ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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Signatures

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

We were incorporated in the State of Idaho on August 28, 1968 under the name Silver Crystal Mines, Inc., to engage in the business of exploring for precious metal deposits and advancing them toward production.  We ceased exploration activities (searching for ore by drilling) during the 1990s and became virtually inactive.  In December 2003, a group of investors purchased 80-percent of the issued and outstanding common stock from the then-controlling management team.  In January 2004, we affected a one-for-four reverse split of our issued and outstanding shares of common stock and increased our authorized common stock to 100-million with a par value of $.001.  Unless otherwise indicated, all references herein to shares outstanding and share issuances have been adjusted to give effect to the aforementioned stock split.  On February 2, 2004, the name of the Company was changed to Timberline Resources Corporation (“Timberline” or the “Company”). Since the reorganization of the Company, we have been in an exploration stage evaluating, acquiring and exploring mineral prospects with potential for economic deposits of gold, silver and copper.  A prospect is defined as a mining property, the value of which has not been determined by exploration.

On March 6, 2006, we acquired, as a wholly owned subsidiary, Kettle Drilling, Inc. (“Kettle”), a privately held, Idaho corporation.  Kettle was formed in 1996 and provides drilling services to the mining and mineral exploration industries across North America and worldwide. Since its inception, Kettle has had revenues and has been profitable.

Unless otherwise indicated, any reference to the “Company”, “Timberline”, or such terms as “we”, “us”, “our”, etc. refers to Timberline and/or its wholly owned subsidiary, Kettle.

Our Competition

Both the mineral exploration and drilling industries are intensely competitive in all phases.  In our mineral exploration activities, we will compete with many companies possessing greater financial resources and technical facilities than us for the acquisition of mineral concessions, claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees.  We must overcome significant barriers to enter into the business of mineral exploration as a result of our limited operating history.  There can be no assurance that Timberline will be able to compete in any of its business areas effectively with current or future competitors or that the competitive pressures faced by us will not have a material adverse effect on our business, financial condition and operating results.

Similarly, in our drilling business, our competition includes many companies with significantly greater experience, larger client bases, and substantially greater financial resources.  However, we believe that we are industry leaders in the underground core segment of the drilling industry and that we are presently ahead of our competition in this area.

Our Offices and Other Facilities

Timberline currently maintains its administrative office at 100 East Lakeshore Drive, Suite 301, Coeur d’Alene, ID 83814.  The telephone number is (208) 664-4859.  Kettle maintains its administrative office at 2775 Howard Street, Suite 2, Coeur d’Alene, ID 83815.  Its telephone number is 208-665-7211.  In addition, Kettle maintains a storage facility in Rathdrum, ID and an operational facility in Winnemucca, NV.  Kettle’s Mexican subsidiary, World Wide Exploration, S.A. de C.V., maintains an administrative office and a warehouse in Mexico.

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Our Employees

Timberline, the parent company, is an exploration stage company and currently has no employees other than its officers and directors.  Management expects to hire staff as necessary, and does not anticipate a need to engage any full-time employees until the business plan is applied.

Kettle, our subsidiary, has a total of 76 employees, including five management and/or supervisory personnel. The remaining Kettle employees are categorized as follows: four in clerical capacity, four in administrative capacity and 63 in drilling operations. We believe that our relationship with our employees is good.

Regulation

The exploration, drilling and mining industries operate in a legal environment that requires permits to conduct virtually all operations.  Thus permits are required by local, state and federal government agencies.  Federal agencies that may be involved include: The U.S. Forest Service (USFS), Bureau of Land Management (BLM), Environmental Protection Agency (EPA), National Institute for Occupational Safety and Health (NIOSH), the Mine Safety and Health Administration (MSHA) and the Fish and Wildlife Service (FWS). Individual states also have various environmental regulatory bodies, such as Departments of Ecology and so on.  Local authorities, usually counties, also have control over mining activity.  The various permits address such issues as prospecting, development, production, labor standards, taxes, occupational health and safety, toxic substances, air quality, water use, water discharge, water quality, noise, dust, wildlife impacts, as well as other environmental and socioeconomic issues.

Prior to receiving the necessary permits to explore or mine, the operator must comply with all regulatory requirements imposed by all governmental authorities having jurisdiction over the project area.  Very often, in order to obtain the requisite permits, the operator must have its land reclamation, restoration or replacement plans pre-approved. Specifically, the operator must present its plan as to how it intends to restore or replace the effected area. Often all or any of these requirements can cause delays or involve costly studies or alterations of the proposed activity or time frame of operations, in order to mitigate impacts.  All of these factors make it more difficult and costly to operate and have a negative and sometimes fatal impact on the viability of the exploration or mining operation. Finally, it is possible that future changes in these laws or regulations could have a significant impact on the Company’s business, causing those activities to be economically reevaluated at that time.

OVERVIEW OF KETTLE DRILLING, INC. – OUR WHOLLY-OWNED SUBSIDIARY

Kettle provides drilling services to mining and mineral exploration companies throughout North America, combining state of the art equipment, world-class technical expertise, innovative thinking, and an impeccable safety record.  Kettle provides services in both underground core drilling and surface drilling, with approximately 80-percent of its revenues derived from the underground drilling, a specialty or niche that we believe will eventually become more common within the industry as additional mines are developed.  Kettle performs services for such industry leaders as Newmont Mining, Barrick Gold, Kennecott, Industrias Penoles, U.S. Gold and others.  Kettle, along with its newly-formed Mexican subsidiary, generated well over $6-million in operating revenue this year, continuing on a rapid growth track that it has sustained for the past several years.

OVERVIEW OF OUR MINERAL EXPLORATION BUSINESS

Our parent company is a mineral exploration company.  Mineral exploration is essentially a research activity that does not produce a product.  Successful exploration often results in increased project value that can be realized through the optioning or selling of the claimed site to larger companies.  As such, we acquire properties, which we believe have potential to host economic concentrations of minerals,

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particularly gold, silver and copper.  These acquisitions have and may take the form of unpatented mining claims on federal land, or leasing claims, or private property owned by others.  An unpatented mining claim is an interest that can be acquired to the mineral rights on open lands of the federally owned public domain.  Claims are staked in accordance with the Mining Law of 1872, recorded with the federal government pursuant to laws and regulations established by the Bureau of Land Management (the Federal agency that administers America’s public lands), and grant the holder of the claim a possessory interest in the mineral rights, subject to the paramount title of the United States.

We will perform basic geological work to identify specific drill targets on the properties, and then collect subsurface samples by drilling to confirm the presence of mineralization (the presence of economic minerals in a specific area or geological formation.)  We may enter into joint venture agreements with other companies to fund further exploration work.  It is our plan to focus on assembling a high quality group of early to mid-stage mineral (gold, silver, and copper) exploration prospects, using the experience and contacts of the management group.  By such prospects, we mean properties that may have been previously identified by third parties, including prior owners such as exploration companies, as mineral prospects with potential for economic mineralization.  Often these properties have been sampled, mapped and sometimes drilled, usually with indefinite results.  Accordingly, such acquired projects will either have some prior exploration history or will have strong similarity to a recognized geologic ore deposit model.  Geographic emphasis will be placed on the western United States.

The focus of our activity has been to acquire properties that we believe to be undervalued; including those that we believe to hold previously unrecognized mineral potential.  Properties have been acquired through the location of unpatented mining claims (which allow the claimholder the right to mine the minerals without holding title to the property), or by negotiating lease/option agreements.  Our Vice-President of Exploration, Paul Dircksen, has abundant experience in evaluating, staking and filing unpatented mining claims, and in negotiating and preparing mineral lease agreements in connection with those mining claims.  See his biographical information, below, in Item 9, Part III (“Directors and Executive Officers of the Registrant”).

The geologic potential and ore deposit models have been defined and specific drill targets identified on the majority of the Company’s properties.  Our property evaluation process involves using basic geologic fieldwork to perform an initial evaluation of a property.  If the evaluation is positive, we seek to acquire it, either by staking unpatented mining claims on open public domain, or by leasing the property from the owner of private property or the owner of unpatented claims.  Once acquired, we then typically make a more detailed evaluation of the property.  This detailed evaluation involves expenditures for exploration work which may include rock and soil sampling, geologic mapping, geophysics, trenching, drilling, or other means to determine if economic mineralization is present on the property.

Portions of our mineral properties are owned by third parties, and leased to us.  These agreements are held by David Miller and Howard Adams, Jim Ebisch, Sedi-Met, Inc, Hecla Mining Company, Snowshoe Mining Company and Renegade Exploration, Inc.  The contract with Mr. Ebisch, a former director, is an assignment of lease; the state of Idaho is the underlying owner.  In addition, we own a number of unpatented mining claims outright.  Approximately 45 of these claims are located near our Snowstorm Project in Shoshone County, Idaho, and have been included in the earn-in agreement with Hecla Mining Company (“Hecla”) (Exhibit 10.7*).  An “earn-in agreement” requires one party to spend a certain amount of money, usually in mineral exploration expenditures, to earn a specified percentage ownership in the property. On February 1, 2006, pursuant to the agreement, Hecla elected to withdraw from the venture but retains four percent (4%) net smelter return royalty on any mineral production from the subject claims. See Exhibit 10.17 which incorporates by reference Exhibit 10.3 of the Company’s Form 8K filed on February 6, 2006. In conjunction with this withdrawal, Hecla assigned approximately 750 acres of mineral rights in the area to the Company. See Exhibit 10.18 which incorporates by reference Exhibit 10.2 of the Company’s Form 8K filed on February 6, 2006. Four additional groups of unpatented claims owned by the Company are located in Sanders and Lincoln counties, Montana.  The Montana claims are leased by the Company to Sterling Mining Company (Exhibit 10.6*).   

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All of the leases are contracts with varied terms, all of which provide for us to earn an interest in the property or receive a royalty.  See Item 3, Description of Property below for further descriptions of the properties and lease agreements.  In addition, the actual agreements are referred to herein as Exhibits 10.1 through 10.10*.   

It is our strategy with properties deemed to be of higher risk or those that would require very large exploration expenditures to present them to larger companies for joint venture.  Our joint venture strategy is intended to maximize the abilities and skills of the management group, conserve capital, and provide superior leverage for investors.  If we present a property to a major company and they are not interested, we will continue to seek an interested partner.

For our prospects where drilling costs are reasonable and the likelihood of success seems favorable, we will undertake our own drilling.  The target depths, the tenor of mineralization on the surface, and the general geology of the area are all factors that determine the risk as calculated by the Company in conducting a drilling operation.  Mineral exploration is a research and development activity and is, by definition, a high risk business that relies on numerous untested assumptions and variables.  Accordingly, we make our decisions on a project by project basis.  We do not have any steadfast formula that we apply in determining the reasonableness of drilling costs in comparison to the likelihood of success, i.e. in determining whether success seems “favorable.”   

OVERVIEW OF REGULATORY, ECONOMIC AND ENVIRONMENTAL ISSUES

Hard rock mining and drilling in the United States is a closely regulated industrial activity.  Mining and drilling operations are subject to review and approval by a wide variety of agencies at the federal, state and local level.  Each level of government requires applications for permits to conduct operations.  The approval process always involves consideration of many issues including but not limited to air pollution, water use and discharge, noise issues, and wildlife impacts.  Mining operations always involve preparation of an environmental impact statement that examines the probable effect of the proposed site development.  Federal agencies that may be involved include: The U.S. Forest Service (USFS), Bureau of Land Management (BLM), Environmental Protection Agency (EPA), National Institute for Occupational Safety and Health (NIOSH), the Mine Safety and Health Administration (MSHA) and the Fish and Wildlife Service (FWS).  Individual states also have various environmental regulatory bodies, such as Departments of Ecology and so on.  Local authorities, usually counties, also have control over mining activity.  An example of such regulation is the State of Montana’s recent ban on the use of cyanide in mining activities within the state.  Cyanide is used in the mining of gold.  However, since our prospects in Montana are for silver and copper rather than gold, this ban does not affect our plans in Montana.  We are not aware of any other states that plan to enact similar legislation.

Gold, silver and copper are mined in a wide variety of ways, both in open pit and underground mines.  Open pit mines require the gold deposit to be relatively close to the surface.  These deposits tend to be low grade (such as 0.01-0.03 ounces per ton gold) and are mined using large, costly earth moving equipment, usually at very high tonnages per day.   

Open pit operations for gold usually involve heap leaching as a metallurgical method to remove the gold.  Heap leaching involves stacking the ore on pads which are lined with an impenetratable surface, then sprinkling the gold with a weak cyanide solution to extract the gold.  The particle impregnated solution is collected and the gold recovered through further processing.

* Incorporated by reference to Timberline’s Form 10SB filed September 29, 2005.

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Underground metal mines generally involve higher grade ore bodies.  Less tonnage is mined underground, and generally the higher grade ore is processed in a mill or other refining facility.  This process results in the accumulation of waste by-products from the washing of the ground ore. Mills require associated tailings ponds to capture waste by-products and treat water used in the milling process.

Capital costs for mine, mill and tailings pond construction can easily run into the hundreds of millions of dollars.  These costs, of course, are factored into the profitability of a mining operation. Metal mining is sensitive to both cost considerations and to the value of the metal produced.  Metals prices are set on a world-wide market and are not controlled by the operators of the mine.  Changes in currency values or exchange rates can also impact metals prices. Thus changes in metals prices or operating costs can have a huge impact on the economic viability of a mining operation.

Environmental protection and remediation is an increasingly important part of mineral economics.  In some cases, particularly in Montana, with its concern for its grizzly bear population, mining companies have been required to acquire and donate additional land to serve as a substitute habitat for this endangered species.

Estimated future costs of reclamation or restoration of mined land are based principally on legal and regulatory requirements. Reclamation of affected areas after mining operations may cost millions of dollars.  Often governmental permitting agencies are requiring multi-million dollar bonds from mining companies prior to granting permits, to insure that reclamation takes place.  All environmental mitigation tends to decrease profitability of the mining operation, but these expenses are recognized as a cost of doing business by modern mining and exploration companies.    

Mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.

Every mining activity has an environmental impact. In order for a proposed mining project to be granted the required governmental permits, mining companies are required to present proposed plans for mitigating this impact.  In the United States, where the Company’s properties are located, no mine can operate without obtaining a number of permits.  These permits address the social, economic, and environmental impacts of the operation and include numerous opportunities for public involvement and comment.  More information about mining and the permitting process can be found on the website of the National Mining Association at www.nma.org.  Additional information on gold mining can also be found at www.responsiblegold.org.

The Company intends to focus on exploration and discovery of mineral resources, not their production.  If the Company is successful, the ore bodies discovered will be attractive to production companies.  The mining industry is, like agriculture, a fundamental component of modern industrial society, and minerals of all sorts are needed to maintain our way of life.  If the Company is successful in finding an attractive ore body, be it gold, silver or copper, sufficient value will be created to reward the company’s shareholders and allow for all production and reclamation expenses to be paid by the actual producer to whom we convey, assign or joint venture the project.

THE GOLD MARKET

Since bottoming near $250 per ounce in 2001, the gold price has risen steadily for the last few years, reaching a 16-year high above $450 per ounce in late-2004. Through 2005, gold has traded in a fairly narrow price range between roughly $410 and $520 per ounce. In 2006, it traded between approximately $520 and $680. The rise of the gold price in recent years is widely considered to reflect a

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relative decline of the U.S. dollar to other foreign currencies along with general strength in commodity prices.

According to GFMS (Gold Fields Mineral Services), world gold supply in 2004 came primarily from mine output at 2,464 metric tons (down 5% from 2003), scrap at 828 metric tons (down 12%) and official sector (governments and central banks) sales at 478 metric tons (down 22%). World gold demand in 2004 was driven by fabrication demand (jewelry and industrial) at nearly 3,021 metric tons (up 5% from 2003), with investment demand (including Exchange Traded Funds, or ETFs, index funds or trusts that specialize in trading of the securities of gold producing companies on exchanges) far behind at 475 metric tons (up 43%). Producer de-hedging added 442 metric tons of effective demand for gold (up 58%).  As gold prices began to rise, beginning in 2001, producers “de-hedged (purchased gold) to cover their put options and short positions.  This had the reverse effect of hedging, decreasing the available gold supply to strengthen gold prices.

The outlook for 2007 mine production is for it to continue to rebound from 2004, though not to 2003 levels. Although the average gold price was up $46 in 2004 over 2003, producer costs rose by an average of $29, reflecting sharply increased energy costs and other side effects of a weaker U.S. dollar. Central bank dishoarding continued its decline in 2004, although it did rise sharply late in that year and into early 2005.  Historically, the world’s central banks are known to be large holders (hoarders) of gold bullion.  As gold became increasingly out of favor as an investment in the mid-to-late 1990’s, many central banks around the world began selling some of their gold reserves (dishoarding), ostensibly to seek better returns elsewhere.  These sales had the effect of adding supply to the gold market and reducing its price.  Reductions in central bank sales (i.e. reduced dishoarding) had the reverse effect.   

Jewelry and investment demand for physical gold continues to strengthen in rapidly developing areas of Asia, while it continues to soften in much of the western world. However, the introduction of ETFs has greatly increased institutional investment interest in gold. Producer de-hedging continues to contribute significantly to the demand side, a trend that is expected to continue.

We believe that gold production will begin to fall, perhaps dramatically, in coming years due to a lack of investment in gold exploration beginning in the late-1990s. If there are not enough new projects in the development pipeline to replace currently producing mines that will inevitably exhaust themselves in coming years, it will likely put upward pressure on the gold price.

Simultaneously, it is our opinion that massive deficits in both the federal budget and foreign trade will continue to pressure the U.S. dollar for the foreseeable future. A weaker U.S. dollar is likely to result in higher dollar-denominated prices of gold and other commodities, as has been the case for the last several years. Furthermore, with oil prices reaching at all-time highs exceeding $60 per barrel, the gold-oil ratio is also trading at all-time lows, suggesting that gold may be currently undervalued on a relative basis.

THE SILVER MARKET

After failing to participate in an unfolding precious metal bull market for over two years, silver finally broke out of its long-term trading range in late-2003, with its price soaring to over $8 per ounce before settling into its current trading range near $7 per ounce. Prior to its breakout, silver had been basing consistently below $6 per ounce since the late-1980s and had spent most of the years 2000 through 2003 comfortably below $5 per ounce, even as other metals, including historically well-correlated gold, had strong and sustained rallies during that period. In 2005, the price of silver per ounce ranged approximately from $6.50 to $9.25. In 2006, the price ranged from $9.00 to $15.00 per ounce.

According to The Silver Institute (a world wide association of silver miners, refiners, fabricators and manufacturers), world silver supply in 2004 came primarily from mine output at 19,731 metric tons (up 4% from 2003), scrap at 5,633 metric tons (down 1%) and government sales at 1,920 metric tons (down 30%). World silver fabrication demand (including coins) in 2004 was 26,023 metric tons (down 2%

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from 2003), its lowest level since 1998. However, the fact that demand did not tail off more significantly in response to the sharp silver price increase is considered a sign of underlying strength by many market observers. In 2004, total fabrication demand outstripped silver supply from mines and scrap sources for the 14th consecutive year.

The increase in 2004 silver production was led by primary silver mines, not gold or base metal (i.e. any non-precious metal such as copper, lead, zinc or nickel) mines where silver is produced as a by-product. Global production is expected to remain fairly stable through 2005 before accelerating in 2006. Scrap supply has diminished in recent years largely due to a decrease in photographic demand and a drop in subsequent recycling. Supply from government offloading has decreased as well, led by a reduction in sales by the Chinese.

Silver use in photography declined for a fifth consecutive year, while jewelry and silverware demand fell to 9-year lows. On the other hand, industrial demand was up strongly as new uses for silver continue to be developed, particularly in the biocide and electronics industries.  Silver use in coinage was up 15%. The expected listing of an ETF for silver in 2005 is expected to spur an increase in institutional investment interest, as has happened recently with gold.

Despite chronic silver supply deficits dating back to the early-1990s, the key driver in the recent price surge has not originated with physical silver, but in the futures markets. Trading by hedge funds and commodity traders has dominated the silver market in recent years with interest and volume increasing considerably. Some market analysts believe that the trend toward increased investment interest in silver is likely to continue, so long as general interest in commodities remains strong and the U.S. dollar remains under pressure.

THE COPPER MARKET

After bottoming out just above $0.60 per pound in early-1999 and successfully retesting that level again in late-2001, the copper price began a strong uptrend that has taken it above the $1.60 level in recent trading. Following a consolidation just below $0.80 per pound in 2002 and most of 2003, the copper price soared in late 2003 to reach $1.40 per pound in early-2004. It has since formed an upward channel between roughly $1.20 and $1.60 per pound, trading at levels not seen since the late-1980s. During 2006, the approximate price per pound of copper ranged from $2.25 to $3.90.

Copper, along with other base metals, has seen its price benefit greatly by tremendous demand increases in China and other Asian countries against a backdrop of the strongest global economic growth in decades. Recent strong demand has led to shortages in base metal inventories, reflecting a lack of investment in mining during extended periods of low metal prices since the late-1990s. Besides supply and demand issues, hedge funds and other speculators are widely viewed as having influenced base metals prices higher in recent years.

Management believes that the markets for copper and other base metals will cool off in coming years as expectations include softening global demand and increased mine production. A reversal in copper price trends is likely to be mirrored by hedge fund activity as well.

GLOSSARY OF CERTAIN MINING TERMS

ADIT:   An opening driven horizontally into the side of a mountain or hill for providing access to a mineral deposit.

ALTERATION:

Any physical or chemical change in a rock or mineral subsequent to its formation. Milder and more localized than metamorphism.

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ASSAY:   A chemical test performed on a sample of ores or minerals to determine the amount of valuable metals contained.

BASE METAL:   Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.).

BRECCIA:   A rock in which angular fragments are surrounded by a mass of fine-grained minerals.

BULK MINING:   Any large-scale, mechanized method of mining involving many thousands of tons of ore being brought to surface per day.

BUREAU OF LAND MANAGEMENT: Also known as BLM.  It is an agency within the United States Department of the Interior which administers America’s public lands.

COMMERICALLY MINEABLE ORE BODY: A mineral deposit that contains ore reserves that may be mined economically.

CORE:   The long cylindrical piece of rock, about an inch in diameter, brought to surface by diamond drilling.

DECLINE: An underground passageway connecting one or more levels in a mine, providing adequate traction for heavy, self-propelled equipment. Such underground openings are often driven in an upward or downward spiral, much the same as a spiral staircase.

DEVELOPMENT:   Work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible.

DIAMOND DRILL: A rotary type of rock drill that cuts a core of rock that is recovered in long cylindrical sections, two centimeters or more in diameter.

DILUTION:   Rock that is, by necessity, removed along with the ore in the mining process, subsequently lowering the grade of the ore.

DIP:   The angle at which a vein, structure or rock bed is inclined from the horizontal as measured at right angles to the strike.  A vein is a mineralized zone having a more or less regular development in length, width and depth, which clearly separates it from neighboring rock.  A strike is the direction or bearing from true north of a vein or rock formation measured on a horizontal surface.   

DISSEMINATED ORE: Ore carrying small particles of valuable minerals spread more or less uniformly through the host rock.

DRIFT:   A horizontal underground opening that follows along the length of a vein or rock formation as opposed to a cross-cut which crosses the rock formation.

EPITHERMAL DEPOSIT: A mineral deposit consisting of veins and replacement bodies, usually in volcanic or sedimentary rocks, containing precious metals, or, more rarely, base metals.

EXPLORATION:   Work involved in searching for ore, usually by drilling or driving a drift.

FOOTWALL:   The rock on the underside of a vein or ore structure.

FRACTURE:   A break in the rock, the opening of which allows mineral bearing solutions to enter. A “cross-fracture” is a minor break extending at more-or-less right angles to the direction of the principal fractures.

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FREE MILLING:   Ores of gold or silver from which the precious metals can be recovered by concentrating methods without resort to pressure leaching or other chemical treatment.

GEOPHYSICAL SURVEY: Indirect methods of investigating the subsurface geology using the applications of physics including electric, gravimetric, magnetic, electromagnetic, seismic, and radiometric principles.

GRADE:   The average assay of a ton of ore, reflecting metal content.

HOST ROCK:   The rock surrounding an ore deposit.

INTRUSIVE:   A body of igneous rock formed by the consolidation of magma intruded into other rocks, in contrast to lavas, which are extruded upon the surface.

LIMESTONE:   A bedded, sedimentary deposit consisting chiefly of calcium carbonate.

LODE:   A mineral deposit in solid rock.

METAMORPHIC ROCKS: Rocks which have undergone a change in texture or composition as the result of heat and/or pressure.

MILL:   A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to affect recovery of the pure metal, recovery being the percentage of valuable metal in the ore that is recovered by metallurgical treatment.

MINE DEVELOPMENT: The work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible

MINERAL:   A naturally occurring homogeneous substance having definite physical properties and chemical composition and, if formed under favorable conditions, a definite crystal form.

MINERAL RESERVE: The economically mineable part of a measured or indicated mineral resource. Appropriate assessments, often called feasibility studies , have been carried out and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social, and governmental factors. These assessments demonstrate, at the time of reporting, that extraction is reasonably justified. Mineral reserves are sub-divided, in order of increasing confidence, into probable and proven categories. A probable reserve is the economically mineable part of an indicated (and in certain circumstances, measured ) resource. A proven reserve is the economically mineable part of a measured resource.

MINERAL RESOURCE:    A deposit or concentration of natural, solid, inorganic or fossilized organic substance in such quantity and at such grade or quality that extraction of the material at a profit is currently or potentially possible. Mineral resources are sub-divided, in order of increasing geological confidence, into inferred , indicated and measured categories.  An inferred resource designation comes from limited sampling data insufficient for verification of deposit quantity and quality, but it is usually supported by limited geological, geochemical and geophysical data. An indicated resource designation comes from sampling data spaced closely enough to allow certain assumptions of deposit quantity and quality and to clearly establish its mineral content. Finally, a measured resource designation comes from sampling data spaced closely enough to allow confirmation of deposit quantity and quality and to allow a preliminary evaluation of the economic viability of the deposit.

MINERALIZED MATERIAL OR DEPOSIT: A mineralized body, which has been delineated by appropriate drilling and/or underground sampling to support a sufficient tonnage and average grade of

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metal(s). Under SEC standards, such a deposit does not qualify as a reserve until a comprehensive evaluation, based upon unit cost, grade, recoveries, and other factors, conclude economic feasibility.

MINERALIZATION: The presence of economic minerals in a specific area or geological formation.

NET SMELTER RETURN: A share of the net revenues generated from the sale of metal produced by a mine.

OPEN PIT:   A mine that is entirely on surface. Also referred to as open-cut or open-cast mine.

ORE:       Material that can be mined and processed at a positive cash flow.

PATENT:   The ultimate stage of holding a mineral claim in the United States, after which no more assessment work is necessary because all mineral rights have been earned.

PROSPECT:   A mining property, the value of which has not been determined by exploration.

QUALIFIED PERSON: A qualified person must make resource and reserve designations. A qualified person is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development, production activities, or project assessment, or any combination thereof, including experience relevant to the subject matter of the report and is a member in good standing of a self-regulatory organization.

RECLAMATION:   The restoration of a site after mining or exploration activity is completed.

RECOVERY:   The percentage of valuable metal in the ore that is recovered by metallurgical treatment.

RESERVES:   That part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of “Ore” when dealing with metalliferous minerals.

RESOURCE:   The calculated amount of material in a mineral deposit, based on limited drill information.

SHEAR OR SHEARING: The deformation of rocks by lateral movement along numerous parallel planes, generally resulting from pressure and producing such metamorphic structures as cleavage and schistosity.

SKARN:   Name for the metamorphic rocks surrounding an igneous intrusive where it comes in contact with a limestone or dolomite formation.

STRIKE:   The direction, or bearing from true north, of a vein or rock formation measured on a horizontal surface.

SULFIDE:   A compound of sulfur and some other element.

TAILINGS:   Material rejected from a mill after more of the recoverable valuable minerals have been extracted.

TREND:   The direction, in the horizontal plane, or a linear geological feature (for example, an ore zone), measured from true north.

UNPATENTED MINING CLAIM: A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode-mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law.

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VEIN:   A mineralized zone having a more or less regular development in length, width and depth, which clearly separates it from neighboring rock.

Overview of the Mineral Exploration Process

Mineral exploration is the first stage in the mining process.  Typically, it involves the following:   

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The search for and location of a mineral deposit with mine development potential.

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The definition of the quantity, grade and continuity of the mineral deposit necessary for its classification as a mineral resource; and

·

Demonstration (through feasibility study) of the commercial viability of the mineral resource necessary for its classification as a mineral reserve.   

Mineral Deposit Location

The first step in the mineral exploration process is the search for and location of a mineral deposit with mine development potential.  Management strategy involves the identification and exploration of prospects that have the potential to host economic or mineable ore deposits.  An economically viable mineral deposit can be mined and refined at a profit.  The goal of the Company will be to find an economically viable mineral deposit.   

Mineral Resource Classification

Following the discovery of a prospective mineral deposit, initial geological data, or exploration information, is assembled for the purpose of providing sufficient geological assurance to justify further exploration work.  When geological knowledge and confidence increase to a level at which a qualified person (as defined in the glossary) can estimate the deposit as “potentially mineable mineralization”, then it can be classified as a mineral resource.  The initial designation of inferred resource is usually supported by a limited range of geological, geochemical, geophysical or other geo-scientific data.  As confidence in its quantity and grade increases through continued exploration work, the resource can be upgraded from inferred to the indicated and measured categories.   

Mineral Reserve Classification

The ultimate objective of mineral exploration is to demonstrate the commercial viability of a deposit sufficiently to advance it to the mine development and production stages.  When a qualified person renders such an assessment, then a mineral resource can be classified as a mineral reserve.  This designation is supported by feasibility studies, which take into account “modifying factors” that determine commercial viability.  These factors include consideration of the following:

MINING

ore extraction method (underground or open pit); underground mining factors (mining widths, ore dilution cut-off grades); reserve estimates; mining sequence (or plan)

METALURGICAL

mineralization content (including “penalty elements”); processing method (milling or leaching); mineral separation methods and expected recovery rates; smelting & refining needs (if any); expected throughput rate

ECONOMIC

mining capital, labor, and energy costs; mining and processing costs; transportation costs; infrastructure maintenance costs; financing options and debt service costs; royalty payments; taxes; commodity market forecasts; revenue projections and cash flow analysis

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REGULATORY/LEGAL

environmental regulations; water and land use issues; title assurance and property ownership issues; taxation, safety and other legislative issues, tailings disposal and reclamation; community support for the project

RISK FACTORS

An investment in an exploration stage mining company with no history of operations such as ours involves an unusually high amount of risk, both unknown and known, and present and potential, including, but not limited to the risks enumerated below.

Risks Associated With Mining

All of our properties are in the exploration stage. There is no assurance that we can establish the existence of any mineral resource on any of our properties in commercially exploitable quantities. Until we can do so, we cannot earn any revenues and if we do not do so we will lose all of the funds that we expend on exploration. If we do not discover any mineral resource in a commercially exploitable quantity, our business will fail.

Despite exploration work on our mineral properties, we have not established that any of them contain any mineral reserve, nor can there be any assurance that we will be able to do so. If we do not, our business will fail. A mineral reserve is defined by the Securities and Exchange Commission in its Industry Guide 7 (http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7) as that part of a mineral deposit, which could be economically and legally extracted or produced at the time of the reserve determination. The probability of an individual prospect ever having a "reserve" that meets the requirements of the Securities and Exchange Commission's Industry Guide 7 is extremely remote; in all probability our mineral resource property does not contain any 'reserve' and any funds that we spend on exploration will probably be lost. Even if we do eventually discover a mineral reserve on one or more of our properties, there can be no assurance that they can be developed into producing mines and extract those resources. Both mineral exploration and development involve a high degree of risk and few properties, which are explored, are ultimately developed into producing mines.

The commercial viability of an established mineral deposit will depend on a number of factors including, by way of example, the size, grade and other attributes of the mineral deposit, the proximity of the resource to infrastructure such as a smelter, roads and a point for shipping, government regulation and market prices. Most of these factors will be beyond our control, and any of them could increase costs and make extraction of any identified mineral resource unprofitable.

Mineral operations are subject to applicable law and government regulation. Even if we discover a mineral resource in a commercially exploitable quantity, these laws and regulations could restrict or prohibit the exploitation of that mineral resource. If we cannot exploit any mineral resource that we might discover on our properties, our business may fail.

Both mineral exploration and extraction require permits from various foreign, federal, state, provincial and local governmental authorities and are governed by laws and regulations, including those with respect to prospecting, mine development, mineral production, transport, export, taxation, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters.  We have obtained an exploration permit from the State of Idaho for our current exploration program on private land in Shoshone County, Idaho.  Regarding our future ground disturbing activity on federal land, we will be required to obtain a permit from the US Forest Service or the Bureau of Land Management prior to commencing exploration.  To date, we have not commenced such activities.  There can be no assurance that we will be able to obtain or maintain any of the permits required for the continued exploration of our mineral properties or for the construction and operation of a mine on our properties at economically viable costs. If we cannot accomplish these objectives, our business could fail.

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We believe that we are in compliance with all material laws and regulations that currently apply to our activities but there can be no assurance that we can continue to do so. Current laws and regulations could be amended and we might not be able to comply with them, as amended. Further, there can be no assurance that we will be able to obtain or maintain all permits necessary for our future operations, or that we will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, we may be delayed or prohibited from proceeding with planned exploration or development of our mineral properties.

Environmental hazards unknown to us, which have been caused by previous or existing owners or operators of the properties, may exist on the properties in which we hold an interest.  In past years we have 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 this or other areas at present, it is possible 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 this report, the Company is not aware of any environmental issues or litigation relating to any of its current or former properties.

If we establish the existence of a mineral resource on any of our properties in a commercially exploitable quantity, we will require additional capital in order to develop the property into a producing mine. If we cannot raise this additional capital, we will not be able to exploit the resource, and our business could fail.

If we do discover mineral resources in commercially exploitable quantities on any of our properties, we will be required to expend substantial sums of money to establish the extent of the resource, develop processes to extract it and develop extraction and processing facilities and infrastructure. Although we may derive substantial benefits from the discovery of a major deposit, there can be no assurance that such a resource will be large enough to justify commercial operations, nor can there be any assurance that we will be able to raise the funds required for development on a timely basis. If we cannot raise the necessary capital or complete the necessary facilities and infrastructure, our business may fail.

Mineral exploration and development is subject to extraordinary operating risks. We do not currently insure against these risks. In the event of a cave-in or similar occurrence, our liability may exceed our resources, which would have an adverse impact on our Company.

Mineral exploration, development and production involve many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Our operations will be subject to all the hazards and risks inherent in the exploration, development and production of resources, including liability for pollution, cave-ins or similar hazards against which we cannot insure or against which we may elect not to insure. Any such event could result in work stoppages and damage to property, including damage to the environment. We do not currently maintain any insurance coverage against these operating hazards. The payment of any liabilities that arise from any such occurrence would have a material, adverse impact on our Company.

Mineral prices are subject to dramatic and unpredictable fluctuations.

We expect to derive revenues, if any, from the eventual extraction and sale of precious and base metals such as gold, silver and copper. The price of those commodities has fluctuated widely in recent years, and is affected by numerous factors beyond our control including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities and increased production due to new extraction developments and improved extraction and production methods. The effect of these factors on the price of base and precious metals, and, therefore, the economic viability of any of our exploration projects, cannot accurately be predicted.

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The mining industry is highly competitive and there is no assurance that we will continue to be successful in acquiring mineral claims. If we cannot continue to acquire properties to explore for mineral resources, we may be required to reduce or cease operations.

The mineral exploration, development, and production industry is largely un-integrated. We compete with other exploration companies looking for mineral resource properties and the resources that can be produced from them. While we compete with other exploration companies in the effort to locate and license mineral resource properties, we do not compete with them for the removal or sales of mineral products from our properties if we should eventually discover the presence of them in quantities sufficient to make production economically feasible. Readily available markets exist worldwide for the sale of gold and other mineral products. Therefore, we will likely be able to sell any gold or mineral products that we identify and produce.

There are hundreds of public and private companies that are actively engaged in mineral exploration. The exact number is virtually impossible to quantify.  Furthermore, since the mineral exploration sphere is so diverse, it is quite difficult to identify specific primary competitors and make comparisons to our Company.  A representative sample of such companies that are similar to our Company in size, financial resources and objective include such publicly traded mineral exploration companies as Little Squaw Gold Mining Company (LITS), Idaho General Mines, Inc. (GMO), and New Jersey Mining Company (NJMC).

Many of our competitors have greater financial resources and technical facilities. Accordingly, we will attempt to compete primarily through the knowledge and experience of our management.  This competition could adversely affect our ability to acquire suitable prospects for exploration in the future. Accordingly, there can be no assurance that we will acquire any interest in additional mineral resource properties that might yield reserves or result in commercial mining operations.

Third parties may challenge our rights to our resource properties or the agreements that permit us to explore our properties may expire if we fail to timely renew them and pay the required fees.

In connection with the acquisition of our mineral properties, we sometimes conduct only limited reviews of title and related matters, and obtain certain representations regarding ownership.  These limited reviews do not necessarily preclude third parties from challenging our title and, furthermore, our title may be defective.  Consequently, there can be no assurance that we hold good and marketable title to all of our mining concessions and mining claims.  If any of our concessions or claims were challenged, we could incur significant costs and lose valuable time in defending such a challenge.  These costs or an adverse ruling with regards to any challenge of our titles could have a material adverse affect on our financial position or results of operations.  There can be no assurance that any such disputes or challenges will be resolved in out favor.

We are not aware of challenges to the location or area of any of the mining concessions and mining claims. There is, however, no guarantee that title to the claims and concessions will not be challenged or impugned in the future.

Risks Related To Our Parent Company

We have a limited operating history on which to base an evaluation of our business and prospects.

Although we have been in the business of exploring mineral resource properties since our incorporation in 1968, we were inactive for many years prior to the commencement of our exploration stage new management  in January 2004. Since January 2004, we have not yet located any mineral reserve. As a result, we have not had any revenues from our operations since then. In addition, our operating history has been restricted to the acquisition and exploration of our mineral properties and this does not

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provide a meaningful basis for an evaluation of our prospects if we ever determine that we have a mineral reserve and commence the construction and operation of a mine. We have no way to evaluate the likelihood of whether our mineral properties contain any mineral reserve or, if they do that we will be able to be able to be operated successfully. We anticipate that we will continue to incur operating costs without realizing any revenues during the period when we are exploring our properties.

During the fiscal year ending September 30, 2006, we (the parent company) had losses of $1,068,718 in connection with the maintenance and exploration of our mineral properties and the operation of our exploration business. We therefore expect to continue to incur significant losses into the foreseeable future. We recognize that if we are unable to generate significant revenues from mining operations and any dispositions of our properties, we will not be able to earn profits or continue operations. At this early stage of our operation, we also expect to face the risks, uncertainties, expenses and difficulties frequently encountered by companies at the start up stage of their business development. We cannot be sure that we will be successful in addressing these risks and uncertainties and our failure to do so could have a materially adverse effect on our financial condition. There is no history upon which to base any assumption as to the likelihood that we will prove successful and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations.

Investors’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share if we issue employee/director/consultant options or if we issue additional shares to finance our operations.

We have not ever generated revenue from exploration since the commencement of our exploration stage in January 2004. We are currently without a source of revenue and will most likely be required to issue additional shares to finance our operations and, depending on the outcome of our exploration programs, may issue additional shares to finance additional exploration programs of any or all of our projects or to acquire additional properties. We may also in the future grant to some or all of our directors, officers, insiders, and key employees options to purchase our common shares as non-cash incentives to those persons. The issuance of any equity securities could, and the issuance of any additional shares will, cause our existing shareholders to experience dilution of their ownership interests.

If we issue additional shares or decide to enter into joint ventures with other parties in order to raise financing through the sale of equity securities, investors' interests in our Company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. As of the date of the filing of this report there are also outstanding approximately 6,372,090 common share purchase warrants (exercisable into approximately 3,186,045 shares of common stock), options granted that are exercisable into 1,047,500 common shares and 5,000,000 shares of convertible preferred shares that are convertible into at least 5,000,000 shares of common stock. If all of these were exercised or converted, these would represent approximately 39% of our issued and outstanding shares. If all of these warrants and options are exercised and the underlying shares are issued, such issuance will cause a reduction in the proportionate ownership and voting power of all other shareholders. The dilution may result in a decline in the market price of our shares.

Dividend Record

We have no dividend record. We have not paid dividends on our common shares since incorporation and do not anticipate doing so in the foreseeable future.

Conflicts of Interest

Certain of our officers and directors may be or become associated with other businesses, including natural resource companies that acquire interests in mineral properties.   Such associations may give rise to conflicts of interest from time to time. Our directors are required by Idaho Corporation law to act honestly and in good faith with a view to our best interests and to disclose any interest, which they may have in any

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of our projects or opportunities. In general, if a conflict of interest arises at a meeting of the board of directors, any director in a conflict will disclose his interest and abstain from voting on such matter or, if he does vote, his vote will not be counted.

We have not adopted any separate formal corporate policy regarding conflicts of interest, or any other corporate governance measures such as creating a directors’ audit committee requiring independent directors.  However, our recently adopted Code of Ethics, a copy of which is attached as Exhibit 14, does address areas of possible conflicts of interest.  As of September 30, 2006, we had two independent directors on our board of directors (Vance Thornsberry and Eric Klepfer); however, we have not yet formed an audit committee.  Other corporate governance measures such as establishing an independent audit committee of the board of directors are required under rules of national exchanges and NASDAQ. We feel that the newly adopted Code of Ethics is sufficient corporate governance for our purposes at this time.  If and when our securities are traded on a national exchange or on NASDAQ, we will be required to formulate and adopt additional measures to comply with current regulations.  In the absence of these corporate governance measures, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.

Dependence on Key Management Employees

The nature of our business, our ability to continue our exploration and development activities and to develop a competitive edge in the marketplace depends, in large part, on our ability to attract and maintain qualified key management personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to attract and retain such personnel. Our development now and in the future will depend on the efforts of key management figures, such as John Swallow, Paul Dircksen or Douglas Kettle and David Deeds (officers of our subsidiary, Kettle). The loss of any of these key people could have a material adverse effect on our business. In this regard, the Company has attempted to reduce the risk associated with the loss of key personnel. Accordingly, subsequent to September 30, 2006, we obtained key man life insurance. In addition, we have expanded the provisions of our equity incentive plan so that we can provide incentives for our key personnel.

Certain Risks Associated with Operation of Our Wholly Owned Subsidiary, Kettle Drilling, Inc.

Our subsidiary derives all of its revenues from companies in the exploration and production industry, a historically cyclical industry.

Our subsidiary derives all its revenues from companies in the exploration and production industry, a historically cyclical industry. Any prolonged reduction in the overall level of exploration and development activities, can adversely impact our subsidiary in many ways by negatively affecting:

Kettle Drilling, Inc. may be unable to attract and retain qualified, skilled employees necessary to operate its business.

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Kettle’s success depends in large part on its ability to attract and retain skilled and qualified personnel. Its inability to hire, train and retain a sufficient number of qualified employees could impair Kettle’s ability to manage and maintain our business. Kettle requires skilled employees who can perform physically demanding work. Shortages of qualified personnel are occurring in this industry. As a result of the volatility of the drilling industry and the demanding nature of the work, potential employees may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. If Kettle should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate its equipment, its operations could be materially and adversely affected. With a reduced pool of workers, it is possible that it will have to raise wage rates to attract workers from other fields and to retain its current employees. If Kettle is not able to increase its service rates to its customers to compensate for wage-rate increases, its profitability and other results of operations may be adversely affected.

Shortages in equipment and supplies could limit Kettle’s drilling operations and jeopardize its relations with customers.

The materials and supplies Kettle uses in its drilling operations include fuels to operate our drilling equipment, drilling mud, drill pipe, drill collars, drill bits and cement. Shortages in equipment supplies could limit its drilling operations and jeopardize its relations with customers. Kettle does not rely on a single source of supply for any of these items. From time to time there have been shortages of drilling equipment and supplies during periods of high demand, which we believe could reoccur. Shortages could result in increased prices for drilling equipment or supplies that Kettle may be unable to pass on to customers. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in its obtaining drilling equipment or supplies could limit drilling operations and jeopardize our relations with customers. In addition, shortages of drilling equipment or supplies could delay and adversely affect Kettle’s ability to obtain new contracts for its rigs, which could negatively impact its revenues and profitability.

Risks Associated With Our Common Stock

Our common stock is traded only on the OTC Bulletin Board and we cannot assure you that a liquid public market will be maintained.

Our common stock is quoted on the National Association of Securities Dealer's OTC Bulletin Board. We cannot provide any assurance that a public market will be maintained or if it will provide you with liquidity for your investment.

Our stock price has been volatile and your investment in our common stock could suffer a decline in value.

Our common stock is traded on the OTC Bulletin Board. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include price fluctuations of precious metals, government regulations, disputes regarding mining claims, broad stock market fluctuations and economic conditions in the United States.

Because we do not intend to pay any dividends on our common shares, investors seeking dividend income or liquidity should not purchase our shares.

We do not currently anticipate declaring and paying dividends to our shareholders in the near future. It is our current intention to apply net earnings, if any, in the foreseeable future to increasing our working capital. Prospective investors seeking or needing dividend income or liquidity should, therefore, not purchase our common stock. We currently have no revenues and a history of losses, so there can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our

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shares, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors, who currently do not intend to pay any dividends on our common shares for the foreseeable future.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC's penny stock regulations, which may limit a stockholder's ability to buy and sell our stock.

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

NASD sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

In addition to the "penny stock" rules promulgated by the Securities and Exchange Commission (see above for discussions of penny stock rules), the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Shares Eligible for Sale Could Depress the Market for Common Stock

Of our issued and outstanding shares of common stock, a large majority of those shares are “restricted securities”. In general, Rule 144 of the Securities Act of 1933, as amended, a person, is entitled to sell restricted shares into the public market if at least one year has passed since the purchase of such shares from the issuer of an affiliate of an issuer, subject to the satisfaction of certain other conditions. A significant number of the “restricted” shares of our common stock outstanding were purchased more than one year ago. Accordingly, those shares are eligible for sale into the public market. Sales of substantial amounts of those restricted shares, or even the perception that such sales could occur, could adversely

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affect prevailing market prices of our common stock, and could impair our ability to raise capital through an offering of our equity securities.

PLEASE READ THIS FORM 10KSB CAREFULLY. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED HEREIN AND ON THE OTHER REPORTS AND OUR FORM 10SB, AS AMENDED, THAT WE HAVE FILIED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.

ITEM 2. DESCRIPTION OF PROPERTY

Summary of Timberline’s Mineral Exploration Prospects

As of November 2006, Timberline had acquired mineral prospects for exploration in California, Nevada, Idaho, and Montana for target commodities of gold, silver and copper. The prospects are held by unpatented mining claims owned by the Company or through legal agreements conveying exploration and development rights to the Company.  Most of our prospects have had a prior exploration history and this is typical in the mineral exploration industry.  Most mineral prospects go through several rounds of exploration before an economic ore body is discovered and prior work often eliminates targets or points to new ones.  Also, prior operators may have explored under a completely different commodity price structure or technological regime.  Mineralization which was uneconomic in the past may be ore grade at current market prices when extracted and processed with modern technology.

The State of Montana has banned the use of cyanide in mining activities.  Cyanide is used in the mining of gold.  Since our prospects in Montana are for silver and copper only, this ban does not affect our plans in Montana.

CALIFORNIA GOLD PROPERTY

The Conglomerate Mesa Prospect

In September 2006, Timberline signed a Memorandum of Understanding (“MOU”) outlining the terms for a Lease/Option to Purchase Agreement for the Conglomerate Mesa prospect in Inyo County, California.  The property hosts structurally and stratigraphically controlled, sediment-hosted gold mineralization similar to the "Carlin-type" deposits of north-central Nevada.  Four claim blocks have been acquired or staked within the project area totaling 250 claims, covering nearly ten square miles, including several mineralized gold zones identified by prior operators.  Timberline believes that the property has the potential to host multi-million ounce gold deposits.

The property was originally explored by Newmont while it was within the Cerro Gordo Wilderness Study Area (“WSA”).  Initial drilling of just one of the mineralized zones ("Resource Area") outlined mineralized material pre-dating (and not compliant with) NI 43-101 standards totaling 175,000 ounces of gold contained in 3 million tons grading 0.06 ounces per ton (oz/t).  Newmont withdrew from Conglomerate Mesa in 1993.  Federal agencies dropped the property's WSA status the following year, removing significant impediments to future development.

The gold mineralization and associated alteration are structurally and stratigraphically controlled.  The gold mineralization at Conglomerate Mesa is introduced along axial plane fault zones within a northerly trending anticline and preferentially within favorable host sediments.

All available data from prior operators is now being compiled in preparation for an immediate program of geologic mapping and geochemical sampling to define targets for a drill program planned for early 2007.  The Company has been actively working under the MOU and, at the request of the owner,

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staking additional claims following evaluation of additional historical drill data and reports.  A formal agreement is expected to be signed in January 2007.

The MOU provides Timberline the right to purchase a 100-percent interest in Conglomerate Mesa, subject to a 4-percent Net Smelter Returns (NSR) production royalty of which 1-percent may be purchased for $1-million.  In the first year of the proposed agreement, Timberline is obligated to make an option payment of $75,000 and 100,000 shares of its common stock to the property owners, along with a commitment to $100,000 in exploration expenditures.  The option payment will continue at $75,000 in 2007, and then increase by $25,000 per year annually to a cap of $250,000.  Annual share payments and work commitments will remain fixed at 100,000 and $100,000, respectively.

NEVADA GOLD PROPERTIES

The East Camp Douglas Prospect

In June 2006, Timberline entered into an Exploration and Option to Lease Agreement on the East Camp Douglas prospect along Nevada’s Walker Lane Mineral Belt.  The property is comprised of 87 unpatented mining claims, totaling more than 1,700 acres, and represents a high-priority epithermal gold-silver exploration project.  Drilling by previous operators included intercepts of 60 feet of 0.47 oz/t gold and 10 feet of 0.19 oz/t gold, with select rock chip samples grading up to 4.9 oz/t gold.  Two separate areas of low-sulphidation quartz-adularia and high-sulphidation quartz-alunite alteration and mineralization have been explored on the property.  

The project is structurally well-located at the intersection of the regional W-NW trending Pancake/Cerro Duro Lineament (Bodie, Aurora, and Borealis mines) and the NW trending Walker Lane Structural Belt (Rawhide, Paradise Peak, Tonopah, and Goldfield mines).  The Miocene age gold-silver mineralization at East Camp Douglas is related to an extensive intermediate to felsic eruptive volcanic center including early andesitic and later dacitic flows and dikes.

Timberline has conducted geochemical sampling along with detailed surface and geological mapping, focused on alteration and structural interpretation.  The Company is also digitizing and reviewing available historical data from previous operators to assist in prioritizing exploration targets, in anticipation of drilling by mid-2007.   

The Agreement calls for Timberline to render annual advance royalty payments of $15,000 escalating to a cap of $75,000 and annual work expenditure obligations of $50,000, escalating to a cap of $100,000.  Upon completion of a positive feasibility study or a production decision, Timberline may purchase the property for $10,000 subject to a 3-percent NSR royalty, of which 1-percent may be purchased for $2 million.

The Long Canyon Prospect

In July 2006, Timberline signed a Letter of Intent (“LOI”) to enter a Lease / Option to Purchase Agreement on the Long Canyon prospect, 9 miles east-southeast of the East Camp Douglas prospect, also on the Walker Lane Mineral Belt.  The property covers 22 mining claims and represents the upper levels of a low-sulfidation, quartz-adularia gold system within the same positive structural setting as East Camp Douglas.  

The project area contains a series of narrow quartz veins grading up to 3.9 grams per ton (g/t) gold and 529 g/t silver, cutting a broad, undefined, zone of gold bearing siliceous breccias associated with a poorly defined intrusive mafic sill.  Additionally, a regional rhyolite dike swarm appears to control some of the gold mineralization.  Timberline plans to initiate a program of geologic mapping, geochemical sampling, and geophysical magnetic surveying.

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The Agreement requires Timberline to make annual advance royalty payments of $20,000 increasing $5,000 annually to a cap of $50,000.  Upon a production decision, Timberline may purchase the Property for $500,000 subject to a 2-percent NSR royalty, of which 1-percent may be purchased for $1-million.

The Olympic-Sun and Cedar Mountain Prospects – Under Joint Venture Agreement with Christopher James Gold Corp.

The Company controls several other claim groups along the Walker Lane Mineral Belt in Nye and Mineral Counties, including the Olympic and Sun properties (the Olympic-Sun prospect) and the PAC, HD, and ACE properties (the Cedar Mountain prospect).  The primary geological model for both prospects is a volcanic-hosted, epithermal gold deposit similar to the nearby Paradise Peak and Rawhide mines, each of which produced more than a million ounces of gold.  The Company has conducted an initial surface exploration program on these properties, including the compilation of available data, detailed geological mapping, and geochemical sampling.

In May 2006, Timberline entered into a Memorandum of Understanding (“MOU”) with Christopher James Gold Corporation (“CJG”) to explore the Olympic-Sun and Cedar Mountain prospects.  The MOU provides CJG the right to earn a 60-percent interest in each project by incurring US$1.5-million in exploration expenditures for the Olympic-Sun project and US$1.0-million for exploration on the Cedar Mountain project over a four-year period.  An additional 15-percent interest may be earned in each project by CJG upon its completion of a bankable feasibility study.  In addition, CJG must issue 100,000 shares of its common stock to Timberline for participation in each project before the first anniversary of a finalized agreement.    

The Olympic Property

The Olympic property consists of 112 unpatented claims about 17 miles south of Gabbs, Nevada.  The property includes the past-producing Olympic and Loo gold mines along with numerous surface prospect pits and shallow underground workings.  Historical records credit the Olympic with 40,000 ounces of gold production in the early 20 ^th century from three levels and 3,000 feet of underground workings, primarily from a low angle, epithermal quartz vein that ranged from 2 to 7 feet thick and reportedly averaged 0.95 ounces per ton gold.  

Timberline has conducted geologic mapping, rock chip geochemical sampling and additional claim staking at the Olympic property, as well as compilation of data from previous operators.  These efforts have identified two major volcanic-hosted precious metal systems occurring and possibly overlapping on the Olympic property.  These systems comprise a combined area of approximately three square miles of alteration with large sections containing zones highly anomalous in gold and trace elements.  These mineralized areas have only been partially tested.

The Sun Property

The Sun property consists of 47 unpatented lode claims, along trend and two miles southeast of the Olympic Mine, between the Simon Silver-Lead District to the west and the Mina gold system to the east.   The Mina Mine has both historic production and a reported drill-indicated resource of approximately 80,000 ounces of gold.  There have been several exploration efforts at Mina, most recently by Glamis Gold and MK Gold, some of whose work was conducted on ground now covered by the Sun claims.

Samples collected by Timberline personnel from altered rocks, quartz veins and mineralized structural zones are strongly anomalous in gold, arsenic, antimony and mercury.  The major geologic feature at Sun is a NW-SE trending structural zone that extends from the Mina Mine and continues through the Sun claim group.  Mapping and sampling efforts have identified two untested target areas along strike with the Mina Mine.

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The Sedi-Met Agreements

The Olympic property was acquired under a Letter of Intent (“LOI”) between Timberline and Sedi-Met, and then formalized with a Mineral Lease Agreement signed in March 2004.  Terms of the agreement included an initial payment of $15,000 and 10,000 shares of Timberline stock, with future payments increasing by $5,000 per year to a maximum of $40,000.  The lessor retained a 3-percent NSR royalty, reducible by 1-percent for a cash payment of $500,000.

In April 2005, the Company’s mineral lease agreement with Sedi-Met was amended to reflect additional claims (the Sun claims) that had been added, and a modification of the area of interest.  The amendment allowed the Olympic property to be unitized with the Sun property, which is held by different owners (Howard Adams and David Miller).  Payment and royalty terms with Sedi-Met were unchanged.  See Exhibit 10.4 (Sedi-Met, Inc. Agreement/Mineral Lease for Olympic Mine, Nevada) in the Company's Form 10SB/A and incorporated by reference herein.

The Cedar Mountain Prospect

The Cedar Mountain prospect includes the PAC, HD, and ACE properties, all of which are early-exploration stage gold properties.

The PAC Property

The PAC property consists of 14 unpatented mining claims, two miles north of the historic Pactolus workings and ten miles west of the Paradise Peak Mine.  It lies along a NW-SE trending belt of intrusive rhyolite domes that are coincident with the Paradise Peak and Rawhide mines, as well as the HD claims.  Timberline personnel have mapped and sampled the property, identifying two attractive targets: favorable rhyolitic stratigraphy in contact with a quartz vein system and a low-angle mineralized structure.  

The HD Property

The HD property consists of 23 unpatented mining claims located 18 miles southeast of Gabbs.  It lies along a NW-SE trending belt of intrusive rhyolite domes that are coincident with the Paradise Peak and Rawhide mines, as well as the PAC claims.  The property was explored by Kennecott Exploration and Homestake Mining during the 1980s.  The alteration features and geochemical signature at HD indicate a high-level mineralized system anomalous in mercury and arsenic with trace amounts of gold.  Targets at HD include a silica system at depth and favorable volcanic stratigraphy adjacent to a major structure.  

The ACE Property

The ACE property consists of 11 unpatented mining claims located just south of the past-producing Warrior Mine which had limited gold production at average grades slightly less then one ounce per ton.  Potential targets include a continuation of the gold bearing vein system, disseminated mineralization within favorable volcanic rocks, and replacement mineralization within underlying carbonate rocks.  Rock chip samples demonstrate anomalous gold and strongly anomalous mercury that may be leakage along structure from a mineralized body.

The Miller-Adams Agreements

The Sun, PAC, HD and ACE claim groups were acquired under a Letter of Intent (“LOI”) in January 2004 between Timberline and J. David Miller and Howard Adams.  The LOI called for an initial payment of $10,000, an additional payment of $12,000 due by April 2004, and 10,000 shares of Timberline common stock.  The LOI also called for an initial work commitment of $50,000. A 3-percent NSR royalty was reducible to a 1-percent NSR by the performance of specified work commitments and a

25

cash payment of $500,000.  Work commitments were $50,000 during the first lease year, $75,000 during the second lease year, and $100,000 during each year thereafter.  These work commitments were applied to the four claim groups as a whole, and covered the total number of claims identified in the LOI.  

In April 2005, the Mineral Lease Agreement for the Sun, PAC, HD, and ACE properties was amended.  Consideration paid under the amended Agreement of April 2005 was an additional $10,000 plus 20,000 shares of the Timberline common stock.

The amended Agreement segregated the Sun claims into a separate agreement, and then modified the area of interest of the Sun group to be compatible with the area of interest of the Sedi-Met agreement (for the Olympic property) described above.  The Agreement calls for an annual work commitment of $50,000 for the Sun property and payment in cash may be made in lieu of the work expenditures.  A 3-percent NSR royalty will be paid on any production from the Sun claims.  The royalty can be reduced by 1-percent for work expenditures of $150,000 prior to October 1, 2007, and an additional 1-percent by a cash payment of $150,000.  See Exhibit 10.1 (Miller-Adams Agreement/Mineral Lease for “Sun” Property, Nevada) in the Company’s Form 10SB/A which is  incorporated by reference herein.

The amended Agreement reflects the addition of claims to the PAC, HD, and ACE claim groups and now 65 unpatented mining claims are covered by the Agreement on those properties.  Annual payments on the PAC, HD, and ACE properties escalate to $25,000 by March 30, 2008.  A 3-percent NSR royalty will be paid on any production from the claims. The royalty can be reduced by 1-percent for work expenditures of $250,000 prior to October 1, 2007, and an additional 1-percent by a cash payment of $150,000.  Work commitments are $30,000 annually, and payment in lieu of work expenditures can be made.  See Exhibit 10.2 (Miller-Adams Agreement/Mineral Lease for HD, ACE, PAC Claims, Nevada) in the Company’s Form 10SB/A which is incorporated by reference herein.

The Downeyville Prospect

In April 2005, Timberline entered into a Mineral Lease Agreement to acquire the Downeyville Prospect, which is comprised of 21 unpatented mining claims in Nye County, Nevada, approximately ten miles north of the Paradise Peak Mine.

The property is characterized by strongly-oxidized shear-controlled and replacement-type mineralization.  A magnetic high southwest of the claim group under alluvial cover was discovered by an airborne geophysical survey and may represent a buried intrusive related to the distal base and precious metal mineralization seen on the claims.  The high zinc grades and consistently elevated gold and silver values accompanied by pyrrhotite, magnetite, and tremolite-actinolite indicate a proximal gold skarn system, similar to the McCoy-Cove Mine.  Some minor past production has occurred on the property, as evidenced by the existing dumps.  

Twenty-three rock chip samples have been collected by Timberline geologists from mapped structures and existing dumps on the property, nine of which returned assays ranging from strongly anomalous to ore-grade values, up to 28-percent zinc, 12.9 oz/t silver, and 0.24 oz/t gold.  The Company intends to conduct additional geological mapping and geochemical sampling programs, along with possible geophysical surveys to assist in drill target selection.

The Downeyville claims are held under a Mineral Lease Agreement that called for an initial payment of $12,000 plus 8,000 shares of Timberline common stock, followed by annual payments of $10,000 beginning in 2006.  A 3-percent NSR royalty will be paid on any production from the claims, which can be reduced by 1-percent for work expenditures of $150,000 prior to October 1, 2008, and an additional 1-percent by a cash payment of $150,000.  Work commitments are $20,000 the first year and $50,000 annually thereafter, and payment in lieu of work expenditures can be made.  See Exhibit 10.3 (Miller-Adams Agreement/Mineral lease for DOW Claims, Nevada) in the Company’s Form 10SB/A which is incorporated by reference herein.

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NEVADA SILVER PROPERTY

The Sanger Prospect

In September 2004, the Company signed a Letter of Intent (“LOI”) with Renegade Exploration, Inc. (“Renegade”) for nine unpatented lode mining claims (“the Sanger Claims”) near the Sanger Mine, in Esmeralda County, Nevada.  The Company reimbursed Renegade for the recording and filing fees on these claims.  The LOI contemplated an initial payment for the claims, and preparation of a formal mineral lease agreement, once other adjacent property was acquired.  Thus far, the Company has been unsuccessful in acquiring the adjacent property, and the conditions of the LOI have not been fulfilled.  It is the intention of the Company and Renegade to amend the LOI, such that the Company will continue to pay the claim maintenance fees on the nine unpatented claims, until such time as the adjacent property is acquired, when the LOI will be converted to a formal mineral lease agreement.  Subsequent to the date of the financial statements, the Company amended this letter of intent, extending it for one year.

In August 2005, an amended letter of intent was signed with Renegade for the Sanger Claims.  The amended LOI has a term of one year, or until it is replaced with a formal mineral lease agreement and calls for Timberline to make the annual claim maintenance payments on the Sanger Claims with the Bureau of Land Management.  An initial payment of $1,000 was made by Timberline to Renegade, on execution of the amended LOI.  Other terms specified in the LOI, to be included in the formal agreement, call for annual payments beginning at $5,000 annually and escalating after four years to $25,000 annually.  The LOI specifies that a 1-percent NSR royalty will be paid on any production from the claims.  This royalty can be purchased for a cash payment of $500,000.  The LOI also calls for the issuance of 10,000 shares of Timberline common stock on execution of the formal agreement, and an additional 10,000 shares on the first anniversary of the formal agreement.   See Exhibit 10.10 (Renegade Exploration Letter of Intent) in the Company’s Form 10SB/A which is incorporated by reference herein.

The Sanger Claims are located adjacent to and on-strike with the main mineralization developed in the Sanger Decline.  There are five additional unpatented lode-mining claims that control the portal of the decline into the Sanger Mine that are owned by a third party.  The target geology at the Sanger prospect is a silver-bearing vein, approximately 6 to 10 feet wide, grading approximately 9 to 20 oz/t silver.

The Sanger Mine was developed by Inspiration Development Company during the 1970s.  A decline was driven to the vein and small-scale mining was conducted before declining silver prices closed operations in the 1980s.

IDAHO COPPER-SILVER PROPERTY

The Snowstorm Prospect

In August 2004, Timberline signed a Letter of Intent (“LOI”) with Hecla Mining Company (“Hecla”) to conduct exploration on ground controlled by Hecla in Shoshone County, Idaho.  A formal earn-in agreement replaced the LOI in December 2004, allowing Timberline to earn a 49-percent interest in the project by spending $250,000 by October 2006.  The formal agreement covered an area of interest consisting of private mineral rights held by Hecla and unpatented lode mining claims staked by Timberline.  Adjacent properties were added by Timberline through a Lease Agreement with Snowshoe Mining Company (“Snowshoe”).  The property covered by the Agreement is detailed in Exhibit 10.7 of the Company’s Form 10SB/A which is incorporated by reference herein.

The Snowstorm prospect is located in north Idaho’s “Silver Valley” and features the historic Snowstorm Mine, a small but profitable operation from the early-1900s that produced 800,000 tons of ore averaging 4-percent copper and 6 oz/t silver.  Snowstorm mineralization occurred as disseminated copper and silver found in the same Revett quartzites that host the Troy, Rock Creek and Montanore deposits on

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the Montana Copper Sulfide Belt, but was of a much higher grade.  The Snowstorm property lies in the southwest corner of the Montana Copper Sulfide Belt where it overlaps the northeast corner of the Coeur d'Alene Mining District, just north of Hecla’s Lucky Friday Mine.  

The mineralized horizon at the Snowstorm Mine was discovered in outcrop, and subsequently developed with four adits, each driven at lower elevations to access its nearly vertical structure.  The horizon appears to have been faulted out or displaced near the lowest adit and little systematic exploration has been conducted for the truncated lower portion of the Snowstorm ore body.   Zones of higher-grade, secondary-enriched copper-silver ore similar to the one mined at Snowstorm will be sought by exploration efforts, in addition to the more typical disseminated Troy-type mineralization.  

2005 Exploration Program

Exploration work has been conducted in the project area for decades.  U.S. Borax conducted a program focusing on the nearby Military Gulch area during the 1980s.  Later, Silver Mountain Lead Mines, The Bunker Hill Company, and Hecla held the project area and also conducted significant exploration.  Timberline has obtained access to most of this data, which represents hundreds of thousands of dollars worth of work.  This data was reviewed and assembled to aid in the development of the 2005 exploration program.

In late-2005, Timberline completed a Phase I exploration program at Snowstorm, designed as an initial evaluation of the potential for copper-silver mineralization in Upper Revett quartzite within the large project area.  The program consisted of 10 core holes totaling 4,104 feet, drilled at nine widely-spaced sites along the projected mineralized horizon at depths ranging from 149 to 712 feet.

Mineralization was found to occur within the lower unit of the Upper Revett quartzite, with all ten drill holes encountering the quartzite in thicknesses varying from 37 to 57 feet.  Six holes encountered narrow irregular bands of mineralization grading up to 0.8-percent copper and 1.4 oz/t silver over a two-foot interval within the stratigraphic unit, with two additional holes returning anomalous values.  Although the continuity of the stratigraphy and the mineralized horizon was demonstrated, bulk grades across the horizon were sub-economic, with copper values typically less than 0.3-percent and silver values typically less than 0.25 oz/t.  Much of the mineralization in the shallower intercepts was oxidized with leaching contributing to the lower grades.  In the sulfide zones, chalcopyrite was the predominate sulfide rather than bornite or chalcocite.  Results of the drilling were reported in the Company’s 8-K report dated January 3, 2006.  

Timberline submitted a technical report on the Phase I exploration program at Snowstorm, along with a Phase II exploration proposal, to Hecla as required by an earn-in agreement.  Hecla has subsequently elected not to participate in future expenditures at Snowstorm and thus retains a 4-percent NSR royalty on any future production from the project.  Timberline now controls 100-percent of the Snowstorm prospect.  See Exhibit 10.l7 (Hecla Agreement/Joint Venture Agreement for Snowstorm, Idaho) in the Company’s Form 10SB/A which is incorporated by reference herein.

Future Work Plan

Despite the inability of the Phase I program to indicate the presence of an economic Troy-type deposit over a broad area west of the Snowstorm Mine, at least three high-potential targets remain to be tested and were included in Timberline’s Phase II exploration proposal.  They include:

·

The faulted extension of the historic high-grade Snowstorm orebody.  The Snowstorm Mine was a small but highly profitable operation that produced 800,000 tons of ore averaging 4-percent copper and 6 oz/t silver.  The deposit was clearly truncated by a fault, the extension for which has never been found.

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·

The known low-grade stratabound copper-silver mineralization peripheral to the Snowstorm workings.  Past drilling, primarily by Hecla, has demonstrated a “halo” grading approximately 1-percent (20 pounds per ton) copper and 1 oz/t silver and containing an estimated 5 to 10 million tons of mineralized material.

·

The potential for a southeast-plunging ore zone in the area north and northwest of the upper Missoula workings and, perhaps, other stratabound targets within the Lower Revett quartzite below the stratigraphic section tested in Phase I.

The Snowshoe Agreement

In May 2005, the Company signed a Mineral Lease Agreement with Snowshoe for additional ground adjacent to the Snowstorm project area.  The property subject to the Snowshoe Agreement includes the patented claims of Mineral Survey 2224, encompassing an area of approximately 76 acres, just west of the Snowstorm claims.  The Agreement calls for an initial payment of $8,000, with annual payments increasing to $15,000 by May 2009, and remaining at that level thereafter.  The Company will pay a 3-percent NSR royalty on any production from the Snowshoe property, and will perform a minimum of $10,000 worth of exploration work upon it annually.  The work may be performed on or for the benefit of the Snowshoe claims. See Exhibit 10.8 (Snowshoe Mining Co. Lease/Mineral Lease Property at Snowstorm, Idaho) in the Company’s Form 10SB/A.  Hecla previously elected to include the Snowshoe claims within the area of interest, and will consequently receive a 1-percent NSR royalty on any production from the Snowshoe property.  

IDAHO GOLD PROPERTY

The Spencer Prospect

The Spencer prospect covers 640 acres on the western end of the Kilgore-Spencer Trend, a northeast-trending belt of rhyolite volcanics known to host epithermal gold-silver mineralization, just south of a privately-held opal mine near the town of Spencer.  The Company believes that the property has the potential to host both open-pit and underground gold deposits.

The project area is six miles southwest of the Kilgore deposit, an epithermal ore body with a NI 43-101 compliant indicated and inferred resource of 487,000 ounces of gold from 16.7 million tons grading 0.03 oz/t.  The deposit was defined by nearly 200 core and reverse-circulation drill holes totaling over 125,000 feet, primarily by Echo Bay and Placer Dome in the 1990s.  Although the existing resource is presented a possible open pit deposit, drilling has shown underground potential at Kilgore as well, with high-grade gold intercepts including 9.0 oz/t over 10 feet and 0.56 oz/t over 25 feet.

The Kilgore property is now held by Canadian-listed Kilgore Minerals Ltd.  In 2004, Kilgore Minerals announced the discovery of a new gold zone nearly a mile southwest and along trend from the existing resource, where they encountered a 10-foot intercept grading 0.465 oz/t gold within a 170-foot section grading 0.04 oz/t gold.

The geochemistry at Spencer is similar to that shown at Kilgore and is consistent with the upper levels of an epithermal system.  Rock sampling at Spencer has returned values of up to 0.20 ppm gold, 3.6 ppm silver, 8.7 ppm mercury, and 88 ppm arsenic.  Although there was considerable interest in the region during the 1980s and 1990s following the Kilgore discovery, the Spencer property has never been drill tested.

The Company has performed a phase-one exploration program consisting of reconnaissance-scale geological mapping along with rock chip and soil geochemical sampling.  Future work may include more detailed mapping and sampling, and possibly a geophysical survey, to help define drill targets.  A geologic

29

correlation model between Spencer and Kilgore is also proposed, based upon their similar stratigraphy and alteration.

The Spencer Prospect is held by State of Idaho Department of Lands Mineral Lease No. 9347. The Mineral Lease was issued to a prior Director of Timberline, who assigned it to the Company for consideration of common stock and approximately $3,000 in expenses.

The prospect is located in Section 16, Township 12 North, Range 37 East, in Clark County, Idaho.  The lease covers an area of approximately 640 acres and calls for annual payments to the State of Idaho of $640.  Royalties on production of previous metals are 5-percent of the gross receipts from the sale of minerals produced, less reasonable transportation, smelting and treatment costs.  See Exhibit 10.5 (Assignment of State Lease/State Lease for Spencer Property) in the Company’s Form 10SB/A which is incorporated by reference herein.

MONTANA COPPER-SILVER PROPERTIES

The Minton Pass, East Bull, Standard Creek and Lucky Luke Prospects  

In 2004, Timberline acquired four properties on the Montana Copper Sulfide Belt in Lincoln and Sanders counties, all of which were then leased to Sterling Mining Company (“Sterling”).  All four properties are interpreted as sediment-hosted copper-silver occurrences located in the Revett Formation of the Montana Copper-Silver Belt and are considered early-stage exploration prospects.  The properties were held by U.S. Borax and its successor company, Kennecott Exploration, during the 1980s and early-1990s.  Timberline has acquired the mapping and sampling data from the U.S. Borax program.  There has been no documented activity in these areas since 1992.

In the 1970s and 1980s, major exploration companies identified several copper-silver occurrences within the Montana Copper Sulfide Belt, and successfully outlined three world-class ore bodies, including Troy, Rock Creek and Montanore.  These quartzite-hosted deposits are characterized by their lateral extensive size and continuity of mineralization.  The Troy Mine produced 390 million pounds of copper and 44 million ounces of silver from 1981 to 1993, and the undeveloped Rock Creek deposit is reported to contain 137 million tons of ore averaging 0.72-percent copper and 1.67 oz/t silver.  Many of the copper-silver occurrences, including those held by the Company, were evaluated in only a cursory manner during previous exploration.  

Metasedimentary rocks of the Precambrian Belt Supergroup underlie the area. Outcropping rocks consist of a sequence of argillites, siltstones, and quartzites representing the basal portion of the Wallace, St. Regis, and Revett formations, along with the upper portion of the Burke Formation.  Locally, these rocks strike northwest with a shallow westerly dip.  Major faulting associated with the mineralization is generally north-northwest.  Disseminated bornite with secondary chrysocolla and malachite is reported to occur within a specific quartzite horizon of the Revett Formation.  

All claims were staked by Timberline and are not subject to any underlying production royalty.  All of these claims have been filed with the BLM and their serial numbers can be found in Exhibits that are included in the Company's Form 10SB and 10SB/A and are incorporated by reference herein.

The State of Montana has banned the use of cyanide in mining activities within the state.  Cyanide is used in the mining of gold.  Since Timberline’s Montana prospects are for silver and copper only, this ban does not affect our plans in Montana.  

Minton Pass

Minton Pass is a copper-silver occurrence first recognized during the early exploration phase of the Montana Copper-Sulfide Belt, and is comprised of 20 unpatented mining claims near Trout Creek.  

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The property has been explored intermittently since its discovery in 1966 with exploration focused on two mineralized horizons.  Mapping, sampling and trenching were conducted to better define the extent of the mineralization at Minton Pass and there is evidence of several drill holes on the claims.  Rock chip sampling over a 17-foot stratigraphic thickness averaged 0.70-percent copper and 1.78 oz/t silver.  The thickness and grade of Minton Pass mineralization is consistent with the geologic model, exhibiting similarities to the Troy and Rock Creek deposits.

Lucky Luke

The Lucky Luke prospect consists of 20 unpatented mining claims located on U.S. Forest Service property northwest of Thompson Falls.  The property has seen limited historic production via an adit that was driven on a mineralized quartz vein and eventually extended for 1,000 feet.  Exploration work at Lucky Luke has included several shallow trenches that crosscut at least two quartz veins with strike lengths in excess of 3,000 feet.  Chip samples from the vein contained 6 oz/t silver along with significant copper mineralization.

East Bull

The East Bull prospect consists of 19 unpatented mining claims located on U.S. Forest Service property about one mile east of the Troy Mine.  The primary feature at East Bull is its potential for stratiform silver-copper mineralization in the Upper or Lower Revett Formation on either side of the Bull Lake Fault, a large and untested structure near the Troy Mine.

Standard Creek

The Standard Creek prospect consists of 29 unpatented mining claims located on U.S. Forest Service property about six miles east of the Montanore deposit.  The property was staked on the basis of high-grade vein mineralization that has returned assay values of up to 0.10 oz/t gold, 9.95 oz/t silver, 0.69-percent copper, 3.6-percent lead, and 1.2-percent zinc.  In 1987, U.S. Borax mapped and sampled the property, and then drilled a single 1,450-foot core hole to the south of the existing claim block that encountered only trace amounts of pyrite, chalcopyrite and bornite.  A drill test to the north, closer to the vein mineralization, is still warranted.

Lease Agreement with Sterling Mining Company

In November 2004, the Company signed a Mineral Lease Agreement with Sterling for a twenty-year lease on the four claim groups described above.  While Sterling retains the lease on these properties, any work program will be performed and paid for by Sterling.  Consideration for the Agreement included a cash payment of $19,600 for expenses incurred in staking the claims, and forgiveness of loans totaling $65,000 in principal and accrued interest of $2,669.  The Agreement calls for Sterling to make annual lease payments of $5,000 per claim group retained in the Agreement, beginning on June 1, 2007, and to pay a 1-percent NSR royalty on any production from the claims that are subject to the Agreement.  Timberline deems income derived from this arrangement as lease income.  See Exhibit 10.6 (Sterling Mining Co. Lease/Mineral Lease with Sterling Mining for four claim groups in western Montana) in the Company’s Form 10SB/A which is incorporated by reference herein.

ITEM 3. LEGAL PROCEEDINGS

Timberline is not a party to any 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.

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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On September 22, 2006 we held our 2006 annual meeting of shareholders,  at the Coeur d’Alene Inn and Conference Center, 506 West Appleway, Coeur  d’Alene, ID 83814 which all matters submitted to a vote of the company's shareholders as described in the proxy  statement  filed  with the SEC on September  8, 2006 were approved.

11,554,523 shares were present, all by valid proxy.

At the 2006 Annual Meeting, our shareholders took the following actions:

Election of Directors - Our shareholders elected John Swallow, Paul Dircksen, Stephen Goss, Eric Klepfer and Vance Thornsberry to serve as directors until the next annual meeting of shareholders or until their successors are elected and qualified. The number of votes cast for each of these individuals is set forth below:

Director                           

Shares For   

Shares Against  

Share Abstentions

John Swallow

11,544,273

      10,000

250

Paul Dircksen

11,544,273

      10,000

250

Steve Goss

11,544,273

      10,000

250

Eric Klepfer

11,544,273

      10,000

250

Vance Thornsberry

11,544,273

      10,000

250

Ratification of Accountants - Our shareholders ratified the appointment of DeCoria, Maichel & Teague, P.S. as our independent certified public accountants for the fiscal year ended September 30, 2006.   The vote totals were 11,554,273 shares for, 0 shares against and 250 shares abstained.

Stock Options - Our shareholders approved an amendment to our Amended 2005 Equity Incentive Plan increasing the number of shares available for issuance under the plan.  The vote totals were 10,863,914 shares for, 60,625 shares against and 629,984 shares abstained.  

(See Exhibit 10.19 originally filed September 8, 2006 as Exhibit A with our SCH Def14A (Proxy Statement) and incorporated by reference herein.)

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASERS OF EQUITY SECURITIES

Market Information

From February 2004 until July 6, 2006, our common stock was only traded between stockholders and third parties on an individual transaction basis and trading prices were published in the “pink sheets,” a quotation service that displays sale prices, and volume information for transactions with market makers in over-the-counter (“OTC”) equity securities. Since July 7, 2006, our common stock has been traded on the OTC Bulletin Board. All such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.

Based on information obtained from the pink sheets through July 6, 2006, and from the OTC Bulletin Board since July 7, 2006, the high and low bid quotations for the common stock for each of the quarters of our fiscal years ended September 30, 2004, 2005, and 2006 are set forth in the table below, after giving effect to the Company’s January 2004 one for four reverse common stock split:

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        Price Range

High($)

Low($)

Quarter ended 12/31/03 (1)

N/A

N/A

Quarter ended 3/31/04

$1.75

$1.30

Quarter ended 6/30/04

$1.40

$0.75

Quarter ended 9/30/04

$1.05

$0.75

Quarter ended 12/31/04

$0.70

$0.56

Quarter ended 3/31/05

$0.66

$0.55

Quarter ended 6/30/05

$1.00

$0.35

Quarter ended 9/30/05

$0.47

$0.35

Quarter ended 12/31/05  

$0.56

$0.30

Quarter ended 3/31/06

$0.85

$0.67

Quarter ended 6/30/06

$1.10

$0.50

Quarter ended 9/30/06

$0.85

$0.60

 (1)

Prior to February 2004, the Company was known as Silver Crystal Mines, Inc. and was inactive and

not traded on any recognized exchange.

Currently, there are 12 broker-dealers making a market in our common stock.  On January 8, 2007, the closing bid and asked prices of our common stock as published on the OTC Bulletin Board were $1.30 and $1.34 per share, respectively.

Holders

As of December 31, 2006, there were 640 holders of record (of which we are aware) of the Company’s Common Stock.

Dividends

We have not paid any cash dividend to date, and we have no intention of paying any cash dividends on our common stock in the foreseeable future.  The declaration and payment of dividends is subject to the discretion of our Board of Directors and to certain limitations imposed under the Idaho Business Corporations Act.  The timing, amount and form of dividends, if any, will depend on, among other things, our results of operation, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

Sales of Unregistered Securities

During the year ended September 30, 2006, we sold unregistered securities. Those sales have been previously reported in our Current Reports on Form 8K that we have filed with the Securities and Exchange Commission.

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ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 our acquisition of Kettle Drilling Inc. (“Kettle”) in March 2006, we have advanced a new, aggressive business plan.  Prior to our purchase of Kettle, the Company had not had any revenues and only losses since well before that time.  Accordingly, a comparison of our financial information for prior accounting periods would not likely be meaningful or helpful in making an investment decision regarding our Company.

Kettle specializes in hardrock, underground drilling – a niche business that we believe is perfectly positioned as the industry matures and exploration projects are advanced into producing mines.  Kettle has generated over $6-million in revenues in the 7 months from March through September of this year – with over $1.2-million of that from its recently formed Mexican subsidiary, World Wide Exploration, S.A. de C.V.  (“World Wide”).  Kettle had gross revenue of roughly $5.4-million for the entire 12 months of 2005.

Since completing the acquisition, Kettle has invested in several state-of-the-art, computerized drills (with additional drills on back order), has invested over $750,000 in World Wide, and has sharply increased its staffing in anticipation of increased demand for drilling services and a shortage of experienced people.  Kettle owns eight main service modernized core drills in the U.S. with an additional three main service modernized core drills in Mexico.  In addition, Kettle owns several smaller and less modern drills that it uses on an as needed, special application basis.  A substantial portion of the Company’s core drill purchases are financed through capital leases.  Payment for the fiscal year ending September 30, 2006 under these capital leases was $251,980.  The following fiscal year payments are due under these leases: $588,060 (2007), $433,875 (2008), $255,332 (2009) and $118,875 (2010).

Kettle also owns a fleet of vehicles, trucks and fork lifts for its drilling operations.  Other equipment and vehicles were financed with notes collateralized by the equipment or vehicles. Monthly payments under the notes at September 30, 2006 were $15,882. The following fiscal year payments are due under these financing arrangements: $165,849 (2007), $135,069 (2008), $102,243 (2009) and $37,203 (2010).  

Timberline and its subsidiaries lease office space and storage facilities.  All of these facilities, which we believe are adequate for our needs for the foreseeable future, are leased. Under the current leases, we paid rental payments of $46,377 in the fiscal year ending September 30, 2006. The current leases call for total payments of $27,100 in fiscal year 2007.

This year, we also invested in building a top-notch exploration team and property portfolio.  In March, we hired Paul Dircksen as our VP of Exploration.  (See “Item 9 – Directors and Executive Officers of the Registrant”, below.)  Paul is an experienced and well-connected geologist who has been part of nine different gold discoveries, six of which became producing mines.  He has immediately brought upper tier exploration capabilities to Timberline as evidenced by our joint-venture with Christopher James Gold and by district-scale property deals at East Camp Douglas and Conglomerate Mesa.  

We also paid back $400,000 of the Notes relating to the Kettle purchase this year.

Our business plan for the next twelve months is to continue to grow both our domestic and Mexican drilling operations as well as to continue to evaluate and advance our exploration prospects – either on our own or through joint venture.  We anticipate that our exploration costs will be at least $660,000 over the next 12 months.  However, since the exploration business is essentially a research and development activity, our exploration costs are largely dependent upon near-term results, and thus future plans are always subject to review and revision.

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The revenues earned in the year ending September 30, 2006, were primarily derived from contracts entered into in 2005, and were governed by the Kettle 2005 price schedule.  Renewal of those contracts, if that occurs, should be subject to price increases in the range of 30 to 70 percent (subject to market dynamics).  Included in the acquisition are all of Kettle’s assets and liabilities, such as existing contracts and accounts receivable and payable.  As planned, cash flow from drilling operations has been reinvested into the drilling business and deployed toward high-potential mineral exploration ventures, including due diligence efforts and down payments for high-potential gold exploration properties.  Kettle is also investigating expanding its operations and consulting services into additional foreign markets beyond Mexico.

Subsequent to year-end, we completed a private placement for a total of $2.73-million in December 2006.  Also subsequent to year-end, Kettle acquired an operating line of credit from a local bank for $600,000, and a commitment for a $1.5-million equipment purchase line of credit. We believe that we have sufficient funds and revenues to proceed with our business plan over the next 12 months.  However, if we are incorrect with our anticipated revenues and expenses over the next 12 months, we may not be able to proceed with all aspects of our business plan, including our planned exploration activities, without additional financing.  

Along with the new hires and expansion at Kettle, we also recently hired new auditors (see “Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure”, below) and added Mike Wilson as our CFO (see “Item 9 – Directors and Executive Officers of the Registrant”, below).  We have also recently retained an Investor Relations firm.    

Results of Operations for Years Ending September 30, 2005 and 2006

Financial Information from Comparative Years

We did not earn any revenues during the years ending September 31, 2005, and only began to earn revenues after the acquisition of Kettle.  With respect to our mineral exploration activities, we do not anticipate earning revenues until such time, if at all, that we have successful exploration results.  We are presently in the exploration stage of the mining business.  We can provide no assurance that we will discover economic mineralization levels of minerals, or if such minerals are discovered, that we will enter into commercial production.

We incurred operating expenses in the amount of $550,062 for the fiscal year ended September 30, 2005, and $2,960,331 for the year ended September 30, 2006.

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Our net loss increased from $530,973 during the year ended September 30, 2005 to $1,966,177 during the year ended September 30, 2006 primarily due to incurring of the costs related to the acquisition and operation of Kettle, the formation and establishment (which includes purchasing of equipment and the hiring of personnel, etc.) of World Wide, and mineral exploration expenses resulting from our increased exploration activities.  Specifically, our general and administrative expenses increased from $160,741 to $2,429,317 and our mineral exploration expenses increased from $389,321 to $531,014.

Financial Condition and Liquidity

At September 30, 2006, we had assets of $10,594,702 consisting of cash in the amount of $732,245 and other assets of $9,862,457.

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 in Item 7, 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.  Payments made to lease mineral properties are expensed until proved reserves are established.  

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.  Revenues from leases are recognized when realized and earned according to the lease provisions and receipt of the lease payments.  

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 six 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.  

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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.

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.

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ITEM 7.  FINANCIAL STATEMENTS

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

Consolidated Financial Statements

September 30, 2006 and 2005

Contents

Page

FINANCIAL STATEMENTS:

Consolidated balance sheets

39

Consolidated statements of operations

40

Consolidated statements of stockholders’ equity

41

Consolidated statements of cash flows

42

Notes to consolidated financial statements

44

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