**UNITED
      STATESSECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**--------------------------------------------**


**FORM
      10-QSB**


--------------------------------------------




**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**For
        the Quarterly Period Ended September 30, 2007**
  **Commission
        File Number 1-13524**





**TIMELINE,
      INC.**


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





**Washington**
            
            **91-1590734**(State
                or other jurisdiction of incorporation or
                organization)
            
            (IRS
                Employer
              Identification
                No.)





**1700
      Seventh Avenue, Ste. 2100**


**Seattle,
      WA 98101**


(Address
      of principal executive offices)





**(206)
      357-8422**


(Issuer’s
      telephone number)








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





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:





**Class**
            
            **Outstanding
                at**
              **October
                31, 2007**Common
                Stock, $.01 Par Value
            
            4,190,998





Transitional
      Small Business Disclosure Format (check one):  Yes  ̈ No x







**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


**TIMELINE,
      INC.**





**CONSOLIDATED
      BALANCE SHEETS**








As
                  of
                September
                  30,2007
              (Unaudited)
            
            As
                  of,March 31,
              2007**ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            226,447
            
            $
            784,635Note
                receivable
            
            
            270,471
            
            
            —Prepaid
                expenses and other
            
            
            18,647
            
            
            59,469Total
                current assets
            
            
            515,565
            
            
            844,104Property
                and equipment, net of accumulateddepreciation
                of $19,618 and $18,943
            
            
            2,001
            
            
            2,676Capitalized
                patents, net of accumulatedamortization
                of $153,515 and $138,310
            
            
            257,819
            
            
            265,118Long-term
                notes receivable
            
            
            —
            
            
            505,609Other
                assets
            
            
            2,450
            
            
            2,450Total
                assets
            
            $
            777,835
            
            $
            1,619,957




**LIABILITIES
                AND SHAREHOLDERS’
                EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            280,563
            
            $
            346,436Accrued
                expenses
            
            
            24,197
            
            
            83,655Total
                current liabilities
            
            
            304,760
            
            
            430,091Total
                liabilities
            
            
            304,760
            
            
            430,091SHAREHOLDERS’
                EQUITY:Common
                stock, $0.01 par value, 20,000,000 sharesauthorized,
                4,190,998 shares issued and outstanding
            
            
            41,910
            
            
            41,910Additional
                paid-in capital
            
            
            10,584,396
            
            
            10,584,396Accumulated
                deficit
            
            
            (10,153,231
            )
            
            (9,436,440
            )Total
                shareholders’ equity
            
            
            473,075
            
            
            1,189,866Total
                liabilities and shareholders’ equity
            
            $
            777,835
            
            $
            1,619,957








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




1





**TIMELINE,
      INC.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**For
      the Three Months and Six Months Ended September 30, 2007 and
      2006**


**(unaudited)**








Three
                Months Ended
              September
                30,
            
            Six
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006REVENUE:Patent
                license
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Consulting
                and other
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —COST
                OF REVENUES:Patent
                license
            
            
            7,631
            
            
            7,358
            
            
            15,205
            
            
            14,607Total
                cost of revenues
            
            
            7,631
            
            
            7,358
            
            
            15,205
            
            
            14,607Gross
                loss
            
            
            (7,631
            )
            
            (7,358
            )
            
            (15,205
            )
            
            (14,607
            )OPERATING
                EXPENSES:General
                and administrative
            
            
            42,688
            
            
            80,527
            
            
            69,572
            
            
            158,674Patents
            
            
            189,056
            
            
            48,722
            
            
            615,675
            
            
            79,408Depreciation
            
            
            338
            
            
            338
            
            
            677
            
            
            709Discount
                on note receivable
            
            
            —
            
            
            —
            
            
            40,000
            
            
            —Total
                operating expenses
            
            
            232,082
            
            
            129,587
            
            
            725,924
            
            
            238,791Loss
                from operations
            
            
            (239,713
            )
            
            (136,945
            )
            
            (741,129
            )
            
            (253,398
            )OTHER
                INCOME:Interest
                income and other
            
            
            7,966
            
            
            26,505
            
            
            24,337
            
            
            52,998Total
                other income
            
            
            7,966
            
            
            26,505
            
            
            24,337
            
            
            52,998Loss
                from operations beforeincome
                taxes
            
            
            (231,747
            )
            
            (110,440
            )
            
            (716,792
            )
            
            (200,400
            )Provision
                for income tax
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss
            
            $
            (231,747
            )
            $
            (110,440
            )
            $
            (716,792
            )
            $
            (200,400
            )Basic
                net loss per share from operations
            
            $
            (0.06
            )
            $
            (0.03
            )
            $
            (0.17
            )
            $
            (0.05
            )Diluted
                net loss per share
            
            $
            (0.06
            )
            $
            (0.03
            )
            $
            (0.17
            )
            $
            (0.05
            )Shares
                used in calculation of basic anddiluted
                net loss per share
            
            
            4,190,998
            
            
            4,190,998
            
            
            4,190,998
            
            
            4,190,998








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




2





**TIMELINE,
      INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





**For
      the Six Months Ended September 30, 2007 and 2006**


**(unaudited)**








2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (716,792
            )
            $
            (220,400
            )Adjustments
                to reconcile net loss to net cash providedby
                (used in) operating activities:Depreciation
                and amortization
            
            
            15,881
            
            
            15,316Reassessment
                of UK tax liability accrual
            
            
            (60,586
            )
            
            —Discount
                on note receivable
            
            
            40,000
            
            
            —Stock-based
                compensation
            
            
            —
            
            
            5,950Changes
                in operating assets and liabilities:Prepaid
                expenses and other
            
            
            40,822
            
            
            18,845Accounts
                payable
            
            
            (65,873
            )
            
            (7,395
            )Accrued
                expenses and other
            
            
            1,128
            
            
            (36,194
            )Interest
                from note receivable
            
            
            (4,861
            )
            
            (30,000
            )Net
                cash used in operating activities
            
            
            (750,281
            )
            
            (233,878
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Investment
                in capitalized software and patents
            
            
            (7,907
            )
            
            (5,162
            )Proceeds
                from note receivable
            
            
            200,000
            
            
            —Net
                cash from (used in) investing activities
            
            
            192,093
            
            
            (5,162
            )CASH
                FLOWS FROM FINANCING ACTIVITIES
            
            
            —
            
            
            —NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (558,188
            )
            
            (239,040
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            784,635
            
            
            1,158,172CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            226,447
            
            $
            919,132SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid for interest
            
            $
            —
            
            $
            —







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




3


**TIMELINE,
      INC.**





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**September
      30, 2007**





**1.
      THE COMPANY**





Organization





The
      accompanying consolidated financial statements are of Timeline, Inc. and
      subsidiaries. Timeline, which is headquartered in Seattle, Washington, licenses
      intellectual property protected by patents granted by the U.S. Patent and
      Trademark Office and eight other countries.





Operations





We
      are in
      the business of licensing our intellectual property which consists of a
      portfolio of patents granted in nine different countries consisting of the
      United States of America, Australia, Canada, China, Hong Kong, Israel, Korea,
      Mexico and Singapore. At September 30, 2007, this line of business had generated
      approximately $14.8 million in total patent license fees since March 1998.
      However, patent licensing tends to be very litigious in nature and, as such,
      revenue generation has been and is expected to continue to be sporadic.





As
      of
      September 30, 2007, we had net working capital of approximately $211,000 and
      had
      an accumulated deficit of approximately $10,153,000 with total shareholders’
equity of approximately $473,000. These consolidated financial statements have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America, assuming we will continue as a going concern. Our
      auditors for fiscal year ended March 31, 2007, added an explanatory paragraph
      to
      their opinion on our fiscal 2007 financial statements stating that there was
      substantial doubt about our ability to continue as a going concern. Subsequent
      to September 30, 2007, we settled our patent litigation against ProClarity
      Corporation and we believe that our current cash and cash equivalents, and
      any
      net cash provided by operations are sufficient to meet anticipated cash needs
      for working capital and capital expenditures through fiscal 2008.





**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Interim
      Financial Statements**





The
      accompanying consolidated financial statements are unaudited, but in our opinion
      the financial statements include all adjustments necessary to state fairly
      the
      financial information set forth in this report in conformity with accounting
      principles generally accepted in the United States of America. Operating results
      for the three months and six months ended September 30, 2007 are not necessarily
      indicative of the results that may be expected for the year ending March 31,
      2008.





Certain
      notes and other information have been condensed or omitted from the interim
      financial statements presented in this Quarterly Report on Form 10-QSB.
      Accordingly, these financial statements should be read in conjunction with
      our
      annual financial statements for the year ended March 31, 2007, as
      previously reported in our Form 10-KSB.




4


**TIMELINE,
        INC.**
 
 **CONDENSED
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30, 2007**


**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued**




**Use
      of Estimates**





The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires the use of estimates and assumptions that affect
      the reported amounts of assets and liabilities, disclosure of contingent assets
      and liabilities known to exist as of the date the financial statements are
      published, and the reported amounts of revenues and expenses during the
      reporting period. Uncertainties with respect to such estimates and assumptions
      are inherent in the preparation of our financial statements. Accordingly, it
      is
      possible that the actual results could differ from these estimates and
      assumptions that could have a material effect on the reported amounts of our
      financial position and results of operations.





**Basis
      of Presentation**





Our
      subsidiaries, all wholly-owned, did not generate any revenue or expense for
      the
      quarter ended September 30, 2007.





**Revenue
      Recognition**





Revenue
      generated from the licensing of patents is recognized when a patent license
      agreement is signed, collectibility is probable and the amount of payment is
      fixed and determinable, consistent with SOP 97-2 and Staff Accounting Bulletin
      (SAB) No.101, “Revenue Recognition” (SAB 101).





For
      all
      licenses, we use a signed agreement as evidence of an arrangement. At the time
      of each transaction, we assess whether the fee associated with our revenue
      transactions is fixed and determinable and whether or not collection is
      reasonably assured. We assess whether the fee is fixed and determinable based
      on
      the payment terms associated with the transaction. If a significant portion
      of a
      fee is due after our normal payment terms, we account for the fee as not being
      fixed and determinable. In these cases, we defer revenue and recognize it when
      it becomes due and payable.





We
      assess
      the probability of collection based on a number of factors including the current
      financial condition of the customer. We do not request collateral from our
      customers. If it is determined that collection of a fee is not reasonably
      assured, revenue is deferred until the time collection becomes reasonably
      assured.





**Net
      Income (Loss) per Common Share**





We
      have
      adopted Statement of Financial Accounting Standards No. 128, which provides
      for
      calculation of “basic” and “diluted” earnings per share. Basic earnings per
      share includes no dilution and is computed by dividing net income available
      to
      common shareholders by the weighted average common shares outstanding for the
      period. Diluted earnings per share reflect the potential dilution of securities
      that could share in the earnings of an entity. There were 250,000 stock options
      and 7,500 warrants of common stock equivalents outstanding at September 30,
      2007. Basic earnings per share and diluted earnings per share are the same
      because under the treasury stock method of calculating diluted earnings per
      share, the options and warrants would be antidilutive.





**Stock-Based
      Compensation**





Effective
      April 1, 2006, we adopted the fair value method of accounting for stock-based
      compensation as required under SFAS No. 123R and also elected to use the
      modified prospective method of transition. As a result, an expense of $5,950
      was
      recorded to reflect the unvested portion of previously granted stock options
      which vested over the first seven months of fiscal 2007. No new options were
      granted during fiscal 2007 or the first six months of fiscal 2008 and, while
      the
      expense noted above is fully reflected in the statements, no current deferred
      tax benefit associated with the subject stock options was recorded as we
      maintain a valuation allowance that fully offsets our deferred tax assets.




5





**TIMELINE,
      INC.**





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**September
      30, 2007**






2.
      SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES – continued




**Fair
      Value of Financial Instruments**





Our
      financial instruments as defined by Statement of Financial Accounting Standard
      No. 107, “Disclosures about Fair Value of Financial Instruments,” include cash,
      accounts payable and accrued expenses. All instruments are accounted for on
      a
      historical cost basis, which, due to the short maturity of these financial
      instruments, approximates fair value at September 30, 2007 and March 31,
      2007.





**Impairment
      of Long-lived Assets**





In
      accordance with Statement of Financial Accounting Standards No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), we evaluate
      long-lived assets, including intangible assets other than goodwill, for
      impairment whenever events or changes in circumstances indicate that the
      carrying value of an asset may not be recoverable based on estimated
      undiscounted cash flows attributable to that asset. The amount of any impairment
      is measured as the difference between the carrying value and the fair value
      of
      the impaired asset. We do not currently believe that any of our long-lived
      assets are impaired.





**3.
      LITIGATION**





In
      June
      2005, we filed an action in the United States District Court for the Western
      District of Washington against ProClarity Corporation alleging infringement
      of
      our patents. In May 2006, Microsoft Corporation purchased all of the stock
      of
      ProClarity Corporation. We had gained information through discovery in the
      case
      against ProClarity and information garnered through various other means that
      led
      us to believe Microsoft Corporation had undertaken specific acts which
      constituted a material breach of the patent license between Timeline and
      Microsoft (the “1999 Agreement”). On June 28, 2007, we filed an action in King
      County Superior Court on the alleged breaches under the 1999 Agreement.  On
      June 1, 2007, we also filed an action in King County Superior Court on a
      companion claim against Microsoft for breach of a separate 1995 agreement
      between Timeline and Microsoft. On October 15, 2007, we reached a settlement
      agreement with Microsoft Corporation and ProClarity Corporation on both our
      patent infringement lawsuit filed against Microsoft and ProClarity and our
      breach of contract lawsuit filed against Microsoft, as further described in
      Footnote 4, Subsequent Events.





From
      time
      to time, we may pursue litigation against other third parties to enforce or
      protect our rights under our patents or our intellectual property rights
      generally.





**4.
      SUBSEQUENT EVENTS**





On
      October 15, 2007, we entered into a Confidential Settlement Agreement with
      Microsoft Corporation and ProClarity Corporation in settlement of our patent
      infringement lawsuit filed against Microsoft and ProClarity and our breach
      of
      contract lawsuit filed against Microsoft. Also on October 15, 2007, in
      connection with the Settlement Agreement, we entered into a Confidential Patent
      License Agreement with Microsoft.




Under
      the
      Settlement Agreement, Microsoft paid us a one-time payment of $5,000,000 as
      consideration for entering into the Settlement Agreement and the Patent License
      Agreement. The net proceeds to us from this amount will be reduced by payment
      of
      our 45% contingent attorneys’ fees and other expenses of the
      litigation.





Effective
      October 1, 2007, we entered into an amendment of our lease agreement for office
      space to extend the lease for eight months to May 31, 2008 and increase our
      base
      rent $170.80 per month.





6




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





*This
      Quarterly Report on Form 10-QSB includes a number of forward-looking statements
      that reflect our current views with respect to business strategies, future
      events and financial performance. These forward-looking statements are subject
      to certain risks and uncertainties, including those discussed below, that could
      cause actual results to differ materially from historical results or those
      anticipated, including the risks and uncertainties described below, as well
      as
      in our annual report on Form 10-KSB for the year ended March 31, 2007, under
      the
      caption “Risk Factors.” When used in this Report, the words "anticipate,"
      "believe," "intend," "may," “could,” “should,” ”would,” "will," "expect,"
“future,” “continue,” and variations of such words and similar expressions as
      they relate to our business are intended to identify such forward-looking
      statements, but are not the exclusive means of identifying such statements.
      Our
      actual results, performance or achievements could differ materially from the
      results expressed in, or implied by, these forward-looking statements. We do
      not
      undertake any obligation to revise these forward-looking statements to reflect
      any future events or circumstances. In addition, the disclosures under the
      caption "Risk Factors” consist principally of a brief discussion of risks which
      may affect future results and are thus, in their entirety, forward-looking
      in
      nature.* ***To
      facilitate readers in identifying forward-looking statements in this Report,
      we
      have attempted to mark sentences containing such statements with a single
      asterisk and paragraphs containing only forward-looking statements with double
      asterisks. However, no assurance can be made all such statements have been
      identified and marked.*** *Therefore,
      readers are urged to carefully review and consider the various disclosures
      made
      in this report and in our other reports previously filed with the Securities
      and
      Exchange Commission (the "SEC"), including our periodic reports on Forms 10-KSB
      and 10-QSB, and those described from time to time in our press releases and
      other communications, which attempt to advise interested parties of the risks
      and factors that may affect our business.*





**OVERVIEW**





Timeline,
      Inc., headquartered in Seattle, Washington, licenses intellectual property
      protected by patents granted by the U.S. Patent and Trademark Office and eight
      other countries. We currently hold seven patents issued by the U.S. Patent
      and
      Trademark Office on our technology, for a total of 148 issued claims. We have
      also been issued patents in Australia, Canada, China, Hong Kong, Israel, Korea,
      Mexico and Singapore.





Our
      consolidated financial statements for the quarter and six months ended September
      30, 2007 have been prepared on a going-concern basis, which contemplates the
      realization of assets and the settlement of liabilities in the normal course
      of
      business. We incurred a net loss of $231,747 for the quarter and $716,792 for
      the six-month period ending September 30, 2007. Subsequent to September 30,
      2007, we settled our lawsuits against ProClarity Corporation and Microsoft
      Corporation. Under the settlement agreement, Microsoft agreed to pay us a
      one-time payment of $5,000,000 and we entered into a patent license agreement
      with Microsoft. The net proceeds to us from this amount will be reduced by
      payment of our 45% contingent attorneys’ fees and other expenses of the
      litigation.* With the net proceeds from this settlement, we believe that our
      current cash and cash equivalents, and any net cash provided by operations
      are
      sufficient to meet anticipated cash needs for working capital and capital
      expenditures through fiscal 2008.*




7


**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





*The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates including, among others, those
      affecting revenues and the useful lives of tangible and intangible assets.
      The
      discussion below is intended as a brief discussion of some of the judgments
      and
      uncertainties that can impact the application of these policies and the specific
      dollar amounts reported on our financial statements. We base our estimates
      on
      historical experience and on various other assumptions that we believe to be
      reasonable under the circumstances, the results of which form our basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions, or if we made different
      judgments or utilized different estimates. Our estimates or judgments are based
      in part on anticipated future events or performance, and as such are
      forward-looking in nature, and are subject to many risks and uncertainties,
      including those discussed below and elsewhere in this Report. We do not
      undertake any obligation to update or revise this discussion to reflect any
      future events or circumstances.*





We
      have
      identified the policies below as critical to our business operations and the
      understanding of our results of operations. The impact and any associated risks
      related to these policies on our business operations is discussed throughout
      Management’s Discussion and Analysis or Plan of Operations where such policies
      affect our reported and expected financial results. For a detailed discussion
      on
      the application of these and our other accounting policies, see the Notes to
      Consolidated Financial Statements.





**Revenue
      Recognition**





We
      recognize revenue when persuasive evidence of an arrangement exists and delivery
      has occurred, provided the fee is fixed or determinable, and collectibility
      is
      probable. For all patent licenses, we use a signed agreement, as evidence of
      an
      arrangement. We assess whether the fee is fixed and determinable based on the
      payment terms associated with the transaction. If a fee is based upon a variable
      such as a royalty based on units sold, we account for the fee as not being
      fixed
      and determinable. In these cases, we defer revenue and recognize it when it
      becomes due and payable. We assess the probability of collection based on a
      number of factors, including past transaction history with the licensee and
      the
      current financial condition of the licensee. We do not request collateral from
      our licensees. If we determine that collection of a fee is not reasonably
      assured, we defer revenue until the time collection becomes reasonably
      assured.





**Capitalized
      Patents**





We
      capitalize the direct out-of-pocket costs to obtain patents on our technology.
      Such costs are amortized over the then remaining life of the respective patents,
      which had an initial life of 20 years. In the case of maintenance fees to renew
      our registration of a patent in a particular jurisdiction, the fee would then
      be
      amortized over the remaining portion of the original 20 year grant.* Should
      we
      determine that we will not be able to generate future revenues as a result
      of a
      patent, we would need to write off the remaining capitalized value of the patent
      in the period we determine that the patent is impaired.* At September 30, 2007,
      such a write-off would reduce our total assets by approximately $258,000. It
      would have no effect on cash. Costs of defending our patents are expensed as
      incurred, which, depending on the nature and complexity of the legal defense
      strategy, could materially impact our results of operations in any given
      period.*




8




**Impairment
      of Long-Lived Assets**





We
      assess
      the impairment of our long-lived assets, including property and equipment and
      capitalized patents, whenever events or changes in circumstances indicate that
      the carrying value may not be recoverable based on estimated undiscounted cash
      flows attributable to that asset. The amount of any impairment is measured
      as
      the difference between the carrying value and the fair value of the impaired
      asset. Our judgments regarding the existence of impairment indicators are based
      on legal factors and market conditions. Future events could cause us to conclude
      that impairment indicators exist and that certain assets are impaired.* Such
      an
      adjustment would have no effect on our current cash.*





**RESULTS
      OF OPERATIONS**





**Results
      of Operations**





Revenue/Gross
      Loss








Three
                Months Ended
            
            
            
            Six
                Months EndedSeptember
                30,
            
            
            
            September
                30,2007
            
            2006
            
            Change
            
            2007
            
            2006
            
            ChangePatent
                license revenue
            
            $
            —
            
            $
            —
            
            
            N/A
            
            $
            —
            
            $
            —
            
            
            N/APatent
                amortizationexpense
            
            
            (7,631
            )
            
            (7,358
            )
            
            4
            %
            
            (15,205
            )
            
            (14,607
            )
            
            4
            %Gross
                loss
            
            $
            (7,631
            )
            $
            (7,358
            )
            
            4
            %
            $
            (15,205
            )
            $
            (14,607
            )
            
            4
            %





We
      received no revenues during the first two quarters of fiscal 2008 or fiscal
      2007. Patent license revenue is very sporadic. Because of our litigation against
      ProClarity Corporation and Microsoft Corporation, since December 2005 we have
      not been successful in entering into new patent license agreements with third
      parties and we anticipated that this would continue until the litigation we
      instituted against ProClarity Corporation was resolved. Subsequent to the end
      of
      the September 30, 2007 quarter, on October 15, 2007 we settled the lawsuits
      with
      ProClarity and Microsoft. The settlement includes a patent license in favor
      of
      Microsoft, which provides a license for essential steps provided by Microsoft
      in
      any infringement of our patents when a Microsoft product is used in combination
      with a third party product. Consequently, many third party applications that
      are
      used in combination with a Microsoft product will not be required to obtain
      further patent licenses from Timeline.





Although
      the patent license with Microsoft reduces the number of potential third-party
      infringers of our patents, we do intend to continue to pursue patent license
      agreements during the remainder of fiscal 2008 and beyond either directly or
      in
      conjunction with a third party as a joint venture or partnership.* A number
      of
      favorable judicial decisions made during the course of litigation with
      ProClarity helped clarify the breadth of our patent coverage and the strength
      of
      our patents against any third party challenges to their validity. Additionally,
      we are considering the viability of an outright sale of the patents in
      combination with a liquidation or sale of the corporation. No definitive
      decision has been made in this regard as additional research is needed for
      our
      Board of Directors’ consideration.




9




Patent
      amortization expenses consist of amortization of capitalized costs of patent
      acquisition, filing and maintenance. We capitalize the cost of procuring
      patents, which mainly consists of attorneys’ and filing fees. Once a patent is
      granted, we also capitalize the expense of maintaining our registration in
      the
      various countries. These costs are amortized over the remaining life of the
      various patents on a straight line basis. The costs associated with litigation
      or negotiation of patent licenses with third parties is separately accounted
      for
      as “patent expenses” under “Operating Expense” below. Patent amortization
      expenses for the first quarter and six-month period of fiscal 2008 increased
      by
      4%, respectively, over the comparable periods in fiscal 2007 due to additional
      patent-related fees incurred during the last twelve months and added to the
      amortizable base.





Operating
      Expense





Three
                Months Ended
            
            
            
            Six
                Months EndedSeptember
                30,
            
            
            
            September
                30,2007
            
            2006
            
            Change
            
            2007
            
            2006
            
            ChangeGeneral
                & administrative
            
            $
            42,688
            
            $
            80,527
            
            
            (47
            %)
            $
            69,572
            
            $
            158,674
            
            
            (56
            %)Patent
                expense
            
            
            189,056
            
            
            48,722
            
            
            288
            %
            
            615,675
            
            
            79,408
            
            
            675
            %Depreciation
            
            
            338
            
            
            338
            
            
            (0
            %)
            
            677
            
            
            709
            
            
            (5
            %)Discount
                on notereceivable
            
            
            —
            
            
            —
            
            
            N/A
            
            
            40,000
            
            
            —
            
            
            N/ATotal
                operating expense
            
            $
            232,082
            
            $
            129,587
            
            
            79
            %
            $
            725,924
            
            $
            238,791
            
            
            204
            %





Expenses
      of operations in all periods reflect costs associated with patent litigation,
      pursuing licenses of the patents and the costs of maintaining the public entity.





General
      and administrative expense consists of salaries, legal and accounting fees,
      rent, insurance and other expenses associated with maintaining the corporate
      entity. We have attempted to streamline administrative expenses in all
      categories of general and administrative expense and achieved savings in this
      regard are reflected in lower costs in the first quarter and six months of
      fiscal 2008. We expect our general and administrative expense in future periods
      to increase somewhat due to the payment of some incentive compensation triggered
      by the result of the settlement of the lawsuits against ProClarity and
      Microsoft.*





Patent
      expense includes the costs of litigation, which mainly consist of expert witness
      fees, travel and reporting costs associated with depositions, and document
      production costs. Due to the fact litigation activity increased during fiscal
      2008 as we approached trial, expenses related to the patents increased
      dramatically over those experienced in fiscal 2007. This higher rate of expense
      continued into the third quarter of fiscal 2008, and we will record a large
      contingency attorney fee payment amounting to $2,250,000 in the quarter ending
      December 31, 2007.* Thereafter, we expect lower costs in future quarters until
      and unless we institute additional litigation.* While that is not our preferred
      approach, recent decisions in the U.S. Supreme Court and the Federal Circuit
      Courts make it very difficult to even discuss patent licensing with potential
      infringers prior to filing a lawsuit. These decisions likely mean the cost
      of
      licensing patents will increase dramatically industry wide and the federal
      court
      system will become increasingly jammed with such litigation.*





Depreciation
      expense decreased slightly in the six months ended September 30, 2007 as
      compared to 2006.




10




**Other
      Income and Expense**





Other
      income and expense generated net income of approximately $8,000 in the first
      quarter and $24,000 in the first six months of fiscal 2008 and consisted
      entirely of interest income. This compared to income of approximately $27,000
      in
      the first quarter and $53,000 in the first six months of fiscal 2007. The
      decrease was due to lower cash balances in our interest-bearing
      accounts.





**Income
      Tax**





No
      income
      tax expense was recorded in the comparable three-month and six-month periods
      of
      either fiscal 2008 or fiscal 2007. All income or loss is offset by appropriate
      adjustments to the valuation allowance of our net operating loss carry-forwards.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      September 30, 2007, we had net working capital of approximately $211,000.
      Additionally, as of September 30, 2007, our cash and cash equivalents were
      approximately $226,000 compared to cash and cash equivalents of approximately
      $785,000 as of March 31, 2007. This decrease was due to increased expenses
      during the quarter primarily from our patent litigation and no patent license
      revenue.





At
      September 30, 2007, we held one note receivable from Global Software, Inc.
      in
      principal amount totaling $260,000 from the sale of our software operations
      to
      them during fiscal 2006. This note receivable plus accrued and unpaid interest
      is payable on August 31, 2008. The promissory note bears interest
      at a rate
      of
      6% per annum, and is a general unsecured obligation of Global. The note is
      subject to set off in the event of indemnification claims or other claims by
      Global against us under the Asset Purchase Agreement. As of September 30, 2007,
      Global had not made any indemnification or other set-off claims against
      us.





We
      had no
      accounts receivable at September 30, 2007 or March 31, 2007.





Total
      liabilities were approximately $305,000 at September 30, 2007 compared to
      approximately $430,000 at March 31, 2007. The decrease in total liabilities
      is
      attributable to decreases in accounts payable and accrued expenses.





As
      described in Footnote 7, Subsequent Events, to our financial statements, as
      a
      result of the Settlement Agreement regarding our lawsuits against ProClarity
      and
      Microsoft and receipt of the payment of $5,000,000, we believe that our current
      cash and cash equivalents are sufficient to meet anticipated cash needs for
      working capital and capital expenditures through fiscal 2008.*




11


**Risk
      Factors**





Please
      see the discussion under “Risk Factors” contained in our Annual Report on Form
      10-KSB for the fiscal year ended March 31, 2007. In addition, our operating
      results may fluctuate due to a number of factors, including, but not limited
      to,
      the following factors:





·
            our
                patent licensing strategies regarding when and the number of potential
                infringers we approach,


·
            our
                ability to pursue and successfully negotiate further patent licenses
                and
                generate patent revenues,


·
            challenges
                to the validity of our patents,


·
            costs
                of litigation associated with our patent enforcement,
                and


·
            the
                cost of maintaining our public
                status.





These
      factors are difficult for us to forecast, and can materially adversely affect
      our business and operating results for one quarter or a series of quarters.**





**Item
      3**  **Controls
      and Procedure**





(a)
      Evaluation of Disclosure Controls and Procedures





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in our filings under the Securities Exchange Act of
      1934 is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and forms. Our Chief
      Executive Officer/Chief Financial Officer has evaluated our disclosure controls
      and procedures as of the end of the period covered by this Interim Report on
      Form 10-QSB and has determined that such disclosure controls and procedures
      are
      effective.





(b)
      Changes in Internal Controls





During
      the most recent fiscal quarter, there were no changes in our internal controls
      over financial reporting or in other factors  that
      have
      materially affected, or are reasonably likely to materially affect our internal
      controls.








**PART
      II. - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





In
      June
      2005, we filed an action in the United States District Court for the Western
      District of Washington against ProClarity Corporation alleging infringement
      of
      our patents. In May 2006, Microsoft Corporation purchased all of the stock
      of
      ProClarity Corporation. We had gained information through discovery in the
      case
      against ProClarity and information garnered through various other means that
      led
      us to believe Microsoft Corporation had undertaken specific acts which
      constituted a material breach of the patent license between Timeline and
      Microsoft (the “1999 Agreement”). On June 28, 2007, we filed an action in King
      County Superior Court on the alleged breaches under the 1999 Agreement.  On
      June 1, 2007, we also filed an action in King County Superior Court on a
      companion claim against Microsoft for breach of a separate 1995 agreement
      between Timeline and Microsoft.





On
      October 15, 2007, we entered into a Confidential Settlement Agreement with
      Microsoft Corporation and ProClarity Corporation in settlement of both our
      patent infringement lawsuit filed against Microsoft and ProClarity and our
      breach of contract lawsuit filed against Microsoft. Also on October 15, 2007,
      in
      connection with the Settlement Agreement, we entered into a Confidential Patent
      License Agreement with Microsoft. The effective date for both the Settlement
      Agreement and the Patent License Agreement is October 16, 2007.





12





**Item
      6.**  **Exhibits**





Exhibits:





10.1
            Confidential
                Settlement Agreement, effective October 16, 2007, between Timeline,
                Inc.,
                Microsoft Corporation and ProClarity
                Corporation.





10.2
            Confidential
                Patent License Agreement, effective October 16, 2007, between Timeline,
                Inc. and Microsoft Corporation.





31.1
            Certification
                of Charles R. Osenbaugh, President, Chief Executive Officer and Chief
                Financial Officer of Timeline, Inc. pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Charles R. Osenbaugh, President, Chief Executive Officer and Chief
                Financial Officer of Timeline, Inc. pursuant to 18 U.S.C. Section
                1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.






13





**SIGNATURE**








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.





**Timeline,
                Inc.**
              (Registrant)Date: November
              13, 2007
            By:
            /s/ Charles
              R. OsenbaughCharles
                R. Osenbaugh
              President/Chief
                Financial OfficerSigned
                on behalf of registrant and as principal
              financial
                officer.