UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





FORM 10-QSB/A

Amendment No. 1



|                                              |  |                                                                                         
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------
|x                                             |  | QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended
March 31, 2008
|OR                                           
|o                                             |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
             to



Commission file number: 001-34055







[timberline10qsba1mar3108s002.gif]

TIMBERLINE RESOURCES CORPORATION

(Exact Name of Registrant as Specified
in its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|IDAHO                                                          |  | 82-0291227                          
|(State of other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification
No.)
|                                                               |  |                                     
|101 EAST LAKESIDE AVENUE                                       |  |                                     
|COEUR DALENE, IDAHO                                           |  | 83814                               
|(Address of Principal Executive
Offices)                       |  | (Zip Code)                          



(208) 664-4859

(Registrants Telephone Number, including
Area Code)





(Former name, former address and former
fiscal year, if changed since last report)





Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.   ý
 Yes  ̈ No



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



Number
of shares of issuers common stock outstanding at May 8, 2008:
     27,279,903



Transitional Small Business format (check one):  ̈  Yes  ý  No











1



---









INTRODUCTORY NOTE



This amendment incorporates certain
revisions to the Companys disclosure under Item 3. Disclosure Control and
Procedures under the subsection headings Disclosure Controls and Procedures
and Changes in Internal Control Over Financial Reporting.  These
revisions are being made to clarify the Companys disclosure regarding material
weaknesses in its internal control over financial reporting, but is not intended
to update any other information presented in the Quarterly Report on Form 10-QSB
as originally filed with the SEC.  Please see the Companys subsequently
filed Current Reports, Quarterly Reports, and Annual Reports, as filed with the
SEC, for a discussion of events occurring subsequent to this Quarterly Report on
Form 10-QSB/A.









2



---





INDEX



|                               |          |                                                                                                          |    |  |  |  |  |  |  |  |  | 
|------------------------------ | -------- | -------------------------------------------------------------------------------------------------------- | -- |  |  |  |  |  |  |  |  | 
|                               | Page No.
|PART I - FINANCIAL
INFORMATION |         
|                               | Item 1.  | Consolidated
Financial Statements (Unaudited)                                                            |   
|                               |          | Consolidated
Balance Sheets at March 31, 2008 and September 30, 2007                                     | 5 
|                               |          | Consolidated Statements of
Operations for the three months and six months ended March  31, 2008
and 2007 | 6 
|                               |          | Consolidated Statements of
Cash Flows for the six months ended March 31, 2008 and 2007                   | 7 
|                               |          | Notes to
Consolidated Financial Statements                                                               | 8 
|                               | Item 2.  | Managements
Discussion and Analysis                                                                     | 16
|                               | Item 3.  | Controls
and Procedures                                                                                  | 20
|PART II -
OTHER INFORMATION    |         
|                               | Item 1.  | Legal
Proceedings.                                                                                       | 22
|                               | Item 2.  | Unregistered
Sales of Equity Securities and Use of Proceeds.                                             | 22
|                               | Item 3.  | Defaults
Upon Senior Securities.                                                                         | 22
|                               | Item 4.  | Submission
of Matters to Vote of Security Holders.                                                       | 22
|                               | Item 5.  | Other
Information                                                                                        | 22
|                               | Item 6.  | Exhibits                                                                                                 | 22
|SIGNATURES                     |          | 23                                                                                                      













3



---

PART I  FINANCIAL
INFORMATION





ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)













TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES



Consolidated
Financial Statements



March 31, 2008 and 2007









4



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|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|------------------------------------------------------ | --------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------- | ---------- | ------------ | ----------- | ----------- | -------------
|TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES     
|CONSOLIDATED BALANCE SHEETS                           
|                                                       |                                         |                                                                         |                                                                 |            |              | March 31,   |             | September 30,
|                                                       |                                         |                                                                         |                                                                 |            |              | 2008        |             | 2007         
|                                                       |                                         |                                                                         |                                                                 |            |              | (unaudited) |             | (audited)    
|ASSETS                                                 |                                         |                                                                         |                                                                 |            |             
|                                                       | CURRENT ASSETS:                         |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Cash                                                                    |                                                                 | $          | 4,068,264    | $           | 3,949,988  
|                                                       |                                         | Accounts receivable                                                     |                                                                 |            | 3,984,768    |             | 3,882,275  
|                                                       |                                         | Employee receivable                                                     |                                                                 |            | 13,646       |             | 7,073      
|                                                       |                                         | Materials and supplies inventory                                        |                                                                 |            | 2,958,470    |             | 1,925,392  
|                                                       |                                         | Prepaid expenses                                                        |                                                                 |            | 398,890      |             | 373,288    
|                                                       |                                         |                                                                         | TOTAL CURRENT ASSETS                                            |            |              | 11,424,038  |             | 10,138,016   
|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|                                                       | PROPERTY, MINERAL RIGHTS AND EQUIPMENT: |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Property, mineral rights and equipment, net of
accumulated depreciation |                                                                 |            | 9,965,586    |             | 8,008,928  
|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|                                                       | OTHER ASSETS:                           |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Restricted cash                                                         |                                                                 |            | 801,859      |             | 802,860    
|                                                       |                                         | Deposits and other assets                                               |                                                                 |            | 178,798      |             | 147,058    
|                                                       |                                         | Intangible assets, net of amortization                                  |                                                                 |            | -            |             | 105,557    
|                                                       |                                         | Goodwill                                                                |                                                                 |            | 2,808,524    |             | 2,808,524  
|                                                       |                                         |                                                                         | TOTAL OTHER ASSETS                                              |            |              | 3,789,181   |             | 3,863,999    
|                                                       | TOTAL ASSETS                            |                                                                         | $                                                               | 25,178,805 | $            | 22,010,943 
|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS'
EQUITY |                                         |                                                                         |                                                                 |           
|                                                       | CURRENT LIABILITIES:                    |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Note payable to bank                                                    |                                                                 | $          | 599,065      | $           | 599,065    
|                                                       |                                         | Accounts payable                                                        |                                                                 |            | 3,477,959    |             | 3,617,165  
|                                                       |                                         | Accrued expenses                                                        |                                                                 |            | 1,763,292    |             | 944,627    
|                                                       |                                         | Notes payable - related parties                                         |                                                                 |            | 40,000       |             | 787,000    
|                                                       |                                         | Deferred revenue                                                        |                                                                 |            | 527,709      |             | 250,000    
|                                                       |                                         | Current portion of capital leases                                       |                                                                 |            | 488,654      |             | 476,032    
|                                                       |                                         | Current portion of notes payable                                        |                                                                 |            | 326,651      |             | 300,638    
|                                                       |                                         |                                                                         | TOTAL CURRENT LIABILITIES                                       |            |              | 7,223,330   |             | 6,974,527    
|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|                                                       | LONG-TERM LIABILITIES:                  |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Capital leases, net of current portion                                  |                                                                 |            | 801,240      |             | 647,416    
|                                                       |                                         | Notes payable, net of current portion                                   |                                                                 |            | 528,577      |             | 571,534    
|                                                       |                                         |                                                                         | TOTAL LONG-TERM LIABILITIES                                     |            |              | 1,329,817   |             | 1,218,950    
|                                                       | COMMITMENTS AND CONTINGENCIES           |                                                                         |                                                                 | -          |              | -          
|                                                       | TEMPORARY EQUITY                        |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Series A Preferred stock, $0.01 par value;
liquidation and redemption   |                                                                 |            |              |             |            
|                                                       |                                         |                                                                         | value $2,775,341; 5,000,000 shares authorized,
4,700,000 shares |            |              |             |             |              
|                                                       |                                         |                                                                         | issued and outstanding                                          |            |              | 1,880,000   |             | 1,880,000    
|                                                       |                                         |                                                                         |                                                                 |            |              |             |             |              
|                                                       | STOCKHOLDERS' EQUITY:                   |                                                                         |                                                                 |            |              |            
|                                                       |                                         | Preferred stock, $0.01 par value; 5,000,000 shares
authorized,          |                                                                 |            |              |             |            
|                                                       |                                         |                                                                         | none issued and outstanding                                     |            |              | -           |             | -            
|                                                       |                                         | Common stock, $0.001 par value; 100,000,000
shares                      |                                                                 |            |              |             |            
|                                                       |                                         |                                                                         | authorized, 27,279,903 and 24,801,108  shares
issued            |            |              |             |             |              
|                                                       |                                         |                                                                         | and outstanding, respectively                                   |            |              | 27,279      |             | 24,801       
|                                                       |                                         | Common stock subscribed                                                 |                                                                 |            | -            |             | (802,761)  
|                                                       |                                         | Additional paid-in capital                                              |                                                                 |            | 24,917,181   |             | 20,433,478 
|                                                       |                                         | Accumulated deficit                                                     |                                                                 |            | (10,198,802) |             | (7,718,052)
|                                                       |                                         |                                                                         | TOTAL STOCKHOLDERS' EQUITY                                      |            |              | 14,745,658  |             | 11,937,466   
|                                                       | TOTAL LIABILITIES, TEMPORARY EQUITY
AND |                                                                         |                                                                 |            |              |            
|                                                       |                                         | STOCKHOLDERS' EQUITY                                                    |                                                                 | $          | 25,178,805   | $           | 22,010,943 



See accompanying notes to consolidated
financial statements.



5



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|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|------------------------------------------------- | ----------------------------------------- | ---------------------------- | --------- | ------------------ | ---------------- | ---------- | ----------- | ----------- | ---------- | ----------- | ---------- | -----------
|TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES |                                           |                              |           |                    |                 
|CONSOLIDATED STATEMENTS OF OPERATIONS             |                                           |                              |           |                    |                 
|                                                  |                                           |                              |           | Three Months Ended | Six Months Ended
|                                                  |                                           |                              |           |                    | March 31,        |            | March 31,  
|                                                  |                                           |                              |           |                    | 2008             |            | 2007        |             |            | 2008        |            | 2007       
|                                                  |                                           |                              |           |                    | (unaudited)      |            | (unaudited) |             |            | (unaudited) |            | (unaudited)
|REVENUES                                          |                                           | $                            | 8,386,327 | $                  | 3,833,384        |            | $           | 14,821,452  | $          | 7,041,721  
|COST OF REVENUES                                  |                                           |                              | 6,333,894 |                    | 2,699,761        |            |             | 11,283,559  |            | 5,431,449  
|GROSS PROFIT                                      |                                           |                              | 2,052,433 |                    | 1,133,623        |            |             | 3,537,893   |            | 1,610,272  
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|OPERATING EXPENSES:                               |                                           |                              |           |                    |                  |            |             |             |            |            
|                                                  | Mineral exploration expenses              |                              |           | 422,968            |                  | 71,903     |             |             | 999,720    |             | 154,948   
|                                                  | Other general and administrative expenses |                              |           | 1,826,869          |                  | 1,247,663  |             |             | 4,742,634  |             | 2,713,684 
|                                                  | Loss (gain) on sale of equipment          |                              |           | 4,817              |                  | -          |             |             | (9,824)    |             | -         
|                                                  |                                           | TOTAL OPERATING EXPENSES     |           |                    | 2,254,654        |            | 1,319,566   |             |            | 5,732,530   |            | 2,868,632  
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|LOSS FROM OPERATIONS                              |                                           |                              | (202,221) |                    | (185,943)        |            |             | (2,194,637) |            | (1,258,360)
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|OTHER INCOME (EXPENSE):                           |                                           |                              |           |                    |                  |            |             |             |            |            
|                                                  | Other income                              |                              |           | 101,709            |                  | 8,727      |             |             | 170,909    |             | 17,454    
|                                                  | Interest income                           |                              |           | 45,351             |                  | -          |             |             | 120,440    |             | -         
|                                                  | Interest expense                          |                              |           | (106,372)          |                  | (44,793)   |             |             | (251,940)  |             | (120,145) 
|                                                  |                                           | TOTAL OTHER INCOME (EXPENSE) |           |                    | 40,688           |            | (36,066)    |             |            | 39,409      |            | (102,691)  
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|NET LOSS BEFORE INCOME TAXES                      |                                           |                              | (161,533) |                    | (222,009)        |            |             | (2,155,228) |            | (1,361,051)
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|INCOME TAX EXPENSE                                |                                           |                              | (325,520) |                    | -                |            |             | (325,520)   |            | -          
|NET LOSS                                          |                                           | $                            | (487,053) | $                  | (222,009)        |            | $           | (2,480,748) | $          | (1,361,051)
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|NET LOSS PER SHARE AVAILABLE TO COMMON            |                                           |                              |           |                    |                  |            |             |             |            |            
|                                                  | STOCKHOLDERS, BASIC AND DILUTED           |                              | $         | (0.02)             | $                | (0.01)     |             | $           | (0.09)     | $           | (0.08)    
|                                                  |                                           |                              |           |                    |                  |            |             |             |            |             |            |            
|WEIGHTED AVERAGE NUMBER                           |                                           |                              |           |                    |                  |            |             |             |            |            
|                                                  | OF COMMON SHARES OUTSTANDING,             |                              |           |                    |                  |            |             |             |            |             |           
|                                                  | BASIC AND DILUTED                         |                              |           | 27,072,145         |                  | 19,195,923 |             |             | 26,428,180 |             | 16,949,834





See accompanying notes to consolidated
financial statements.





6



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|                                                                                        |                                                |                                              |           |             |                  |             |            
|--------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------------------------- | --------- | ----------- | ---------------- | ----------- | -----------
|TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|                                                                                        |                                                |                                              |           |             | Six Months Ended
|                                                                                        |                                                |                                              |           |             | March 31,        |             | March 31,  
|                                                                                        |                                                |                                              |           |             | 2008             |             | 2007       
|                                                                                        |                                                |                                              |           |             | (unaudited)      |             | (unaudited)
|                                                                                        |                                                |                                              |           |             |                  |             |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |                                                |                                              |           |             |                 
|                                                                                        | Net loss                                       |                                              | $         | (2,480,748) | $                | (1,361,051)
|                                                                                        | Adjustments to reconcile net loss to net cash  |                                              |           |             |                  |            
|                                                                                        | used by operating
activities:                  |                                              |           |             |                  |            
|                                                                                        |                                                | Depreciation and amortization                |           |             | 659,698          |             | 655,402    
|                                                                                        |                                                | Loss (gain) on sale of equipment             |           |             | (9,824)          |             | 4,379      
|                                                                                        |                                                | Common stock issued for consulting           |           |             | 70,898           |             | 103,000    
|                                                                                        |                                                | Share based compensation                     |           |             | 641,045          |             | 68,350     
|                                                                                        | Changes in assets and liabilities:             |                                              |           |             |                  |            
|                                                                                        |                                                | Accounts receivable                          |           |             | (703,388)        |             | (594,697)  
|                                                                                        |                                                | Materials and supplies inventory             |           |             | (1,033,078)      |             | (696,835)  
|                                                                                        |                                                | Prepaid expenses, deposits, and other assets |           |             | (7,342)          |             | (67,824)   
|                                                                                        |                                                | Employee receivable                          |           |             | (6,573)          |             | (9,539)    
|                                                                                        |                                                | Accounts payable                             |           |             | (139,207)        |             | 34,206     
|                                                                                        |                                                | Accrued expenses                             |           |             | 818,664          |             | 12,989     
|                                                                                        |                                                | Deferred revenue                             |           |             | 277,709          |             | -          
|                                                                                        |                                                | Accrued interest - related party payables    |           |             | -                |             | (19,020)   
|                                                                                        |                                                | Deferred lease income                        |           |             | -                |             | (17,454)   
|                                                                                        |                                                | Net cash used
by operating activities        |           |             | (1,912,146)      |             | (1,888,094)
|                                                                                        |                                                |                                              |           |             |                  |             |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |                                                |                                              |           |             |                 
|                                                                                        | Purchase of equipment                          |                                              |           | (1,398,004) |                  | (893,850)  
|                                                                                        | Change in restricted cash                      |                                              |           | 1,001       |                  | -          
|                                                                                        | Purchase of investment in equity security      |                                              |           | (50,000)    |                  | -          
|                                                                                        | Proceeds from sale of equipment                |                                              |           | 14,641      |                  | 8,536      
|                                                                                        |                                                | Net cash used by investing activities        |           |             | (1,432,362)      |             | (885,314)  
|                                                                                        |                                                |                                              |           |             |                  |             |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |                                                |                                              |           |             |                 
|                                                                                        | Net proceeds from line of credit               |                                              |           | -           |                  | 596,065    
|                                                                                        | Proceeds from related party notes payable      |                                              |           | 60,000      |                  | 226,061    
|                                                                                        | Payments on related party notes payable        |                                              |           | (807,000)   |                  | (428,979)  
|                                                                                        | Payments on notes payable                      |                                              |           | (162,415)   |                  | (102,551)  
|                                                                                        | Payments on capital leases                     |                                              |           | (204,803)   |                  | (260,807)  
|                                                                                        | Proceeds from exercise of options              |                                              |           | -           |                  | 21,000     
|                                                                                        | Proceeds from exercise of warrants             |                                              |           | 1,483,873   |                  | 462,845    
|                                                                                        | Proceeds from issuances of stock and warrants, |                                              |           |             |                  |            
|                                                                                        | net of stock offering
costs                    |                                              |           | 3,093,129   |                  | 2,730,000  
|                                                                                        |                                                | Net cash provided by financing activities    |           |             | 3,462,784        |             | 3,243,634  
|                                                                                        |                                                |                                              |           |             |                  |             |            
|                                                                                        | Net increase in cash                           |                                              |           | 118,276     |                  | 470,226    
|                                                                                        |                                                |                                              |           |             |                  |             |            
|CASH AT BEGINNING OF PERIOD                                                             |                                                |                                              | 3,949,988 |             | 732,245         
|                                                                                        |                                                |                                              |           |             |                  |             |            
|CASH AT END OF PERIOD                                                                   |                                                | $                                            | 4,068,264 | $           | 1,202,471       
|                                                                                        |                                                |                                              |           |             |                  |             |            
|NON-CASH FINANCING AND INVESTING
ACTIVITIES:                                            |                                                |                                              |           |             |                 
|                                                                                        |                                                |                                              |           |             |                  |             |            
|                                                                                        | Account receivable exchanged for equipment     |                                              | $         | 600,895     | $                | -          
|                                                                                        | Capital lease for equipment purchase           |                                              |           | 387,297     |                  | -          
|                                                                                        | Note payable issued for equipment purchase     |                                              |           | 129,423     |                  | 555,242    



See accompanying notes to consolidated
financial statements.





7



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TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 1 
ORGANIZATION AND DESCRIPTION OF BUSINESS:



Timberline Resources
Corporation (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.



During the first quarter
of 2006, the Company acquired Kettle Drilling, Inc. (Kettle Drilling or
Kettle) and its Mexican subsidiary, World Wide Exploration S.A. de C.V.
(World Wide). Kettle provides drilling services to the mining and mineral
exploration industries across North America and worldwide.



NOTE 2  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:



a. Basis of presentation  The accompanying unaudited
consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of
America for interim financial information, as well as the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of the Companys
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the interim financial statements
have been included. Operating results for the three and six-month period ended
March 31, 2008 are not necessarily indicative of the results that may be
expected for the full year ending September 30, 2008.



For
further information refer to the financial statements and footnotes thereto in
the Companys Annual Report on Form 10-KSB for the year ended September 30,
2007.



b.Net loss per share  Statement of Financial Accounting
Standards No. 128, Earnings per Share requires dual presentation of basic
earnings per share (EPS) and diluted EPS on the face of all income statements
issued after December 15, 1997, for all entities with complex capital
structures. Basic EPS is computed as net income (loss) divided by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable through
stock options, warrants, and other convertible securities.



Cumulative but
undeclared dividends on the Series A Preferred Stock (Note 7) for the three
months ended March 31, 2008 have been considered in the EPS computation.



The
dilutive effect of convertible and exercisable securities, in periods of future
income as of March 31, 2008, is as follows:



Stock
options                        
   3,215,001

Warrants                                
 2,426,734

Convertible preferred stock      
4,700,000



Total possible
dilution         10,341,735



At
March 31, 2008 and 2007, the effect of the Companys outstanding options and
common stock equivalents would have been anti-dilutive.





8



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 3  RELATED
PARTY TRANSACTIONS:



In 2006, Kettle Drilling
entered into loan agreements with its officers, David Deeds and Doug Kettle.
 These loans totaled $160,000 and $627,000, respectively as of September
30, 2007. David Deeds is the Chief Executive Officer of Kettle Drilling and a
shareholder of the Company.  Mr. Kettle is the President of Kettle Drilling
and a shareholder of the Company. The loans bear interest at 10% and are due on
demand. There was no accrued interest outstanding as of March 31, 2008 and
September 30, 2007.



Related party notes
payable consist of the following at March 31, 2008 and September 30, 2007:



|                     |   |               |   |              
|-------------------- | - | ------------- | - | -------------
|                     |   | Mar. 31,
2008 |   | Sep. 30,
2007
|                     |   |               |   |              
|Doug & Brenda Kettle | $ | 40,000        | $ | 627,000      
|David Deeds          |   | 0             |   | 160,000      
|Less
current portion |   | (40,000)      |   | (787,000)    
|                     | $ | 0             | $ | 0            



NOTE 4  INCOME
TAXES:



Income (loss) from
continuing operations before income taxes for the six months ended March 31,
2008 and 2007 are as follows:



|         |   |             |   |            
|-------- | - | ----------- | - | -----------
|         |   | 2008        |   | 2007       
|Current: |   |             |   |            
|Domestic | $ | (2,924,386) | $ | (1,641,572)
|Foreign  |   | 769,158     |   | 280,521    
|         | $ | (2,155,228) | $ | (1,361,051)





9



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 4  INCOME
TAXES (continued) :



Significant components of
income tax expense as of March 31, 2008 and 2007 are as follows:



|                                  |   |         |   |     
|--------------------------------- | - | ------- | - | ----
|                                  |   | 2008    |   | 2007
|Current:                          |   |         |   |     
|Federal                           | $ | -       | $ | -   
|State                             |   | -       |   | -   
|Foreign                           |   | 325,520 |   | -   
|Total
current income tax expense  |   | 325,520 |   | -   
|                                  |   |         |   |     
|Deferred:                         |   |         |   |     
|Federal                           |   | -       |   | -   
|State                             |   | -       |   | -   
|Foreign                           |   | -       |   | -   
|Total
deferred income tax expense |   | -       |   | -   
|Total income tax expense          | $ | 325,520 | $ | -   



|                                                              |   |           |   |          
|------------------------------------------------------------- | - | --------- | - | ---------
|                                                              |   | 2008      |   | 2007     
|                                                              |   |           |   |          
|Statutory Federal income tax
rate                             |   | 34%       |   | 34%      
|                                                              |   |           |   |          
|Expected income tax expense
(benefit) based on statutory rate | $ | (732,778) | $ | (462,757)
|Non-recognition of tax benefits
related to losses             |   | 732,778   |   | 462,757  
|Foreign tax expense                                           |   | 325,520   |   | -        
|Total income tax expense                                      | $ | 325,520   | $ | -        





NOTE 5  COMMON
STOCK AND WARRANTS:



During September, 2007,
the Company initiated a private placement of the Companys restricted common
stock. Under the private placement subscription agreement, the Company can sell
up to 2,545,455 units for a total of $7,000,000, plus up to 5% in
over-subscriptions. Each unit consists of one share of common stock and one half
of one Class A Warrant; with each whole warrant exercisable to acquire one
additional share of common stock at an exercise price of $3.50 per share for the
period of twenty-four months from the Issue Date. The units were sold for $2.75
each, representing managements estimate of the fair value of the Companys
unregistered common stock and warrants at the time of sale. In connection with
this offering, the Company agreed to use commercially reasonable efforts to file
a resale registration on Form SB-2 (or such other available form) no later than
60 days after the Closing Date and cause such registration to be declared
effective no later than 120 days after the Closing Date (150 days if reviewed by
the SEC).  The registration statement is to register for resale the shares
of common stock and the shares of common stock acquirable upon exercise of the
warrants.  The Company sold a total of 2,626,694 units for total proceeds
of $7,223,408; with 1,780,972 units for proceeds of $4,897,673 closing on
September 30, 2007, 288,182 units for proceeds of $792,500 closing on October 1,
2007, and 557,540 units for proceeds of $1,533,235 closing on October 11, 2007.
 As of March 31, 2008, there are 1,337,934 warrants outstanding from this
placement.







10



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 5  COMMON
STOCK AND WARRANTS (continued):



During the quarter ended
March 31, 2008, the Company issued 766,000 shares of common stock as a result of
warrants exercised.  The warrants were granted pursuant to a private
placement during 2006 and were exercised at a price of $1.00 per warrant.



The following is a summary of the
Companys warrants outstanding:



|                                  |             |   |                                
|--------------------------------- | ----------- | - | -------------------------------
|                                  | Warrants    |   | Weighted Average Exercise Price
|Outstanding at
September 30, 2007 | 3,618,061   | $ | 1.62                           
|Issued                            | 447,447     |   | 3.50                           
|Exercised                         | (1,638,774) |   | (1.00)                         
|Outstanding at
March 31, 2008     | 2,426,734   |   | 2.38                           



These warrants expire as follows:



|          |       |                   
|--------- | ----- | ------------------
|Warrants  | Price | Expiration
Date   
|1,088,800 | $1.00 | December 31, 2008 
|1,337,934 | $3.50 | September 30, 2009
|2,426,734 |       |                   



NOTE 6  STOCK OPTIONS:



The
Company has established a stock incentive plan as amended August 31, 2006, to
authorize the granting of up to 2,750,000 stock options to employees, directors
and consultants.  The plan documents include a provision for all options
granted to be exercised through a cashless exercise.



During
October 2007, the Company granted 1,230,000 options to purchase common stock to
directors and employees of the company as compensation for services rendered.
The options have an exercise price of $3.40, the market price of the common
stock on that date, and vest over the next two years.  These options expire
five years from the grant date.  The fair value of the options granted was
estimated on their grant date using the Black-Scholes Option Price Calculation.
The following assumptions were made in estimating fair value: risk-free interest
rate of 3.75%; volatility of 82.3%; expected life of three years; dividend yield
of zero. The options were valued at $1.87 per share. 493,336 of these options
vested immediately, however only 267,500 were available under the reserve limit
of the plan.  Accordingly, an expense relating to those that were available
under the reserve of the plan was recognized during the quarter ended December
31, 2007 in the amount of $500,225 and is included in Other general and
administrative expenses.  The expense was allocated on a pro-rata basis
according to the number of options that vested immediately on the grant date.
 The remaining 225,836 options that did not vest because they were in
excess of the reserve limit of the plan will only vest upon shareholder approval
of an increase in the reserve limit.  An additional 82,918 options vested
during the quarter ended December 31, 2007 and an expense of $45,118 was taken
related to those vested options.







11



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 6  STOCK OPTIONS (continued):



During
January 2008, the Company granted 165,000 options to purchase common stock to
two individuals for consulting services performed. The options have an exercise
price of $4.05, the market price of the common stock on that date, and vest over
the next two years.  These options expire five years from the grant date.
 The fair value of the options granted was estimated on their grant date
using the Black-Scholes Option Price Calculation. The following assumptions were
made in estimating fair value: risk-free interest rate of 3.11%; volatility of
81.8%; expected life of three years; dividend yield of zero. The options were
valued at $2.22 per share. These options did not vest because they were in
excess of the reserve limit of the plan and will only vest upon shareholder
approval of an increase in the reserve limit.



During
February 2008, the Company granted 30,000 options to purchase common stock to an
employee of the company. The options have an exercise price of $3.20, the market
price of the common stock on that date, and vest over the next two years.
 These options expire five years from the grant date.  The fair value
of the options granted was estimated on their grant date using the Black-Scholes
Option Price Calculation. The following assumptions were made in estimating fair
value: risk-free interest rate of 2.15%; volatility of 82.3%; expected life of
three years; dividend yield of zero. The options were valued at $1.73 per share.
These options did not vest because they were in excess of the reserve limit of
the plan and will only vest upon shareholder approval of an increase in the
reserve limit.  An additional 57,918 options vested during the quarter
ended March 31, 2008 and an expense of $30,601 was taken related to those vested
options.



The
current number of securities to be issued upon exercise of outstanding options
exceeds the authorized shares to be issued under the Amended 2005 Equity
Incentive Plan which was approved by shareholders on September 22, 2006.
 The Company plans to seek an increase in the number of authorized shares
to be issued under the Amended 2005 Equity Incentive Plan at its next annual
shareholders meeting.  If the requested increase in the number of
authorized shares is not approved, only 2,750,000 options will vest and may be
exercised.  If the requested increase in the number of authorized shares to
be issued under the Plan is approved, the expense related to the remaining
options that were to vest immediately upon grant will be recognized in the
period where shareholder approval is obtained.  There are 1,039,173 options
vested as of March 31, 2008 while 2,175,828 remain unvested and vest over the
next 3 years.





12



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 6  STOCK OPTIONS (continued):



The
following is a summary of the Companys options issued under the Amended 2005
Equity Incentive Plan:

|                                                                       |                     |              |           |   |       |      |          |  | 
|---------------------------------------------------------------------- | ------------------- | ------------ | --------- | - | ----- | ---- | -------- |  | 
|                                                                       |                     |              |           |   |       |      | Weighted
|                                                                       |                     |              |           |   |       |      | Average 
|                                                                       |                     |              |           |   |       |      | Exercise
|                                                                       |                     |              | Options   |   | Price
|                                                                       |                     |              |           |   |       |      |         
|Outstanding at September 30,
2007                                      |                     | 2,073,333    |           | $ | 2.13 
|                                                                       | Granted             |              | 1,425,000 |   |       | 3.47
|                                                                       | Exercised           |              | -0-       |   |       | -0- 
|                                                                       | Expired /
Cancelled |              | 283,332   |   |       | 1.03
|                                                                       |                     |              |           |   |       |      |         
|Outstanding at March 31,
2008                                          |                     | 3,215,001(1) |           | $ | 2.82 
|                                                                       |                     |              |           |   |       |      |         
|Exercisable at March 31,
2008                                          |                     | 813,337      |           | $ | 1.94 
|                                                                       |                     |              |           |   |       |      |         
|Weighted average fair value of
options granted during the period ended |                     |              |           |   |      
|                                                                       | March 31, 2008      |              |           |   | $     | 1.91



The
average remaining contractual term of the options outstanding and exercisable at
March 31, 2008 is 4.00 and 3.74 years, respectively.



(1)As discussed above, options granted that are in excess
of the reserve limit of the Companys Amended 2005 Equity Incentive Plan are
subject to shareholder approval of an increased reserve limit.



NOTE 7  PREFERRED
STOCK:



Timberline is authorized to issue up to 10,000,000 shares of
preferred stock, $.01 par value. The Board of Directors of Timberline is
authorized to issue the preferred stock from time to time in series and is
further authorized to establish such series, to fix and determine the variations
in the relative rights and preferences as between series, to fix voting rights,
if any, for each series, and to allow for the conversion of preferred stock into
Common Stock.



On
February 26, 2006, our Board of Directors adopted a resolution creating a series
of Five Million Shares (5,000,000) shares of voting, convertible Preferred Stock
designated as Series A Preferred Stock.  The Preferred Stock was issued to
Doug Kettle and Dave Deeds (the Kettle Shareholders) as a part of the
consideration delivered to them for the acquisition of Kettle Drilling.



On
March 10, 2008, the Company entered into an agreement to pay $10 million in
aggregate to repurchase all of the outstanding Series A Preferred Stock from the
Kettle Shareholders.  The repurchase of the Series A Preferred Stock is
contingent upon the Companys ability to raise sufficient funds to complete our
previously announced proposed acquisition of SMD as described in the Companys
Form 8-K filing on February 28, 2008.  If the Company is unable to raise
sufficient funds to complete our



13



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS









NOTE 7  PREFERRED STOCK (continued):



previously announced
proposed acquisition of SMD, or does not raise sufficient funds to repurchase
all of the outstanding Series A Preferred Stock via alternative financing by
June 30, 2008, then the agreement to repurchase the Series A Preferred Shares
will be terminated.



As of March 31, 2008,
there is $190,341 of cumulative but undeclared dividends on the Series A
Preferred Stock and the conversion price remains $0.40.



The Company has determined
that the preferred stock of the Company should be classified as a temporary
equity item on the Companys balance sheet.  As a result, the preferred
stock is classified in a mezzanine section of temporary equity presented
between total liabilities and stockholders equity.



NOTE 8  COMMITMENTS
AND CONTINGENCIES:



Real Estate Lease Commitments

The Company has real
estate lease commitments related to its main office in Coeur dAlene, Idaho, a
facility in Butte, Montana, offices of Kettle Drilling in Coeur dAlene, Idaho,
a storage shop in Rathdrum, Idaho, and its operational facility in Elko, Nevada.
The Companys Mexico subsidiary also leases facilities for its administrative
office and warehouse under defined term lease agreements which are for one year.
Total office and storage rental expense aggregated $73,340 and $19,553 for the
three months ended March 31, 2008 and 2007, respectively, and $125,146 and
$51,235 for the six months ended March 31, 2008 and 2007, respectively.



Environmental Contingencies

The Company has in past
years been engaged in mining in northern Idaho, which is currently the site of a
federal Superfund cleanup project. Although the Company is no longer involved in
mining in this or other areas at present, the possibility exists that
environmental cleanup or other environmental restoration procedures could remain
to be completed or mandated by law, causing unpredictable and unexpected
liabilities to arise. At the date of these financial statements, the Company is
not aware of any environmental issues or litigation relating to any of its
current or former properties.



Severance Agreements

During the quarter ended
March 31, 2008, the Company announced a change in management at its Kettle
Drilling subsidiary.  As a result of this change, the Company has a
commitment to pay total additional severance of $1,800,000 to the Kettle
Shareholders contingent upon the Companys ability to raise sufficient funds to
complete our previously announced proposed acquisition of SMD as described in
the Companys Form 8-K filing on February 28, 2008.























14



---

TIMBERLINE RESOURCES
CORPORATIONAND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 9  SEGMENT
INFORMATION:



The Company has three
operating segments at March 31, 2008: drilling revenues from Kettle Drilling;
drilling revenues in Mexico through Kettles subsidiary, World Wide Exploration;
and Timberlines exploration activities.



Segment information (after
intercompany eliminations) for the three months and six months ended March 31,
2008 and 2007 is as follows:



|                                     |   |                              |   |                            |   |             |   |             | 
|------------------------------------ | - | ---------------------------- | - | -------------------------- | - | ----------- | - | ----------- | 
|                                     |   | Three months ending March
31 |   | Six months ending March
31
|Revenues:                            |   | 2008                         |   | 2007                       |   | 2008        |   | 2007       
|Timberline                           | $ | -                            | $ | -                          | $ | -           | $ | -          
|Kettle
Drilling                      |   | 5,722,242                    |   | 2,857,979                  |   | 10,664,421  |   | 5,499,089  
|World
Wide Exploration               |   | 2,664,085                    |   | 975,405                    |   | 4,157,031   |   | 1,542,632  
|Total
revenues                       | $ | 8,386,327                    | $ | 3,833,384                  | $ | 14,821,452  | $ | 7,041,721  
|                                     |   |                              |   |                            |   |             |   |            
|Income / (Loss) before income
taxes: |   |                              |   |                            |   |             |   |            
|Timberline                           | $ | (1,056,007)                  | $ | (458,143)                  | $ | (2,734,884) | $ | (992,237)  
|Kettle
Drilling                      |   | 135,913                      |   | (31,872)                   |   | (189,502)   |   | (649,335)  
|World
Wide Exploration               |   | 758,561                      |   | 268,006                    |   | 769,158     |   | 280,521    
|Income / (Loss) before income
taxes  | $ | (161,533)                    | $ | (222,009)                  | $ | (2,155,228) | $ | (1,361,051)



|                       |  |  |  |  |   |                |   |                   
|---------------------- |  |  |  |  | - | -------------- | - | ------------------
|Total assets:          |  |  |  |  |   | March 31, 2008 |   | September 30, 2007
|Timberline             |  |  |  |  | $ | 17,830,288     | $ | 15,143,464        
|Kettle
Drilling        |  |  |  |  |   | 5,530,749      |   | 6,147,484         
|World
Wide Exploration |  |  |  |  |   | 1,817,768      |   | 719,995           
|Total
assets           |  |  |  |  | $ | 25,178,805     | $ | 22,010,943        



The accounting policies of
the segments are the same as those described in the notes to the consolidated
financial statements included in the Companys annual report filed on Form
10-KSB for the fiscal year ended September 30, 2007, after considering newly
adopted accounting pronouncements described elsewhere herein. Separate
management of each segment is required because each business unit is subject to
different marketing, production, and technology strategies.



During the six months
ended March 31, 2008, revenues from transactions with two customers each
amounted to 10% or more of our total revenues.  One such customer accounted
for revenue of $3,270,275, and another customer accounted for revenue of
$2,035,063.  The revenue for both customers is reported through Kettle
Drilling.



The assets of Timberline
are located in the United States.  The assets of Kettle Drilling are also
located in the United States and their revenues are derived from drilling
contracts in the United States.  The assets of World Wide Exploration are
located in Mexico and their revenues are derived from drilling contracts in
Mexico.



Timberline is not an
operating entity at this point insofar as they are not generating revenues from
the sales of their properties, but they are actively exploring several
properties for their mining potential.





15



---





ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION



You should read the following discussion
and analysis of our financial condition and results of operations together with
our financial statements and related notes appearing elsewhere in this quarterly
report.  This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions.  Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including, but not limited to, those set forth under
Risk Factors and Uncertainties in our Annual Report on Form 10-KSB, filed with
the SEC on January 14, 2008.



Overview

We commenced our exploration stage in
January 2004 with the change in the management of the Company.  From
January 2004 until March 2006, we were strictly a mineral exploration
company.  Beginning with the management appointments of John Swallow and
Paul Dircksen and our acquisition of a drilling services company, Kettle
Drilling, Inc. (Kettle), in March 2006, we have advanced a new, aggressive
business plan.  Prior to our new business model, the addition of new
management, and the purchase of Kettle, the Company had no reported revenues and
accumulated losses.



Our corporate objective is to provide
investors with significant exposure to both the picks and shovels and blue
sky aspects of our industry.  We believe that our business model is highly
scalable and uniquely well-positioned to take advantage of the environment that
currently exists in the mining and exploration industries.  We have the
people and knowledge base to continue to evaluate growth opportunities  either
organically or through mergers and acquisitions.



Kettle and its subsidiary, World Wide
Exploration S.A. de C.V. (WWE), provide both surface and underground drilling
services but specialize in underground, hard rock core drilling.  Their
clients include both mining and exploration companies in the United States and
Mexico.  Total revenues both for the quarter and for the first six months
of 2008 were up approximately 100-percent for the second consecutive year.
  WWE showed a record profit for the quarter.  We are pleased
with our performance in Mexico and expect the established trend of profit growth
to continue.  We are also determined to improve the performance of our U.S.
operations, which showed a modest profit, and believe that refocusing our
emphasis from rapid growth to profitability will continue to improve our
operating results.  Based on the revenues reported by our drilling
operations for the first two quarters, typically our weakest due to holiday
shutdowns, we are confident that, barring unforeseen events, we will achieve our
2008 drilling revenue objective of $30-million.



Additionally, during the quarter we also
announced a management transition at our drilling subsidiaries, which is now
underway, during which we expect drilling operations to proceed as normal and
without interruption.



During the quarter we announced the signing
of a definitive Purchase Agreement to acquire Small Mine Development, LLC
(SMD), one of the largest underground mine contractors in the United
States.  We believe that upon receipt of shareholder approval and closing,
the acquisition of SMD will provide us with the foundation to be a significant
player in the North American mining services industry.  We believe that our
pursuit of SMD demonstrates our belief that a strong presence in both mining
services and exploration are likely to provide excellent returns to our
shareholders over the long term.



Subsequent to the end of the quarter, we
filed a Preliminary Proxy with the U.S. Securities and Exchange Commission (SEC)
which included proposals related to the acquisition of SMD and other items and
is now under review.



In our Exploration Division, during the
quarter we continued our exploration, permitting, and drilling activity.
 Our expenditures are representative of our commitment to ramp up
exploration activity during 2008 on several of our properties.



We received approval from Inyo County
 to proceed with exploration at Conglomerate Mesa and are awaiting approval
from the Bureau of Land Management for our planned road building and drill
program.  In preparation for our upcoming drill program, we have conducted
extensive mapping and sampling at Conglomerate Mesa, recently acquiring 292
additional rock samples.  We continue to build upon previous work performed
by Newmont and BHP-



16



---





Billiton as we explore and define this
district-scale gold exploration prospect.  Additional mapping and sampling
was also performed at East Camp Douglas, including a detailed structural
analysis and the collection of 88 additional rock chip samples, as we outline
and prepare drill targets on the property.  Permitting and planning is also
underway at Butte Highlands and Snowstorm in anticipation of active spring and
summer field seasons at both properties.  At Downeyville, we completed a
6-hole, 5,300-foot drill program and subsequently dropped the property.  We
also dropped the rest of our Cedar Mountains project, the Pac and HD properties.
 Although these were early-stage legacy properties that preceded the
current management team, we believe that they merited limited testing before
being returned to their owners.



Results of Operations for the Three
Month and Six Month Periods ended March 31, 2008 and 2007



Combined Results  Timberline
Corporate, Timberline Exploration, Kettle Drilling and WWE



For the three months ended March 31, 2008,
we reported $8,386,327 in revenue compared to $3,833,384 in the same period of
2007.  For the six months ended March 31, 2008 we reported revenues of
$14,821,452 versus revenues of $7,041,721 in the same period of 2007.  Our
revenues are derived entirely from our drilling subsidiaries and comprised of
$5,722,242 from Kettle Drilling and $2,664,085 from WWE for the three months
ended March 31, 2008.  For the six months ended March 31, 2008 Kettle
Drilling and WWE reported revenues of $10,664,421 and $4,157,031, respectively.
 Our revenue increase was primarily due to the growth in the number of
drill rigs operating this year versus last year.  Gross profit from Kettle
and WWE was $1,204,849 and $847,584, respectively, for the three months ended
March 31, 2008, and $2,392,654 and $1,145,239, respectively, for the six months
ended March 31, 2008.



Our overall after tax net loss for the
three months ended March 31, 2008 was $487,053 compared to an overall net loss
of $222,009 for the three months ended March 31, 2007.  For the six months
ended March 31, 2008, our overall net loss was $2,480,748 compared to $1,361,051
for the same period in 2007.  Our net loss for the three months ended March
31, 2008 is comprised of $1,056,007 for Timberline Corporate and Exploration,
offset by gains of $135,913 for Kettle Drilling and $433,041 at WWE.
  Our net loss for the six months ended March 31, 2008 is comprised of
$2,734,884 for Timberline Corporate and Exploration and $189,502 for Kettle
Drilling offset by a gain of $443,638 at WWE.



Timberline Corporate and Exploration
Division



The after tax net loss
of $1,056,077 for the combined Timberline Corporate and the Exploration division
during the three months ended March 31, 2008 is comprised of non-cash charges of
$130,601, exploration expenditures of $422,968, and other general and
administrative costs of $502,438.  Included in the non-cash charges are
expenses related to stock options that vested during the quarter.  Also
included in the non-cash charges is $100,000 in Depreciation and Amortization.



The after tax net loss
of $2,734,884 for the combined Timberline Corporate and the Exploration division
during the six months ended March 31, 2008 is comprised of non-cash charges of
$838,933, exploration expenditures of $999,720, and other general and
administrative costs of $896,231.  Included in the non-cash charges are
expenses related to common stock issuances for consulting services, stock based
compensation, and for stock options that vested during the quarter.  Also
included in the non-cash charges is $126,990 in Depreciation and Amortization.



Kettle Drilling and WWE



For the three months ended March 31, 2008,
Kettle Drilling had revenues of $5,722,242 as compared to $2,857,979 for the
three months ended March 31, 2007.  WWE had revenues of $2,664,085 for the
three months ended March 31, 2008 as compared to $975,405 for the three months
ended March 31, 2007.  The increase in revenues is attributable to the
growth in the number of operating drill rigs at each company.



For the three months ended March 31, 2008,
net income before taxes from Kettle was $135,913 while net income before taxes
at WWE was $758,561 as compared to a net loss of $31,872 for Kettle and net
income of $268,006 for WWE for the three months ended March 31, 2007.  At
Kettle, our transition to a profit for the quarter is attributable



17



---





to stabilizing our growth, while the net
income at WWE grew substantially compared to the corresponding quarter in 2007
due to the increased activity and number of drill rigs in Mexico.



For the six months ended March 31, 2008,
Kettle Drilling had revenues of $10,664,421 as compared to $5,499,089 for the
six months ended March 31, 2007.  WWE had revenues of $4,157,031 for the
six months ended March 31, 2008 as compared to $1,542,632 for the six months
ended March 31, 2007.  The considerable increase in revenues is
attributable to the growth in the number of operating drill rigs at each
company.



For the six months ended March 31, 2008,
net loss before taxes from Kettle was $189,502 while net income before taxes at
WWE was $769,158, as compared to a net loss of $649,335 for Kettle and net
income before taxes of $280,521 for WWE for the six months ended March 31, 2007.
 At Kettle, the reduced loss from last year is attributable to stabilizing
our growth, while the net income at WWE grew substantially due to the increased
activity and number of drill rigs in Mexico.



Financial Condition and Liquidity



At March 31, 2008, we
had assets of $25,178,805 consisting of cash in the amount of $4,068,264;
accounts receivable in the amount of $3,984,768; inventories valued at
$2,958,470; property, mineral rights and equipment, net of depreciation of
$9,965,586; and other assets of $4,201,717.  The Company believes that its
cash and cash flow from continuing operations will be sufficient to fund our
operations for the next twelve months.



Off-Balance Sheet Arrangements



We do not have any off balance sheet
arrangements that are reasonably likely to have a current or future effect on
our financial condition, revenues, results of operations, liquidity or capital
expenditures.



Critical Accounting Policies and
Estimates



See Note 2 to the financial statements
contained elsewhere in this Quarterly Report for a complete summary of the
significant accounting policies used in the presentation of our financial
statements. The summary is presented to assist the reader in understanding the
financial statements. The accounting policies used conform to accounting
principals generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.



Our critical accounting policies are as follows:



Exploration
Expenditures



All exploration expenditures are expensed
as incurred.  Significant property acquisition payments for active
exploration properties are capitalized.  If no mineable ore body is
discovered, previously capitalized costs are expensed in the period the property
is abandoned.



Revenue Recognition



Generally, the Company recognizes drilling
service revenues as the drilling services are provided to the customer based on
the actual amount drilled for each contract. In some cases, the customer is
responsible for mobilization and stand by costs when the Company deploys its
personnel and equipment to a specific drilling site, but for reasons beyond the
Companys control, drilling activities are not able to take place. Usually, the
specific terms of each drilling job are agreed to by the customer and the
Company prior to the commencement of drilling.





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Intangible Assets



Intangible assets from the acquisition of
Kettle Drilling, including employment contracts, and customer drilling
contracts, are stated at the estimated value at the date of acquisition.
 Amortization of employment contracts is calculated on a straight-line
basis over a useful life of three years.  Amortization of the drilling
contracts is calculated on a straight-line basis over the life of the contracts
(typically one year or less).  The value of employment and customer
drilling contracts will be periodically tested for impairment. Any impairment
loss revealed by this test would be reported in earnings for the period during
which the loss occurred.



Inventories



The Company values its inventories at the
lower of average cost or market, using the first-in-first-out (FIFO) method.
 Allowances are recorded for inventory considered to be in excess or
obsolete. Inventories consist primarily of parts, operating supplies, drill rods
and drill bits. The value of inventory previously used in drilling and still
considered useable, is valued at 25-90% of cost depending on remaining life
expectancy.



Review of Carrying Value of
Property and Equipment for Impairment



The Company reviews the carrying value of
property and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated
future cash flows expected to result from its use and eventual disposition. In
cases where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the carrying
value exceeds the fair value of the asset. The factors considered by management
in performing this assessment include current operating results, trends and
prospects, the manner in which the property is used, and the effects of
obsolescence, demand, competition, and other economic factors.



Goodwill



Goodwill relates to the acquisition of
Kettle Drilling.  In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, at least annually
goodwill is tested for impairment by applying a fair value based test.  In
assessing the value of goodwill, assets and liabilities are assigned to the
reporting units and a discounted cash flow analysis is used to determine fair
value. There was no impairment loss revealed by this test as of September 30,
2007.



Derivative Financial
Instruments



The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks.
 Derivative financial instruments are initially measured at their fair
value. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value,
with changes in the fair value reported as charges or credits to income. For
option-based derivative financial instruments, we use the Black-Scholes option
pricing model to value the derivative instruments.



_________________________________________________________________________________________

Certain information contained in this Management
Discussion and Analysis constitutes forward looking information and actual
results could differ from estimates, expectations or beliefs contained in such
statements.







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NOTE: Certain parts of the following
Item 3. Disclosure Controls and Procedures reflect revisions incorporated by the
Company to clarify its disclosure regarding material weaknesses in its internal
control over financial reporting. Apart from revisions relating to this
clarified disclosure, this Item 3 has not been revised for new events and
developments occurring after the original filing date of May 15, 2008. Please
see the Companys subsequently filed Current Reports, Quarterly Reports, and
Annual Reports, as filed with the SEC, for a discussion of events occurring
subsequent to this Quarterly Report on Form 10-QSB/A.



ITEM 3. DISCLOSURE CONTROLS AND
PROCEDURES



Disclosure Controls and
Procedures



At the end of the quarter covered by this
report, an evaluation was carried out under the supervision of and with the
participation of the Companys management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operations of the Companys disclosure controls and procedures (as defined
in Rule 13a  15(e) and Rule15d  15(e) under the Exchange Act). Based on that
evaluation the CEO and the CFO have concluded that as of the end of the period
covered by this report, the Companys disclosure controls and procedures were
adequately designed and effective in ensuring that: (i) information required to
be disclosed by the Company in reports that it files or submits to the
Securities and Exchange Commission under the Exchange Act is recorded,
processed, summarized and reported  within the time periods specified in
applicable rules and forms and (ii) material information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow for accurate and timely decisions regarding required disclosure.



The CEO and the CFO reached this conclusion
with respect to the Company's disclosure controls and procedures notwithstanding
the fact that we determined that there were material weaknesses with respect to
the Company's internal control over financial reporting, as discussed
below. While the CEO and CFO believe there is overlap between disclosure
controls and procedures and internal control over financial reporting, they have
concluded that a material weakness in internal controls limited to those
discussed below does not cause the Company's disclosure controls and
procedures to be ineffective. The Company's  CEO and CFO believe that
the inter-relation of disclosure controls and procedures and internal control
over financial reporting is specific to the particular control
policies adopted by the Company and the Company's CEO and CFO have
carefully considered such inter-relation of the Company's specific policies in
reaching this conclusion.  Specifically, the CEO and the CFO have
considered whether the material weakness in internal controls over financial
reporting, as discussed below, stemmed from or was indicative of a lapse in the
Company's disclosure policies related to inter-company reporting policies and
financial statement preparation policies.



As a non-accelerated
filer as defined in Rule 12b-2 of the Exchange Act of 1934, as amended, the
Company is not required to provide managements report on internal control over
financial reporting until its annual report for the fiscal year ended September
30, 2008.  Further, the Companys independent registered public accounting
firm is not required to provide an attestation on the Companys internal control
over financial reporting until the Companys annual report for the fiscal year
ended September 30, 2009.  The Companys management has not completed a
review of internal control over financial reporting necessary to comply with the
requirements for providing a managements report on internal control over
financial reporting and the material weaknesses determined to exist by
management are not the result of such a review.



Changes in Internal Control Over
Financial Reporting





In reviewing our internal controls over
financial reporting for the three months ending March 31, 2008, the Companys
management determined that there were material weaknesses in our internal
control over financial reporting.



These material weaknesses have been
conveyed to our Audit Committee.  Managements assessment is that these
weaknesses are primarily
the result
of not having enough sufficiently qualified accounting personnel involved in the
preparation of the Companys consolidated financial statements.



During the quarter we hired a corporate
controller and have also hired a controller for our Kettle Drilling subsidiary.
 These accounting professionals will strengthen the Companys ability to
maintain records that accurately and fairly reflect the transactions of the
Company.  The Company is also continuing to develop processes and
strengthen internal controls to provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles.  Management
believes the actions taken and the follow-up that will occur during the
remainder of 2008 will effectively eliminate the weaknesses identified.



There were no changes in the Companys
internal control over financial reporting, other than those discussed above,
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.











20



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PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.



Timberline is not a party to any material
pending legal proceedings, and no such proceedings are known to be contemplated.



No director, officer or affiliate of
Timberline and no owner of record or beneficial owner of more than 5.0% of our
securities or any associate of any such director, officer or security holder is
a party adverse to Timberline or has a material interest adverse to Timberline
in reference to pending litigation.



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



The Company issued 766,000 shares of its
common stock upon the exercise of warrants previously sold by the Company as
part of units of the Company, as reported by the Company in its Current Report
on Form 8-K, filed with the SEC on October 18, 2007.  The shares of common
stock issued upon exercise of the warrants were sold pursuant to exemptions from
registration requirements of the Securities Act provided by Section 506 of
Regulation D of the Securities Act and by Rule 903 of Regulation S of the
Securities Act, such exemptions being available based on information obtained
from the investors to the private placement.



ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES.



None.



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



None.



ITEM 5.  OTHER INFORMATION.



None.



ITEM 6. EXHIBITS.



|     |                                                                                                                                                                                      
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated
under the Securities and Exchange Act of1934, as
amended



|     |                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------
|32.1 | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act









21



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SIGNATURES



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



| |                                  |  | 
| | -------------------------------- |  | 
| | TIMBERLINE RESOURCES
CORPORATION



| |                                                                                                                                                                                                                                                                  |  | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | By:  /s/ Randal Hardy
___________________________________
Randal Hardy
Chief Executive Officer and
Chief Financial Officer
(On behalf of the registrant and
as
Principal Executive Officer and
Principal Accounting and
Financial Officer)

Date:  July 21, 2008











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