Metaline Contact Mines (MTLI) 10QSB 2004 Q1 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from 1-1-04 to 3-31-04
[  ]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT.

For the transition period from                                      to                                      

Commission file number 000-31025

METALINE CONTACT MINES

(Exact name of small business issuer as specified in its charter)

Washington	91-0779945
(State or jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

6599 Prichard Creek Road, Murray, ID 83874

(Address of principal executive offices)

920-987-5317

(Issuer’s telephone number

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 14,531,254

Transitional Small Business Disclosure Format (Check one):  Yes  [  ]  No  [X]

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		F-1
Item 2. Management’s Analysis and Discussion		3
Item 3. Controls and Procedures		4
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		6
Item 2. Changes in Securities		6
Item 3. Defaults Upon Senior Securities		6
Item 4. Submission of Matters to a Vote of Security Holders		6
Item 5. Other Information		6
Item 6. Exhibits and Reports on Form 8-K		7
SIGNATURES		7
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

-2-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

METALINE CONTACT MINES

FINANCIAL STATEMENTS
March 31, 2004

Williams & Webster, P.S.
Certified Public Accountants
Bank of America Financial Center
601 W. Riverside, Suite 1940
Spokane, WA 99201

F-1

METALINE CONTACT MINES

TABLE OF CONTENTS

INDEPENDENT ACCOUNTANT’S REVIEW REPORT	F-3
FINANCIAL STATEMENTS
Balance Sheets	F-4
Statements of Operations	F-5
Statement of Stockholders’ Equity	F-6
Statements of Cash Flows	F-7
NOTES TO FINANCIAL STATEMENTS	F-8

F-2

The Board of Directors
Metaline Contact Mines
Murray, Idaho

INDEPENDENT ACCOUNTANT’S REVIEW REPORT

We have reviewed the accompanying balance sheet of Metaline Contact Mines as of March 31, 2004, and the related statements of operations, stockholders’ equity, and cash flows for the three months ended March 31, 2004 and 2003. All information included in these financial statements is the representation of the management of Metaline Contact Mines.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The financial statements for the year ended December 31, 2003 were audited by us and we expressed an unqualified opinion on them in our report dated March 5, 2004. We have not performed any auditing procedures since that date.

Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington

May 10, 2004

F-3

METALINE CONTACT MINES

BALANCE SHEETS

	March 31,			December 31,
	2004			2003
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	105,520		$	105,687
OTHER ASSETS
Prepaid expenses		3,000			—
Receivables from related parties		109,413			109,413
Accrued interest receivable		24,892			22,978
Investment in LLC		33,835			33,935
Total Other Assets		171,140			166,326
TOTAL ASSETS	$	276,660		$	272,013
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Deferred royalty income	$	3,880		$	3,880
Total Current Liabilities		3,880			3,880
COMMITMENTS AND CONTINGENCIES		—			—
STOCKHOLDERS’ EQUITY
Common stock, $0.05 par value; 20,000,000 shares authorized, and 14,531,254 14,064,300 shares issued and outstanding, respectively		726,570			703,222
Additional paid-in capital		316,582			302,165
Stock options		17,907			17,907
Accumulated deficit		(788,279	)		(755,161	)
Total Stockholders’ Equity		272,780			268,133
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	276,660		$	272,013

See accompanying notes and accountant’s review report.

F-4

METALINE CONTACT MINES

STATEMENTS OF OPERATIONS

	Three Months Ended
	March 31,			March 31,
	2004			2003
	(Unaudited)			(Unaudited)
REVENUES
Royalty income	$	3,880		$	3,880
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting and management fees		—			1,500
Property expense		37,765			—
Professional fees		—			6,785
Transfer agent fees		434			453
Taxes, licenses, and fees		300			400
Office supplies and expenses		368			1,016
TOTAL EXPENSES		38,867			10,154
OPERATING LOSS		(34,987	)		(6,274	)
OTHER INCOME (LOSS)
Dividend income		54			128
Interest income		1,915			1,915
Loss from investment in LLC		(100	)		(466	)
TOTAL OTHER INCOME		1,869			1,577
LOSS BEFORE TAXES		(33,118	)		(4,697	)
INCOME TAX EXPENSE		—			—
NET LOSS	$	(33,118	)	$	(4,697	)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED	$	nil		$	nil
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED		14,375,603			14,064,300

See accompanying notes and accountant’s review report.

F-5

METALINE CONTACT MINES

STATEMENT OF STOCKHOLDERS’ EQUITY

					Additional							Total
	Common Stock				Paid-in		Stock		Accumulated			Stockholders’
	Shares		Amount		Capital		Options		Deficit			Equity
Balance, December 31, 2002		14,064,300		703,222		302,165		17,907		(738,208	)		285,086
Net loss for the year ended, December 31, 2003		—		—		—		—		(16,953	)		(16,953	)
Balance, December 31, 2003		14,064,300		703,222		302,165		17,907		(755,161	)		268,133
Common stock issued at $0.08 per share for property expense		466,954		23,348		14,417		—		—			37,765
Net loss for the three months ended, March 31, 2004		—		—		—		—		(33,118	)		(33,118	)
Balance, March 31, 2004 (unaudited)		14,531,254	$	726,570	$	316,582	$	17,907	$	(788,279	)	$	272,780

See accompanying notes and accountant’s review report.

F-6

METALINE CONTACT MINES

STATEMENT OF CASH FLOWS

	Three Months Ended
	March 31,			March 31,
	2004			2003
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(33,118	)	$	(4,697	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Net loss in investment in LLC		100			466
Changes in assets and liabilities:
Increase in interest receivable		(1,914	)		(1,915	)
Increase prepaid expenses		(3,000	)
Payment of expenses from issuance of stock		37,765			—
Net cash provided (used) by operating activities		(167	)		(6,146	)
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:		—			—
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:		—			—
Net increase (decrease) in cash and cash equivalents		(167	)		(6,146	)
Cash and cash equivalents, beginning of period		105,687			111,124
Cash and cash equivalents, end of period	$	105,520		$	104,978
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid	$	—		$	—
Interest paid	$	—		$	—
NON-CASH TRANSACTIONS:
Payment of expenses from issuance of stock	$	37,765		$	—

See accompanying notes and accountant’s review report.

F-7

METALINE CONTACT MINES

NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Metaline Contact Mines (hereinafter “Metaline” or “the Company”) was incorporated in November of 1928 under the laws of the State of Washington for the purpose of engaging in mining and the buying and selling of ores, metals, and minerals.

The Company was reorganized and recapitalized in 1960 and its articles of incorporation were amended to expand its business purposes to include various additional business activities. Metaline has continued its operations since its formation and has historically acquired land, mineral rights, patented lode mining claims, and timber in the Pacific Northwest.

In the last quarter of 1996, Metaline transferred substantially all of its assets to a limited liability company. See Note 4.

The Company’s year end is December 31.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Accounting Method

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

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (hereinafter “SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that there was no impact to its financial statements from the adoption of this statement.

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (hereinafter “SFAS No. 149”). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments

F-8

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative

F-8

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

Instruments and Hedging Activities”. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (hereinafter “SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002. As the Company accounts for stock-based compensation using SFAS No. 123, the adoption of SFAS No. 148 has no material impact on the Company’s financial condition or results of operations.

Use of Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all short-term debt with original maturities of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The carrying amounts for cash, receivables, investments, accounts payable and accrued liabilities approximate their fair value. All instruments are accounted for on an historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at March 31, 2004.

Concentration of Risk

The Company maintains its cash in primarily one money market account, the funds of which are not insured by the Federal Deposit Insurance Corporation. The balance in that account was $105,149 and $105,687 at March 31, 2004 and December 31, 2003, respectively. Further, the Company’s sole source of revenues currently is royalty income received under a mineral property lease with Teck Cominco American, Inc. See Note 6.

F-9

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivative Instruments

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (hereinafter “SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, the last of which is effective June 30, 2003. These statements establish and clarify accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

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

Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.

At March 31, 2004, the Company had not engaged in any transactions that would be considered derivative instruments or hedging activities.

Investments

The Company accounts for its investment in Metaline Contact Mines, LLC using the equity method. See Note 3.

Compensated Absences

Currently, the Company has no employees; therefore, no liability has been recorded in the accompanying financial statements. The Company’s policy will be to recognize the costs of compensated absences when there are employees who earn such benefits.

Basic and Diluted Loss Per Share

Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Outstanding options have been excluded from the calculation of diluted loss per share as they would be antidilutive; accordingly, basic and diluted loss per share are the same.

Revenue Recognition

The Company recognizes royalty revenue as earned according to contract terms.

F-10

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 3 – INVESTMENT IN LLC

On October 30, 1996, the Company organized a Delaware limited liability company, Metaline Contact Mines, LLC (hereinafter “The LLC”). Upon organization of The LLC, the Company transferred substantially all of its assets (primarily real property surface rights and timber) to The LLC. At the time of The LLC’s formation, the Company was the sole managing member in The LLC, representing 100% ownership. In 1998, the majority of the Company’s interest in The LLC was expensed in connection with the sale of the majority of The LLC’s assets.

At the beginning of 1998, the Company’s former shareholders acquired 93% of The LLC by transferring their stock in the Company to The LLC in exchange for non-managing membership interests. See Note 7. At the conclusion of this share exchange, the Company’s percentage of ownership in The LLC was reduced to seven percent (7%). The Company wrote down its initial investment by 93% to reflect its diluted investment in The LLC. After the write down of its investment and net change in member capital during the year 1998, the value of the Company’s investment in The LLC was $45,440 at December 31, 1998.

After the dilution of its investment in The LLC, the Company continued as the managing member of The LLC. See Note 5.

At March 31, 2004, the Company recorded a quarterly loss on its investment in The LLC of $100 thereby reducing the Company’s recorded interest in The LLC to $33,835.

NOTE 4 - MINERAL PROPERTIES

In 1996, Metaline transferred timber and real property surface rights to The LLC (see Note 3) but retained underground mineral rights to the transferred real property and its mining claims, located in Pend Oreille County in Washington State. The timber and real property surface rights were deemed by management to have a value equal to their recorded cost and this cost was transferred to The LLC. The related mineral rights are carried at no cost on Metaline’s books.

In 1997, Metaline and The LLC jointly leased certain Pend Oreille County real estate and all related mineral rights to a major mining company. See Note 6.

In January 2004, the Company issued 466,954 shares of its common stock to Paymaster Resources Incorporated (hereinafter “Paymaster”), a related party (due to common officers and directors), in order to acquire Paymaster’s interest in the Gold Chest Mines minerals lease to patented mining claims in Shoshone County, Idaho. In this transaction, the Company also acquired Paymaster’s interest in an exploration agreement with New Jersey Mining Company which relates to the aforementioned mining claims. Because there are no proven and probable reserves, the Company recognized $37,765 of property expenses in connection with this agreement.

F-11

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 5 – RELATED PARTY TRANSACTIONS

In March 2002, the Company advanced $18,000 on a short-term, non-interest bearing, unsecured basis to Murrayville Land Company, LLC, an affiliated company, to facilitate a real estate purchase. This receivable was repaid in May 2003.

During 1998, The LLC sold property for a net gain of $5,958,762. Metaline’s share of this gain, before adjustments of the Company’s investment from The LLC’s operating results and write down from its substantial decrease in ownership of The LLC, was $507,858. See Note 3. The Company recorded a non-current, related party receivable of $109,413 for the balance of the distribution. Due to uncertainty as to the date this receivable will be collected, this asset together with accrued interest at the rate of 7 percent per annum is recorded as a non-current asset at March 31, 2004 and December 31, 2003.

In June 1998, Metaline executed an agreement with Nor-Pac Limited Company (hereinafter “Nor-Pac”), an affiliated company, wherein, for providing management and consulting services to Metaline, Nor-Pac was entitled to receive 500,000 shares of Metaline common stock in the second half of 1998, 250,000 shares of Metaline common stock quarterly in 1999 and $10,000 per month thereafter commencing on January 1, 2000. This agreement was modified with an effective date of January 1, 2002, reducing the fee to $3,000 per month. A further modification was made effective January 1, 2003, reducing the management fee to $500 per month.

For additional information on related parties, see Notes 3, 4, 6, 7 and 10.

NOTE 6 – MINING LEASE WITH PURCHASE OPTION

On September 1, 1997, Metaline and The LLC acting jointly as lessors executed an agreement with Cominco American Incorporated (hereinafter “Cominco”) wherein Cominco received the right to explore, develop, and mine Metaline’s underground mineral rights in Pend Oreille County, Washington for a period of twenty years with an option renewal period of the same length. Under this lease agreement, Cominco obligated itself to pay the lessors $3,000 per quarter for the first five years of the lease with ascending quarterly increments at each successive five year interval. The lease characterizes the aforementioned quarterly disbursements as “advance royalty payments” which may be fully offset against a three-percent production royalty retained by the lessors. The lease agreement gives Cominco the option to purchase 200 surface acres of the leased property for fair market value during the lease term.

During 2001, Teck Cominco Limited was formed, following the acquisition of Cominco Limited by another mining company, Teck Corporation. The former subsidiary of Cominco Limited, Cominco American Incorporated, was renamed Teck Cominco American, Inc., and continues as lessee under the original Cominco lease agreement.

Effective March 15, 2002, the aforementioned lease agreement was amended, thereby reducing the amount of acreage leased from the Company, and providing for an approximately three percent (3%) decrease in royalty payments.

F-12

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 6 – MINING LEASE WITH PURCHASE OPTION (continued)

From the inception of the lease through March 31, 2004, Metaline has received $94,846 in payments from Cominco and Teck.

NOTE 7 – CHANGE IN LLC OWNERSHIP

On June 1, 1998, Nor-Pac Limited Company (“Nor-Pac”) purchased control of The LLC from its three principal owners at the time (Bunker Limited Partnership, Hecla Mining Company, and Metaline Mining & Leasing Company) by acquiring these entities’ non-managing membership interests in Metaline Contact Mines LLC. See Notes 1 and 5.

NOTE 8 – INCOME TAXES

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

At March 31, 2004 and December 31, 2003, the Company had a net deferred tax asset of approximately $220,000 and $212,000, respectively, principally arising from net operating loss carryforwards for income tax purposes, which were calculated using a 34% tax rate. This resulted in an increase to the net deferred tax asset of approximately $8,000 for the quarter ended March 31, 2004. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established.

At March 31, 2004, the Company has a net operating loss carryforward of approximately $658,000, which will fully expire in the year 2024.

NOTE 9 – STOCK OPTIONS

The Company has adopted Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (hereinafter “SFAS No. 123”), which defines a fair value-based method of accounting for stock options and other equity instruments. This method measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period.

F-13

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

On November 16, 1999, the Company’s board of directors approved the Metaline Contact Mines 1999 Stock Option Plan. This plan allows the Company to distribute up to 2,000,000 shares of

F-13

METALINE CONTACT MINES
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2004

NOTE 9 – STOCK OPTIONS (continued)

common stock shares to officers, directors, employees and consultants through the authorization of the Company’s board of directors at an initial exercise price of $0.125, or $0.15, depending on the terms of the option certificate. The options may be exercised until November 16, 2009, at which time they expire.

The fair value of the options granted on November 12, 2001 was estimated using the Black-Scholes Option Price Calculation. The following assumptions were made to estimate fair value: the risk-free interest rate is 6.0%, volatility is 24%, and the expected life of the options is eight years. Accordingly, $4,275 of option expense was recorded in the Company’s financial statements as consulting and management fees. In accordance with Financial Accounting Standard No. 123 paragraph 115, this expense was deemed to be an estimate, subject to adjustment by decreasing the expense in the period of forfeiture.

As of March 31, 2004 and December 31, 2003, the Company had 1,125,000 options outstanding and exercisable at an average of $0.13 per share of common stock.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

All earnings from The LLC in 1997 and 1996 were attributed by The LLC’s principal owners to Metaline. Accordingly, Metaline reported these earnings as its own taxable income (on both Metaline’s and The LLC’s federal income tax returns) with Metaline retaining only a 6.9861% interest in The LLC. For calendar years 1998 through 2003, Metaline reported only its pro rata share (6.9861%) of taxable income from The LLC, with other LLC members reporting their respective share of LLC taxable income.

The LLC has agreed, in writing, to indemnify Metaline for any prior year income distributions requested by other LLC members. As of March 31, 2004, no cash or property distributions were made by the LLC to its members for indemnification purposes. In view of the ownership changes in The LLC, future distributions are expected to be made by The LLC to its members as determined from time to time by Metaline, its managing member. See Note 7 regarding a change in LLC ownership and see Note 5 regarding related party commitment.

F-14

Item 2. Management’s Discussion and Analysis or Plan of Operations

Results of Operations

The Company had revenues from operations of $3,880 in the first quarter of 2004, the same as in the first quarter of 2003. The Company experienced an increased operating loss of $34,987 in the first quarter of 2004 versus $6,274 in the first quarter of 2003. The increased loss of $28,713 in the first quarter of 2004 was due to a significant property expense incurred as a result of the acquisition of the Golden Chest Lease (see “Item 5 – Other Information” below).

There was a decrease in management and consulting fees to nil in the first quarter of 2004 versus $1,500 in the first quarter of 2003. The decrease was a result of the termination of the Agreement For Management and Consulting Services with Nor-Pac Limited Company (“Nor-Pac”). Property expense increased to $37,765 in the first quarter of 2004, from nil in the first quarter of 2003. The increase of $37,765 was due to the fact that there are no proven or probable ore reserves on the properties subject to the Golden Chest Lease. Professional fees, consisting of legal and accounting were nil in the first quarter of 2004 versus $6,785 in the first quarter of 2003. The decrease of $6,785 was caused by the Company not being billed during the first quarter of 2004 by its auditors for the 2003 audit. Transfer agent fees decreased by $19 in the first quarter of 2004, to $434 in the first quarter of 2004 from $453 in the first quarter of 2003 due to a decrease in trading activities on the Company’s common stock. Office supplies and related expenses decreased to $368 in the first quarter of 2004 from $1,016 in the first quarter of 2003. The decrease of $648 was due primarily to the termination of the Company’s Office Services Agreement with Murrayville Land Company LLC. Taxes, licenses and fees decreased by $100 in the first quarter of 2004, from $400 in 2003 to $300 in 2004.

The Company’s other income increased $292 in the first quarter of 2004 to $1,869 from $1,577 in the first quarter of 2003, due to a reduced loss in its investment in Metaline Contact Mines LLC.

Financial Condition

The Company’s financial condition is such that it can continue at its current level of operations for an additional 2 years without the necessity of additional capital. Current level of operations includes management tasks such as auditing/accounting and other related SEC reporting requirements. Thereafter, the Company may require additional capital for future operating costs and working capital. Such additional capital could be obtained from either increased revenues from operations (in the event the Company’s mineral rights and properties are placed into commercial production by Teck Cominco American Incorporated (“Teck Cominco”) and/or New Jersey Mining Company (“New Jersey Mining”), or from the sale of shares of the Company’s authorized, but unissued, common stock.

Under the New Cominco Lease and New Jersey Exploration Agreement, any production decision on the Company’s mineral rights and properties are under the sole discretion and control of Teck Cominco and New Jersey Mining. Further, there are no assurances that the Company would be able to sell shares of its authorized, but unissued, common stock on terms acceptable to the Company. Any such sales of shares could be dilutive to the Company’s then-existing shareholders, and any debt financings could involve restrictive covenants with respect to future capital raising activities, and other financial and operational matters.

Presently there are no trends, events or uncertainties that have, or are reasonably likely to have, a material impact on the Company’s short-term or long-term liquidity; there are no material commitments for capital expenditures, except for the management of its own business affairs; and there are no known trends, events or uncertainties that have or that are reasonably expected to have a material impact on the revenues from operations.

-3-

From time-to-time, the Company will investigate future business opportunities that are consistent with its corporate charter and field of expertise, and in the opinion of management worthy of investigation. It should be noted, however, that the Company competes with other mining companies in connection with the acquisition of mineral properties, some of which have substantially greater financial resources than the Company. Management recognized such an opportunity with its acquisition of the Golden Chest Lease from Paymaster Resources Incorporated, and the New Jersey Exploration Agreement associated therewith.

Liquidity and Capital Resources

To date, the Company has funded its capital requirements from revenues from operations, and dividends and interest earned on its cash accounts. The Company’s cash position as of March 31, 2004 was $105,520 as compared to $105,687 as of March 31, 2003.

The Company has no debt. The Company does not expect to incur any debt in the immediate future to expand its current level of operation. The Company has no financial obligations under the New Cominco Lease, the Golden Chest Lease, or the New Jersey Exploration Agreement. It’s most significant cash requirements are its accounting fees and financial printing expenses associated with its reporting requirements with the U.S. Securities and Exchange Commission. Management fees payable to Nor-Pac were terminated on January 1, 2004. The Company also has a related party receivable from MCMLLC in the amount of $109,413, with accrued interest of $24,892, as of March 31, 2004. As the Managing Member of MCMLLC, the Company believes it has the ability to collect on this receivable in the event of a shortfall of cash.

Based on the foregoing, it is management’s opinion that at its current level of operations the Company can satisfy its working capital requirements internally in the immediate future without the need to seek outside sources of equity or debt funding.

Item 3. Controls and Procedures

Annual Evaluations of the Company’s Disclosure Controls and Internal Controls.

Within 90 days prior to the date of this Quarterly Report on Form 10-QSB, the Company evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (“Disclosure Controls”), and its “internal controls and procedures for financial reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”) was done under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the SEC require that in this section of the Quarterly Report the Company present the conclusions of the CEO and the CFO about the effectiveness of it’s Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.

CEO and CFO Certifications.

Appearing immediately following the Signatures section of this Quarterly Report there are two separate forms of “Certifications” of the CEO and the CFO. The first form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certification”). This section of the Quarterly Report, which you are currently reading, is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

-4-

Disclosure Controls and Internal Controls.

Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (“Exchange Act’), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that the Company’s (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Limitations of the Effectiveness of Controls.

The Company’s management, including the CEO and CFO, does not expect that it’s Disclosure Controls or its Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation.

The CEO/CFO evaluation of the Company’s Disclosure Controls and our Internal Controls include a review of the controls’ objectives and design, the controls’ implementation by the Company and the effect of the controls’ on the information generated for use in this Quarterly Report. In the course of the Controls Evaluation, management sough to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in the Company’s Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. The Company’s Internal Controls are also evaluated on an on-going basis by its independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including the improvements and corrections) as conditions warrant.

Among other matters, the Company sought in its evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in the Company’s Internal Controls, or whether the Company had identified any acts of fraud involving personnel who have a significant role in the Company’s Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors and to report on related matters in this section of the Annual Report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; these are control issues that could have

-5-

a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and may not be detected within a timely period by employees in the normal course of performing their assigned functions. The Company also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, management considered what revision, improvement and/or correction to make in accord with our on-going procedures.

In accord with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Conclusions.

Based upon the Controls Evaluation, the Company’s CEO and CFO have concluded that, subject to the limitations noted above, its Disclosure Controls are effective to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when its periodic reports are being prepared, and that its Internal Controls are effective to provide reasonable assurance that the Company’s financial statements are fairly presented in conformity with generally accepted accounting principles.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any legal proceedings, and management is not aware of any threatened litigation, claims or assessments.

Item 2. Changes in Securities

There has been no change in securities for the quarter ending March 31, 2004.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

On January 10, 2004, the Company entered into an Agreement with Paymaster Resources Incorporated (hereinafter “Paymaster”) to acquire Paymaster’s mineral lease on mining properties near Murray, Idaho commonly known as the Golden Chest Mine (the “Golden Chest Lease”), and Paymaster’s exploration agreement with New Jersey Mining Company (the “New Jersey Exploration Agreement”), which relates to the Golden Chest Mine. The Paymaster shareholders approved the Agreement at a special meeting on February 23, 2004.

-6-

Summary of Terms of Transaction

Under the terms of the Agreement, the Company issued Paymaster 466,954 shares of its authorized, but unissued, shares of common stock (the “Metaline Shares”) in exchange for Paymaster’s interests in the Golden Chest Lease, and the New Jersey Exploration Agreement. The Metaline Shares will not be registered with the Securities and Exchange Commission or any State, and will be restricted. In the event the Golden Chest Mine commence commercial production during the tenure of the New Jersey Exploration Agreement, or any lease as a result thereof, the Company will pay Paymaster an additional 1,000,000 shares of its authorized, but unissued, common stock.

Golden Chest Lease

The Golden Chest Lease continues until July 1, 2018, with options thereafter so long as there is commercial production. The Company has no advance royalty payments, work requirements, or other holding costs. The Company pays the Lessor, J.W. Beasley Interests LLC, an amount equal to Fifty Percent (50%), in kind, of royalties and other payments received from New Jersey Mining under the terms of the New Jersey Exploration Agreement.

New Jersey Exploration Agreement

The New Jersey Exploration agreement commenced on September 5, 2003, and calls for a 2-1/2 year exploration period. Commencing September 5, 2004, New Jersey Mining will issue the Company 10,000 shares of its common stock each 6-month period. If New Jersey Mining exercises its option to lease the Golden Chest Mine it will pay the Company an additional 100,000             shares of its common stock, and a sliding scale net smelter return royalty, which increases with the price of gold. The royalty is 3% up to a gold price of $400 per ounce, and then increases to a maximum of 6%. Also, New Jersey Mining will issue the Company 50,000 additional shares of its common stock for each 10,000 ounces of gold produced from the Golden Chest Mine.

Item 6. Exhibits and Reports on Form 8-K

Exhibit 31.1 – Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 – Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

There were no reports filed on Form 8-K during the three month period ended March 31, 2004.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED this the 19th day of May, 2004	METALINE CONTACT MINES
	By:	/s/ John W. Beasley
		John W. Beasley
		Secretary/Treasurer/CFO

-7-