See Note 2. Solitario estimates its 2006 mineral property
rental and option payments to be approximately $378,500. If
Solitario's current joint venture partners elect to continue funding
their respective joint ventures throughout the remainder of 2006,
Solitario would be reimbursed for approximately $37,500 of those
costs. Solitario's mineral property agreement at the El Triunfo
Property in Bolivia commits us to exploration expenditures of
$200,000 in 2006 in order to maintain our option to purchase.

Solitario has committed to spend $3,773,000 over the next four
years on gold exploration in regions (“Alliance Projects”) that are
mutually agreed upon by Newmont Exploration and Solitario. As
of December 31, 2005, we have expended $335,000 of the total
commitment of $3,773,000.

Solitario has entered into certain month-to-month office leases for
its field offices in Peru and Brazil. The total rent expense for these
offices during 2005, 2004 and 2003 was approximately $36,000,
$29,000, and $17,000, respectively. In addition, Crown leases office
space under a non-cancelable operating lease for the Wheat Ridge,
Colorado office and Solitario is a co-signor on the lease, which

provides for minimum annual rent payments of $27,000 in 2006.
Crown paid approximately $30,000 for rent expense under this lease
in 2005. Should the Crown – Kinross merger be completed
Solitario will assume the liability for the Wheat Ridge office lease.

7. Stock Option Plan:
On March 4, 1994, Solitario's Board of Directors (the "Board")
adopted the 1994 Stock Option Plan (the "Plan"). The Plan has a
ten-year duration and terminated during 2004. As of December 31,
2005, no more options may be granted under the Plan. Up to
1,100,000 shares of Solitario's common stock were authorized for
issuance under the Plan. The Board voted for, and shareholders
approved, amendments that have increased the authorized shares
under the Plan to 3,736,000 as of June 2002.

All options have been granted at exercise prices that are equal to the
quoted market price of the stock on the grant date. The options
expire five years from the date of grant, and are subject to certain
vesting provisions, as determined by the Board.

The activity in the Plan for the three years ended December 31,
2005 is as follows:

Outstanding,

beginning of year

Granted
Exercised
Expired

Outstanding,
end of year

Exercisable,

end of year

Options

2,272,500
-
(32,500)

2,240,000

2,219,375

2005

Weighted Average

Exercise
Price (Cdn$)

0.82
-
0.75
-

0.82

0.83

2004

Weighted Average

Exercise
Price (Cdn$)

0.95
-
1.17
1.25

0.82

0.83

Options

3,488,500
-
(1,121,000)
(95,000)

2,272,500

2,073,750

Options

3,372,000
192,500
(16,000)
(60,000)

3,488,500

3,019,125

2003

Weighted Average

Exercise
Price (Cdn$)

0.96
0.77
1.16
1.16

0.95

0.97

As a result of the repricing of existing options in 1999, Solitario began to account for the repriced awards as variable as of July 1, 2000, in
accordance with FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25)." Accordingly, an increase in the current market price of Solitario common stock above the higher of the option strike price
and the market price of Solitario's common stock as of July 1, 2000, multiplied by options outstanding will be recorded as compensation
expense over the vesting term of the options. A subsequent reduction in the current market price, to the extent of previously recorded
compensation expense will be credited as a reduction of compensation expense. There was no compensation expense recorded during 2005,
2004 or 2003 as a result of variable accounting for the repriced options. As of December 31, 2005 all repriced options have expired.

The following table summarizes Solitario's stock options as of December 31, 2005:

Exercise Price
Cdn$

0.65
0.73
0.81
0.94
Total

Number

50,000
1,075,000
135,000
980,000
2,240,000

Options Outstanding

Options Exercisable

Weighted
Average
Remaining
Contractual
Life (in years)

2.1
1.2
2.6
0.1
0.8

Weighted
Average
Exercise
Price
Cdn$

0.65
0.73
0.81
0.94

Weighted
Average
Exercise
Price
Cdn$

0.65
0.73
0.81
0.94

Number
Exercisable

50,000
1,075,000
114,375
980,000
2,219,375

SLR2005ARFinsRevise5 5/5/06 2:35 PM Page 24

NOTES

8. Stockholders' Equity:
Because Solitario owned 6,071,626 shares of Crown, as part of the spin-off Solitario received 1,317,142 shares of its own common stock, which were
retired on August 11, 2004, and have the status of authorized but unissued shares of common stock. These shares of Solitario common stock were
recorded as treasury stock at $1,541,000, the fair value of the shares on July 26, 2004, the date of the spin-off by reducing the basis in Solitario’s
holdings of Crown common stock. Upon retiring these shares Solitario reduced common stock by $13,000 and reduced additional paid in capital by
$1,528,000.

During 2005 options for 32,500 shares of Solitario common stock were exercised for proceeds of $21,000.

9. Selected Quarterly Financial Data (Unaudited):
(in thousands)

Net income (loss)
Earnings (loss) per share:

Basic
Diluted

Weighted shares outstanding:

Basic
Diluted

(in thousands)

Net income (loss)
Earnings (loss) per share:

Basic
Diluted

Weighted shares outstanding:

Basic
Diluted

March 31,

June 30,

Sept. 30,(1)

Dec. 31,

(413)

(711)

$ 38

$ (994)

2005

$ (0.02)
$ (0.02)

$ (0.03)
$ (0.03)

26,887
26,887

27,429
27,429

$ 0.00
$ 0.00

27,433
28,611

2004

$ (0.04)
$ (0.04)

27,456
27,456

March 31,

June 30,

Sept. 30,(2)

Dec. 31,

(946)

(1,861)

$ 228

$ (346)

$ (0.04)
$ (0.04)

$ (0.07)
$ (0.07)

25,133
25,133

25,722
25,722

$ 0.01
$ 0.01

25,228
26,346

$ (0.01)
$ (0.01)

24,693
24,693

(1) Solitario reported net income during the third quarter of 2005 primarily related to the Crown dividend payment of $1,275,000 received

on July 26, 2005.

(2) Solitario reported net income during the third quarter of 2004 primarily related to $612,000 of unrealized gain on derivative instruments
related to its investment in Crown warrants. In addition, during the third quarter of 2004 Solitario recorded an increase in its deferred
tax liabilities related to its holdings of Crown stock from conversions of Crown Senior Notes and Crown warrants, which caused
Solitario’s net deferred tax liabilities to exceed its deferred tax assets at September 30, 2004. This allowed Solitario to recognize a deferred
tax benefit of $253,000, primarily related to its year-to-date loss during the quarter. Previously Solitario had provided a valuation
allowance that had completely offset its net operating loss carryforwards.

10. Subsequent Events:
On February 24, 2006 Crown and Kinross amended the Merger Agreement to (i) extend the date on which either party may terminate the
Merger Agreement if the merger contemplated therein has not closed (the "Termination Date") from March 31, 2006 to December 31,
2006, (ii) removed the valuation collar on the transaction, which had previously capped the transaction value at $110 million and (iii) reduced
the exchange ratio to 0.32 shares from the previous exchange ratio of 0.34 shares of Kinross common stock for each share of Crown
common stock.

During the first quarter of 2006, holders exercised options granted under the Solitario Resources Corporation 1994 Stock Option Plan for
980,000 shares of Solitario common stock at an exercise price of Cdn$0.94 per share and 50,000 shares of Solitario common stock at an
exercise price of Cdn$0.65 per share, respectively.

INFORMATION

Officers & Directors

Christopher E. Herald

President and Chief Executive Officer

Walter H. Hunt

Vice President – Operations

James R. Maronick

Chief Financial Officer

Mark E. Jones, III

Chairman

John Hainey

Director

Leonard Harris

Director

Dan Leonard

Director

SLR2005ARrevise11 4/12/06 2:51 PM Page 11

Corporate Offices

4251 Kipling Street, Suite 390

Wheat Ridge, Colorado 80033

Telephone: 303-534-1030

Fax: 303-534-1809

www.solitarioresources.com

Legal Counsel

Solomon, Pearl, Blum Heymann & Stich, LLP

Denver, Colorado

Fogler, Rubinoff LLP

Toronto, Ontario

Auditors

Ernhardt Keefe Steiner and Hottman, PC

Denver, Colorado

Transfer Agent

Computershare

Toronto, Ontario; 800-564-6253

Investor Relations

Questions and requests for information should be

directed to Debbie W. Mino, Director-Investor

Relations at 800-229-6827, or via email at

dwmino@solitarioresources.com

Notice of Annual Meeting

The Annual Meeting of Shareholders will be at

10 a.m. MDT on Tuesday, June 27, 2006 at the

Company’s corporate offices.

Stock Exchange Listing

TSX: SLR

The Company’s common stock has been listed and

traded in Canada on The Toronto Stock Exchange

since July 19, 1994 under the symbol SLR.

Designed & Produced by Pite Creative – www.pitecreative.com

SLR2005ARrevise11 4/12/06 2:51 PM Page 12

Solitario Resources Corporation

4251 Kipling Street, Suite 390
Wheat Ridge, Colorado 80033
www.solitarioresources.com
Toronto Stock Exchange: SLR

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