|OMB APPROVAL                                                                                       
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB

(Mark One)



[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended December 31, 2005



or



[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _________ to _________





TIMBERLINE RESOURCES CORPORATION

(Exact Name of Small Business Registrant as Specified in its Charter)



|IDAHO                                          | 000-51549                 | 82-0291227                       
|---------------------------------------------- | ------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation) | (Commission File  Number) | (IRS Employer Identification No.)



|36 West 16th Avenue Spokane, Washington  |  | 99203     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)



Issuers Telephone Number: (509) 747-5225



Copies of Communications to:

Thomas E. Boccieri, Attorney at Law

561 Schaefer Avenue

Oradell, New Jersey 07649-2517

Telephone: 201-983-2024

Fax: 201-265-6069



Check whether the issuer (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days.   YES  [X]     NO   [  ]



Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)

[  ] Yes [X] No



APPLICABLE ONLY TO CORPORATE ISSUERS:



As of February 21, 2006 the number of the Company's shares of par value $0.001 common stock outstanding was 7,366,125.



Transitional Small Business Disclosure format (check one):  Yes [  ]  No [X]



SEC 2334 (9-05)

Potential persons who are to respond to the collection of information contained in this form are not

required  to  respond unless the  form displays a currently valid OMB control number.

1





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Timberline Resources Corporation

Form 10-QSB



Table of Contents





|Part I  Financial Information                                                                    |   
|------------------------------------------------------------------------------------------------- | --
|                                                                                                  |   
|Item 1. Financial Statements (Unaudited)                                                          |   
|                                                                                                  |   
|Balance Sheet at December 31, 2005 (Unaudited)                                                    | 3 
|Statements of Operations For the Three Month Periods Ended December 31, 2005 and 2004 (Unaudited) | 4 
|Statements of Cash Flows For the Three Month Periods Ended December 31, 2005 and 2004 (Unaudited) | 5 
|Notes to Financial Statements (Unaudited)                                                         | 6 
|                                                                                                  |   
|                                                                                                  |   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations     | 11
|                                                                                                  |   
|                                                                                                  |   
|Item 3.  Controls and Procedures                                                                  | 13
|                                                                                                  |   
|Part II  Other Information                                                                       |   
|                                                                                                  |   
|Item 1.  Legal Proceedings                                                                        | 14
|                                                                                                  |   
|Item 2.  Changes in Securities and Use of Proceeds                                                | 14
|                                                                                                  |   
|Item 3. Defaults Upon Senior Securities                                                           | 14
|                                                                                                  |   
|Item 4. Submission of Matters to a Vote of Security Holders                                       | 14
|                                                                                                  |   
|Item 5. Other Information                                                                         | 14
|                                                                                                  |   
|Item 6. Exhibits                                                                                  | 14
|                                                                                                  |   
|Signature Page                                                                                    | 15
|                                                                                                  |   
|                                                                                                 





2





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PART I - FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS



|TIMBERLINE RESOURCES CORPORATION      |                                            |                                                     |                                                    |            
|------------------------------------- | ------------------------------------------ | --------------------------------------------------- | -------------------------------------------------- | -----------
|(FORMERLY SILVER CRYSTAL MINES, INC.) |                                            |                                                     |                                                    |            
|(An Exploration Stage Company)        |                                            |                                                     |                                                    |            
|BALANCE SHEETS                        |                                            |                                                     |                                                    |            
|                                      |                                            |                                                     |                                                    |            
|                                      |                                            |                                                     |                                                    |            
|                                      |                                            |                                                     |                                                    |            
|ASSETS                                |                                            |                                                     |                                                    |            
|                                      | CURRENT ASSETS                             |                                                     |                                                    |            
|                                      |                                            | Cash                                                | $                                                  | 6,864      
|                                      |                                            |                                                     |                                                    |            
|                                      | PROPERTY AND EQUIPMENT                     |                                                     |                                                    |            
|                                      |                                            | Equipment, net of depreciation                      |                                                    | 425        
|                                      |                                            |                                                     | TOTAL PROPERTY AND EQUIPMENT                       |            
|                                      |                                            |                                                     |                                                    |            
|                                      | OTHER ASSETS                               |                                                     |                                                    |            
|                                      | Deferred acquisition costs                 |                                                     | 53,000                                             |            
|                                      | TOTAL OTHER ASSETS                         |                                                     | 53,000                                             |            
|                                      | TOTAL ASSETS                               | $                                                   | 60,289                                             | $          
|                                      |                                            |                                                     |                                                    |            
|LIABILITIES AND STOCKHOLDERS' EQUITY  |                                            |                                                     |                                                    |            
|                                      |                                            |                                                     |                                                    |            
|                                      | CURRENT LIABILITIES                        |                                                     |                                                    |            
|                                      |                                            | Accounts payable                                    | $                                                  | 8,154      
|                                      |                                            | Related party payables                              |                                                    | 1,225      
|                                      |                                            | Deferred lease income                               |                                                    | 47,857     
|                                      |                                            |                                                     | TOTAL CURRENT LIABILITIES                          |            
|                                      |                                            |                                                     |                                                    |            
|                                      | LONG-TERM LIABILITIES                      |                                                     |                                                    |            
|                                      |                                            | Convertible notes payable - related party           |                                                    | 75,556     
|                                      |                                            |                                                     | TOTAL LONG-TERM LIABILITIES                        |            
|                                      |                                            |                                                     |                                                    |            
|                                      | COMMITMENTS AND CONTINGENCIES              |                                                     | -                                                  |            
|                                      |                                            |                                                     |                                                    |            
|                                      | STOCKHOLDERS' EQUITY                       |                                                     |                                                    |            
|                                      |                                            | Preferred stock, $0.01 par value; 10,000,000 shares |                                                    |            
|                                      |                                            |                                                     | authorized, none issued and outstanding            |            
|                                      |                                            | Common stock, $0.001 par value; 100,000,000 shares  |                                                    |            
|                                      |                                            |                                                     | authorized, 7,366,125 and 7,266,125  shares issued |            
|                                      |                                            |                                                     | and outstanding                                    |            
|                                      |                                            | Additional paid-in capital                          |                                                    | 3,211,671  
|                                      |                                            | Accumulated deficit prior to exploration stage      |                                                    | (2,015,258)
|                                      |                                            | Accumulated deficit during exploration stage        |                                                    | (1,276,282)
|                                      |                                            |                                                     | TOTAL STOCKHOLDERS' EQUITY                         |            
|                                      | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $                                                   | 60,289                                             | $          



See accompanying condensed notes to interim financial statements.

3





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|TIMBERLINE RESOURCES CORPORATION      |                                           |                              |           |                    |           |                   
|------------------------------------- | ----------------------------------------- | ---------------------------- | --------- | ------------------ | --------- | ------------------
|(FORMERLY SILVER CRYSTAL MINES, INC.) |                                           |                              |           |                    |           |                   
|(An Exploration Stage Company)        |                                           |                              |           |                    |           |                   
|STATEMENTS OF OPERATIONS              |                                           |                             
|                                      |                                           |                              |           |                    |           |                   
|                                      |                                           |                              |           |                    |           |                   
|                                      |                                           |                              |           |                    |           |                   
|                                      |                                           |                              |           | Three Months Ended |           | Exploration Stage)
|                                      |                                           |                              |           | December 31,       |           | December 31,      
|                                      |                                           |                              |           | 2005               |           | 2004              
|                                      |                                           |                              |           | (Unaudited)        |           | (Unaudited)       
|REVENUES                              | $                                         | -                            | $         | -                  | $         | -                 
|                                      |                                           |                              |           |                    |           |                   
|GENERAL AND ADMINISTRATIVE EXPENSES   |                                           |                              |           |                    |           |                   
|                                      | Mineral exploration expenses              |                              | 203,458   |                    | 45,033    |                   
|                                      | Other general and administrative expenses |                              | 28,437    |                    | 18,387    |                   
|                                      |                                           | TOTAL EXPENSES               |           | 231,895            |           | 63,420            
|LOSS FROM OPERATIONS                  |                                           | (231,895)                    |           | (63,420)           |           | (1,297,302)       
|                                      |                                           |                              |           |                    |           |                   
|OTHER INCOME (EXPENSE)                |                                           |                              |           |                    |           |                   
|                                      | Lease income                              |                              | 8,445     |                    | 5,630     |                   
|                                      | Interest expense                          |                              | (12,320)  |                    | -         |                   
|                                      |                                           | TOTAL OTHER INCOME (EXPENSE) |           | (3,875)            |           | 5,630             
|                                      |                                           |                              |           |                    |           |                   
|LOSS BEFORE TAXES                     |                                           | (235,770)                    |           | (57,790)           |           | (1,276,282)       
|                                      |                                           |                              |           |                    |           |                   
|INCOME TAX EXPENSE                    |                                           | -                            |           | -                  |           | -                 
|NET LOSS                              | $                                         | (288,770)                    | $         | (57,790)           | $         | (1,329,282)       
|                                      |                                           |                              |           |                    |           |                   
|NET LOSS PER COMMON SHARE,            |                                           |                              |           |                    |           |                   
|                                      | BASIC AND DILUTED                         | $                            | (0.03)    | $                  | (0.01)    |                   
|                                      |                                           |                              |           |                    |           |                   
|WEIGHTED AVERAGE NUMBER               |                                           |                              |           |                    |           |                   
|                                      | OF COMMON SHARES OUTSTANDING,             |                              |           |                    |           |                   
|                                      | BASIC AND DILUTED                         |                              | 7,279,312 |                    | 5,783,125 |                   



See accompanying condensed notes to interim financial statements.



4





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|TIMBERLINE RESOURCES CORPORATION             |                                                 |                                                      |         |           |                    |          |                   
|-------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------- | ------- | --------- | ------------------ | -------- | ------------------
|(FORMERLY SILVER CRYSTAL MINES, INC.)        |                                                 |                                                      |         |           |                    |          |                   
|(An Exploration Stage Company)               |                                                 |                                                      |         |           |                    |          |                   
|STATEMENTS OF CASH FLOWS                     |                                                 |                                                      |         |           |                    |          |                   
|                                             |                                                 | Period from                                         
|                                             |                                                 |                                                      |         |           |                    |          |                   
|                                             |                                                 |                                                      |         |           |                    |          |                   
|                                             |                                                 |                                                      |         |           | Three Months Ended |          | Exploration Stage)
|                                             |                                                 |                                                      |         |           | December 31,       |          | December 31,      
|                                             |                                                 |                                                      |         |           | 2005               |          | 2004              
|                                             |                                                 |                                                      |         |           | (unaudited)        |          | (unaudited)       
|CASH FLOWS FROM OPERATING ACTIVITIES:        |                                                 |                                                      |         |           |                    |          |                   
|                                             | Net loss                                        |                                                      | $       | (235,770) | $                  | (57,790) | $                 
|                                             | Adjustments to reconcile net loss to net cash   |                                                      |         |           |                    |          |                   
|                                             | provided (used) by operating activities:        |                                                      |         |           |                    |          |                   
|                                             |                                                 | Depreciation and amortization                        |         |           | 32                 |          | 32                
|                                             |                                                 | Amortization of debt discount                        |         |           | 9,195              |          | -                 
|                                             |                                                 | Common stock issued for services                     |         |           | -                  |          | -                 
|                                             |                                                 | Common stock issued for mineral agreement and leases |         |           | -                  |          | -                 
|                                             |                                                 | Stock options granted for consulting                 |         |           | 13,554             |          | -                 
|                                             |                                                 | Non-cash lease income                                |         |           | -                  |          | (65,000)          
|                                             | Changes in assets and liabilities:              |                                                      |         |           |                    |          |                   
|                                             |                                                 | Accounts payable                                     |         |           | (30,743)           |          | (35,232)          
|                                             |                                                 | Related party payable                                |         |           | (15,229)           |          | (8,677)           
|                                             |                                                 | Accrued interest, notes payable                      |         |           | -                  |          | (1,922)           
|                                             |                                                 | Deferred lease income                                |         |           | (8,445)            |          | 81,639            
|                                             |                                                 | Net cash used by operating activities                |         |           | (267,406)          |          | (86,950)          
|                                             |                                                 |                                                      |         |           |                    |          |                   
|CASH FLOWS PROVIDED BY INVESTING ACTIVITIES: |                                                 |                                                      |         |           |                    |          |                   
|                                             | Purchase of equipment                           |                                                      |         | -         |                    | -        |                   
|                                             |                                                 | Net cash used by investing activities                |         |           | -                  |          | -                 
|                                             |                                                 |                                                      |         |           |                    |          |                   
|CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: |                                                 |                                                      |         |           |                    |          |                   
|                                             | Proceeds from related party notes payable       |                                                      |         | 100,000   |                    | -        |                   
|                                             | Proceeds from private placement                 |                                                      |         | -         |                    | -        |                   
|                                             |                                                 | Net cash provided by financing activities            |         |           | 100,000            |          | -                 
|                                             |                                                 |                                                      |         |           |                    |          |                   
|                                             | Net increase in cash and cash equivalents       |                                                      |         | (167,406) |                    | (86,950) |                   
|                                             |                                                 |                                                      |         |           |                    |          |                   
|Cash at beginning of period                  |                                                 |                                                      | 174,270 |           | 111,155            |          | 675               
|Cash at end of period                        |                                                 | $                                                    | 6,864   | $         | 24,205             | $        | 6,864             
|                                             |                                                 |                                                      |         |           |                    |          |                   
|SUPPLEMENTAL CASH FLOW DISCLOSURES:          |                                                 |                                                      |         |           |                    |          |                   
|                                             | Income taxes paid                               |                                                      | $       | -         | $                  | -        | $                 
|                                             | Interest paid                                   |                                                      | $       | 1,042     | $                  | -        |                   
|                                             |                                                 |                                                      |         |           |                    |          |                   
|NON-CASH FINANCING AND INVESTING ACTIVITIES: |                                                 |                                                      |         |           |                    |          |                   
|                                             |                                                 |                                                      |         |           |                    |          |                   
|                                             | Common stock issued for services                |                                                      | $       | -         | $                  | -        | $                 
|                                             | Common stock issued for mineral agreement       |                                                      | $       | -         | $                  | -        | $                 
|                                             | Note payable paid by lease transfer             |                                                      | $       | -         | $                  | -        | $                 
|                                             | Stock options issued for consulting             |                                                      | $       | 13,554    | $                  | -        | $                 
|                                             | Benefical conversion rights on convertible debt |                                                      | $       | 76,000    | $                  | -        | $                 
|                                             | Common stock issued for due diligence           |                                                      | $       | 53,000    | $                  | -        | $                 



See accompanying condensed notes to interim financial statements.

5





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TIMBERLINE RESOURCES CORPORATION

(FORMERLY SILVER CRYSTAL MINES, INC.)

(An Exploration Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

December 31, 2005



NOTE 1  BASIS OF PRESENTATION



The foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B as promulgated by the Securities and Exchange Commission (SEC). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited interim financial statements should be read in conjunction with the Companys audited financial statements for the year ended September 30, 2005. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented. Operating results for the three month period ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006.



The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported amounts of asset 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 the Companys financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Companys financial position and results of operations.



NOTE 2  ORGANIZATION AND DESCRIPTION OF BUSINESS



Timberline Resources Corporation (hereinafter Timberline or the Company) was incorporated in August of 1968 under the laws of the State of Idaho as Silver Crystal Mines, Inc., for the purpose of exploring for precious metal deposits and advancing them to production. Silver Crystal Mines operated and produced ore from the Silver Crystal (Ione) and Bear Top Mines in the Summit Mining District east of Murray, Idaho during the late 1960s and into the 1980s.  During the 1990s, the Company entered a period of dormancy, which lasted until the change of control in January 2004.  Effective February 2004, the Companys name was changed to Timberline Resources Corporation. The Companys fiscal year-end is September 30.



On January 15, 2004, at the same time as the change in control, the Company entered a new exploration stage coinciding with the acquisition of new mining properties.  Upon entering the new exploration stage, the Company did not continue owning or developing any properties it owned previously, nor has the Company re-acquired any previously owned properties.



6





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TIMBERLINE RESOURCES CORPORATION

(FORMERLY SILVER CRYSTAL MINES, INC.)

(An Exploration Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

December 31, 2005



NOTE 3  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.



Going Concern

As shown in the accompanying financial statements, the Company has limited revenues, has an accumulated deficit prior to the exploration stage of $2,015,258 and a deficit accumulated during the exploration stage of $1,276,282.  These factors indicate that the Company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.  Management plans to seek additional funding by means of a private placement of the Companys stock to carry out exploration and development of its acquired mineral properties.



Basic and Diluted Net Loss Per Share

Net 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.  Basic and diluted net loss per share were the same at December 31, 2005 and 2004, as the Companys outstanding and exercisable options and shares under convertible debt at December 31, 2005 of 1,245,000 would be anti-dilutive and the Company had no outstanding options or shares under convertible debt at December 31 2004.



Provision for Taxes

At December 31, 2005 and September 30, 2005, the Company had a net deferred tax asset calculated at an expected rate of 34% of approximately $1,095,000 and $1,020,000, respectively, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been recorded at December 31, 2005.



|                                       |   | December 31,
2005 |   | September 30,
2005
|-------------------------------------- | - | ----------------- | - | ------------------
|Net operating loss carryforwards       | $ | 3,290,000         | $ | 3,000,000         
|Deferred tax asset                     | $ | 1,095,000         | $ | 1,020,000         
|Deferred tax asset valuation allowance | $ | (1,095,000)       | $ | (1,020,000)       

7





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TIMBERLINE RESOURCES CORPORATION

(FORMERLY SILVER CRYSTAL MINES, INC.)

(An Exploration Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

December 31, 2005



At December 31, 2005, the Company has a net operating loss carryforward of approximately $3,290,000, which will expire in the years September 30, 2006 through September 30, 2025.  Not included in the calculation of deferred tax assets is approximately $48,000 in stock options granted to officers that are not deductible for tax purposes.  The table below shows the operating net loss carryforward by year of expiration.



The Tax Reform Act of 1986 substantially changed the rules relative to the use of net operating loss and general business credit carryforwards in the event of an ownership change of a corporation.  Due to the change in ownership during January 2004, the Company is restricted in the future use of net operating loss and tax credit carryforwards generated before the ownership change. As of December 31, 2005, this limitation is applicable to accumulated net operating losses of approximately $2,000,000, which were incurred prior to the change of ownership and would substantially limit the use of the Companys respective, existing losses.  The change in the allowance account from September 30, 2005 to December 31, 2005 was $75,000.



The above estimates are based upon managements decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.



Reclassification



Certain amounts from prior periods have been reclassified to conform to the current period presentation. This reclassification has resulted in no changes to the Companys accumulated deficit or net losses presented.



NOTE 4  MINERAL PROPERTY INTERESTS



On November 26, 2004, the Company signed a mineral property lease with Sterling Mining Company (as lessee) on four groups of unpatented lode mining claims (88 individual claims) located in Lincoln and Sanders County, Montana.  Upon execution of the lease, the Company was paid cash of $19,600 and Sterling Mining Corporation forgave loans totaling $65,000 and related interest of $2,669.  In return, Sterling received the right to explore and mine the aforementioned claims through May 31, 2007.  In addition, Sterling can renew the lease on an annual basis after 2007 by making annual lease payments of $5,000 per claim group and paying a one percent (1%) net smelter return royalty on any production from the claims that are subject to the agreement.  The Company is recognizing the $87,269 of lease income over the period of the initial lease which expires on June 1, 2007.  The Company has recognized for the three months ended December 31, 2005, $8,445 in lease income and the remaining balance is included in the financial statements as deferred lease income.



8





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TIMBERLINE RESOURCES CORPORATION

(FORMERLY SILVER CRYSTAL MINES, INC.)

(An Exploration Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

December 31, 2005



NOTE 5  PROPERTY AND EQUIPMENT



Property and equipment are stated at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets. The following is a summary of property, equipment, and accumulated depreciation:



|                              | December 31,
2005 | December 31,
2004      
|----------------------------- | ----------------- | -----------------------
|Equipment                     | $             643 | $                   643
|Less accumulated depreciation | (217)             | (88)                   
|                              | $             425 | $                   555



Depreciation expense for the three months ending December 31, 2005 and 2004 was $32 each period.  Maintenance and repairs are expensed as incurred.



NOTE 6  RELATED PARTY TRANSACTIONS



The Company has entered into seven related party contracts with consultants for professional services, to be paid at customary hourly or daily rates, plus expenses.  At December 31, 2005, $1,225 was accrued to be paid to some of these related parties and is included on the financial statements under accounts payable  related parties. During the year ended September 30, 2005, officers and shareholders of the Company paid expenses on behalf of the Company totaling $16,453.  This amount is reflected on the balance sheet as related party payables.



The Company received a loan of $125,000 from an officer of the company on August 24, 2005 (Note 6). On December 1, 2005, the Company entered into a loan agreement with Swallow Family, LLC, an entity owned by Mr. John Swallow, the Companys chairman, for the LLC to loan the Company $100,000, repayable at 10% interest on an interest only basis. Monthly payments are $833, beginning on January 1, 2006. The term of the loan is from December 1, 2005 to December 1, 2010. The loan is expected to be used to finance an exploration drilling program at the Snowstorm Project.



NOTE 7  CONVERTIBLE DEBT



On August 24, 2005, the Company entered into a loan agreement with Swallow Family, LLC, an entity owned by Mr. John Swallow, the Companys chairman, for the LLC to loan the Company $125,000, repayable at 10% interest on an interest only basis.  Monthly payments are $1,041.67, beginning on September 1, 2005.  The term of the loan is from September 1, 2005 to September 1, 2008.  The loan is convertible to shares of the Companys stock, at a price of $0.25 per share or the market price of the stock when the loan is repaid, whichever is less.  The loan has been used to finance an exploration drilling program at the Snowstorm Project.



The debt is convertible into shares of common stock at either $0.25 per share or the market price on the date of conversion, whichever is less, meaning a minimum of 600,000 shares would be issued.

9





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TIMBERLINE RESOURCES CORPORATION

(FORMERLY SILVER CRYSTAL MINES, INC.)

(An Exploration Stage Company)

CONDENSED NOTES TO FINANCIAL STATEMENTS

December 31, 2005



On December 1, 2005, the Company entered into a loan agreement with Swallow Family, LLC, an entity owned by Mr. John Swallow, the Companys chairman, for the LLC to loan the Company $100,000, repayable at 10% interest on an interest only basis.  Monthly payments are $1,042, beginning on January 1, 2006.  The term of the loan is from December 1, 2006 to December 1, 2010.  The loan is convertible to shares of the Companys stock, at a price of $0.25 per share or the market price of the stock when the loan is repaid, whichever is less.  The loan has been used to finance an exploration drilling program at the Snowstorm Project.



The debt is convertible into shares of common stock at either $0.25 per share or the market price on the date of conversion, whichever is less, meaning a minimum of 400,000 shares would be issued.



Following EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company calculated the value of the beneficial conversion feature of the notes and recorded the value as discounts on debt on the balance sheet.  The beneficial conversion was valued and recorded at $85,000 for the first note and $76,000 for the second, which are being amortized (effectively, a decreasing discount to debt) over the lives of the debts which is three years for each.  Amortization expense for the three months ended December 31, 2005 was $9,195, leaving a carrying value of the loans as $75,556.



NOTE 8  ACQUISITION OF KETTLE DRILLING



On December 19, 2005, the Company signed a letter of intent (LOI) to acquire Kettle Drilling, Inc. (Kettle), a privately held corporation.  Under the terms of the LOI, the Company issued to Kettle 100,000 non-refundable shares of its common in exchange for a 75-day option within which to acquire an initial 60% stake in Kettle for $2.8 million.  On closing, the Company will then receive and additional option to acquire the remaining 40% of Kettle for $2 million over 2 years.  Key management personnel at Kettle have agreed to stay on with the Company for a minimum of three years after the initial transaction closes.



The value of the shares on the date issuance was $0.53 or $53,000 in total.  This was recorded as a deferred acquisition cost on the financial statements.





NOTE 9  SUBSEQUENT EVENTS



Subsequent to the date of the financial statements, the Company initiated a private placement of the Companys common stock.  Under the private placement agreement, the Company can sell up to 8,000,000 shares of stock for a total of $4,400,000.  The stock is being sold in units, with each unit offered containing one share of common stock and one warrant to purchase 1⁄2 of a share of the Companys common stock (two warrants would be needed to purchase one share of common stock).  The units are to be sold for $0.55 per unit.  As of February 20, 2006, the Company has received approximately $1,300,000 under the private placement, and will issue the shares of stock at the closing of the private placement.

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ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



OVERVIEW



We commenced our exploration stage in January 2004 with the change in the control the Company, and we have not had any revenues and only losses since well before that time. Accordingly, a comparison of our financial information for accounting periods would likely not be meaningful or helpful in making an investment decision regarding our Company.  Since the exploration business is essentially a research and development activity, our future business focus depends upon current results where future plans can change radically at any time.  Accordingly, it would not be meaningful, and perhaps would be misleading, to make estimates of anticipated expenditures beyond the next 12 months.



Our plan of operations for the next twelve months is to complete initial exploration programs on our mineral properties. We anticipate that the exploration programs will cost at least $350,000.  In addition, we anticipate spending an additional $150,000 in other fees and expenses over the next year.



On December 19, 2005, we entered into a letter of intent wherein we agreed to acquire Kettle Drilling, Inc.  This arrangement calls for us make a cash payment of $2,800,000 to the principals of Kettle Drilling, Inc., on or about March 1, 2006, along with the issuance to them of convertible preferred stock.   We are currently in our due diligence period for exploring the option of the Kettle acquisition
..



|Anticipated Expenditure Over the Next 12 Months            |   | Amount   
|---------------------------------------------------------- | - | ---------
|Acquisition of Kettle Drilling, Inc.                       | $ | 2,800,000
|Initiate Exploration Activity (Snowstorm Project)          |   | 125,000  
|Initiate Exploration Activity (Olympic/Sun Property)       |   | 75,000   
|Initiate Exploration Activity (HD, ACE and PAC Properties) |   | 50,000   
|Initiate Exploration Activity (Downeyville Property        |   | 50,000   
|Initiate Exploration Activity (Spencer Property)           |   | 50,000   
|Professional and Geological Fees                           |   | 50,000   
|Salaries and Wages                                         |   | 25,000   
|Travel Expenses                                            |   | 25,000   
|Other Administrative Expenses                              |   | 50,000   
|                                                           |   |          
|Total                                                      | $ | 3,300,000



We will not be able to proceed with our planned acquisition of Kettle Drilling, Inc., our exploration programs, or meet our administrative expense requirements, without additional financing.  We are currently conducting a best-efforts private offering of our securities to raise a maximum of $4,400,000. If this offering is not successful, we will not be able to complete the acquisition of Kettle Drilling, Inc.



We may also seek to obtain short-term loans from our directors or principal shareholders. At this time, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our securities (through the current private offering or otherwise) or through loans from our directors or principal shareholders to meet our obligations over the next twelve months. Regarding our exploration activities, if we are unable to raise sufficient additional funding through equity financing and/or loans, we will next attempt to obtain joint venture partners on a project by project basis to help lessen the expenses involved on each project (which would correspondingly reduce our portion of any revenues that may result if a property is successfully developed, of which

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there can be no assurance.)  If we are unsuccessful with that approach, we will attempt to renegotiate the underlying agreements on all or some of the properties to lower the obligations and allow us to maintain the properties.  These factors raise substantial doubt that the Company will be able to continue as a going concern. To the extent managements plans are unsuccessful in overcoming the going concern uncertainty; the Company will cease all operations and no longer continue as a going concern.



Results of Operations for Years Ending September 30, 2004 and 2005



We did not earn any revenues during the years ending September 30, 2004 and 2005. We do not anticipate earning revenues until such time, if at all, that we have successful exploration results and/or if we acquire Kettle Drilling, Inc. and derive income from its drilling activities as our wholly owned subsidiary. We are presently in the exploration stage of our mining exploration business.  We can provide no assurance that we will discover economic mineralization levels of minerals, or if such minerals are discovered, that we will enter into commercial production.



We incurred operating expenses in the amount of $515,344 for the fiscal year ended September 30, 2004, and $552,424 for the year ended September 30, 2005.



Our net loss increased from $1,505 in fiscal 2003 to $517,266 in fiscal 2004 primarily due to a general increase in company activity since the takeover of the new management team and commencement of our exploration stage both in January 2004.



Our net loss increased from $517,266 during the year ended September 30, 2004 to $523,246 during the year ended September 30, 2005 primarily due to increased mineral exploration expenses, but was offset by lease income from one of our properties.  Mining and exploration expenses increased from $364,320 to $389,321 and our general and administrative expenses increased from $151,024 to $163,103.  These increases are due mainly to general increases in individual costs and increased exploration activity.



We have not attained profitable operations and are dependent upon obtaining financing to pursue exploration activities. For these reasons our auditors stated in their report that they have substantial doubt that we will be able to continue as a going concern.



At September 30, 2005, we had assets of $174,727 consisting of cash in the amount of $174,270, and other assets of $457.



Results of Operations for Three Month Periods Ending December 31, 2004 and December 31, 2005



We did not earn any revenues during the three month periods ending December 31, 2004 and 2005. We do not anticipate earning revenues until such time, if at all, that we have successful exploration results and/or if we acquire Kettle Drilling, Inc. and derive income from its drilling activities as our wholly owned subsidiary. We are presently in the exploration stage of our mining exploration business.  We can provide no assurance that we will discover economic mineralization levels of minerals, or if such minerals are discovered, that we will enter into commercial production.



We incurred operating expenses in the amount of $63,420 for the three months ended December 31, 2004, and $231,895 for the three months ended December 31, 2005.



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Our net loss increased from $57,790 for three months ended December 31, 2004 to $235,770 for the three months ended December 31, 2005 primarily due to a general increase in mineral exploration activity and general expenses including legal and accounting expenses, but was offset by lease income from one of our properties.  Mining and exploration expenses increased from $45,033 to $203,458 and our general and administrative expenses increased from $18,387 to $28,437.  These increases are due mainly to general increases in individual costs and increased exploration activity.



We have not attained profitable operations and are dependent upon obtaining financing to pursue exploration activities. For these reasons our auditors stated in their report that they have substantial doubt that we will be able to continue as a going concern.



ITEM 3. CONTROLS AND PROCEDURES



An evaluation was performed by the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. And on that evaluation, the Company has concluded that disclosure controls and procedures were effective as of December 31, 2005, in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.



There has been no change in our internal controls over financial reporting during the quarter ended December 31, 2005 that has materially affect or is reasonable likely to materially affect, our internal controls over financial reporting.













































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PART II - OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS



None



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



During the three month period ended December 31, 2005, the Company issued a total of 100,000 shares of its restricted common stock to secure a 75 day option to purchase Kettle Drilling, Inc. The December 19, 2005, issuance of the shares to the principals of Kettle Drilling, Inc. (David Deeds-25,000 shares, and Douglas Kettle-75,000 shares) was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the Act). Each recipient represented his intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and, appropriate legends were affixed to the share certificates issued in such transactions. No advertisement or general solicitation was used in connection with any offer or sale of such securities.



ITEM 3.  DEFAULT UPON SENIOR SECURITIES



None



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None



ITEM 5.  OTHER INFORMATION



None



ITEM 6. EXHIBITS.





Exhibit 31.1

Certification required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002, Swallow

Exhibit 31.2

Certification required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002, Gurkowski



Exhibit 32.1

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Swallow

Exhibit 32.2

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Gurkowski















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SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Timberline Resources Corporation

(Registrant







/s/  John Swallow

__________________________________________

John Swallow

(Chief Executive Officer and Chairman of the board of Directors)







/s/  Thomas Gurkowski

__________________________________________

Thomas Gurkowski

(Secretary/Treasurer and Chief Financial Officer)







Date:  February 21, 2006











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|INDEX TO ATTACHED EXHIBITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit 31.1 - Certification Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-
14(a), Swallow

Exhibit 31.2 - Certification Principal Financial  Officer required by Rule 13a-14(a) or Rule 15d-
14(a), Gurkowski

Exhibit 32.1 - Certification Required by Rule 13a-14(b) or Rule 15d-14(b) and section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Swallow

Exhibit 32.2 - Certification Required by Rule 13a-14(b) or Rule 15d-14(b) and section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, Gurkowski | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 









































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