**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





**[X]**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**


**For
      the fiscal year ended December 31, 2005**





OR





**TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**





**Commission
      file number: 0-23000**





**TRESTLE
      HOLDINGS, INC.**


(Name
      of
      Small Business Issuer in its charter)








**DELAWARE**
              (State
                or Other Jurisdiction
              of
                Organization)
            **95-4217605**
              (IRS
                Employer Incorporation or
              Identification
                No.)**199
                TECHNOLOGY, # 105,**
              **IRVINE,
                CALIFORNIA**
              (Address
                of Principal Executive Offices)
            **92618**
              (Zip
                Code)








Issuer's
      Telephone Number, Including Area Code: **949-673-1907**





Securities
      registered under Section 12(b) of the Exchange Act: **NONE**





Securities
      registered under Section 12(g) of the Exchange Act:





**COMMON
      STOCK, NO PAR VALUE**


(Title
      of
      class)





Check
      whether the issuer is not required to file a report pursuant to Section 13
      or
      15(d) of the Exchange Act: [ ]





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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to the best of issuer's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any
      amendment to the Form 10-KSB:  [X]





Indicate
      by checkmark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act):  Yes  [
      ]   No [X]





State
      issuer's revenue for its most recent fiscal year: $4,007,000





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the stock was sold,
      or the average bid and asked prices of such stock, as of March 27, 2006, is:
      $1,899,000





State
      the
      number of shares outstanding of each of issuer's classes of common equity,
      as of
      March 14, 2006: 8,257,214





Transitional
      Small Business Disclosure Format: Yes:  [ ]
   No:  [X]





**Documents
      Incorporated By Reference**


The
      following documents are incorporated by reference into this report: Portions
      of
      the Company’s Definitive Proxy Statement to be filed in connection with our 2006
      Annual Meeting of Stockholders subsequent to the date hereof are incorporated
      by
      reference in Part III of this Form 10-KSB. Such Definitive Proxy Statement
      will
      be filed with the Securities and Exchange Commission no later than 120 days
      after the Registrant’s year end of December 31, 2005.














**FORWARD-LOOKING
      STATEMENTS**





This
      report includes forward-looking statements with-in the meaning of
      Section 27A of the Securities Act (the "Securities Act") and
      Section 21E of the Securities Exchange Act of 1934, as amended (the
      "Exchange Act"). We have based these statements on our beliefs and assumptions,
      based on information currently available to us. These forward-looking statements
      are subject to risks and uncertainties. Forward-looking statements include
      the
      information concerning our possible or assumed future results of operations,
      our
      total market opportunity and our business plans and objectives set forth under
      the sections entitled "Business" and "Management's Discussion and Analysis
      of
      Financial Condition and Results of Operations."





Forward-looking
      statements are not guarantees of performance. Our future results and
      requirements may differ materially from those described in the forward-looking
      statements. Many of the factors that will determine these results and
      requirements are beyond our control. In addition to the risks and uncertainties
      discussed in "Business" and "Management's Discussion and Analysis of Financial
      Condition and Results of Operations," investors should consider those discussed
      under "Risk Factors" and, among others, the following:





•  our
      ability to successfully implement our business strategy,


•  changing
      customer preferences,


•  the
      impact of competition and changes to the competitive environment on our products
      and services, and


•  other
      factors detailed from time to time in our filings with the Securities and
      Exchange Commission.





These
      forward-looking statements speak only as of the date of this report. We do
      not
      intend to update or revise any forward-looking statements to reflect changes
      in
      our business anticipated results of our operations, strategy or planned capital
      expenditures, or to reflect the occurrence of unanticipated events.





**PART
      I**





**ITEM
      1.    BUSINESS**




Trestle
      Holdings, Inc. ("Trestle Holdings" or "Company"), develops and sells
      digital tissue imaging products and solutions for improved workflow, analysis
      and data mining in support of pathology in clinical and biopharmaceutical
      applications. Trestle also develops and sells telemedicine applications which
      link disbursed users in the healthcare market. Our digital tissue imaging
      products, MedMicroTMand
      DSMTM,
      provide
      a digital platform to share, store, and analyze tissue images. Trestle's
      MedReachTMproduct
      provides healthcare organizations with a cost effective platform for remote
      examination, diagnosis, and treatment of patients. Products currently under
      development for our XcelleratorTMservice
      platform will provide digital workflow applications and services, image
      acquisition and digitization services, data warehousing services and data mining
      applications and services for tissue informatics in support of drug safety,
      drug
      discovery, and drug development in biopharmaceutical applications as well as
      certain clinical applications.




Our
      customers
      include some of the world's leading pharmaceutical, research and healthcare
      organizations. We have only sold a limited amount of our products to customers
      and have not generated significant revenues to date. Our top customers are
      by
      industry are:




·
            Pharmaceutical
                - Pfizer, GlaxoSmithKline, Sanofi-Aventis, Merck, Abbott Laboratories,
                Wyeth Pharmaceuticals, and Boston Scientific.


·
            Clinical
                - University of Pittsburgh Medical Center, Armed Forces Institute
                of
                Pathology, Baylor University Medical Center, Walter Reed Army Medical
                Center, Clarient, and University of Southern
                California.


·
            Telemedicine
                - Hawaii Health Systems, MeduNet, St. Joseph’s Healthcare, Wexford Health,
                Scott & White Hospitals, and Louisiana Telemedicine
                Consortium.





In
      May 2005, Trestle
      announced it was exploring a range of possible strategic opportunities and
      alternatives, including a merger or possible sale of the Company. On February
      27, 2006, the Company borrowed $250,000 from Clarient, Inc. to be used for
      working capital purposes. See “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations, Liquidity and Capital Resources.” The loan
      is secured by substantially all of the Company’s assets and was provided in
      connection with certain exploratory strategic discussions between the parties
      but there is no assurance that any such discussions will be
      consummated.   *-
            2
            -*





**Digital
      Tissue Imaging Products Summary**





Trestle's
      digital tissue imaging products are microscopy devices which employ the optical
      components of a standard microscope, robotic automated slide handling
      capabilities combined with proprietary imaging and communication software to
      capture high magnification images in digital format. These devices are comprised
      of both hardware and software, and can be used in conjunction with Trestle's
      SL50 Slide Loader System or Integrated Grossing Station.





Trestle's
      digital tissue imaging products, marketed under the names MedMicro and, DSM
      are
      used in clinical, pharmaceutical and research environments. When used
      specifically for pathology, they enable pathologists to consult and collaborate
      with each other remotely and may be referred to as telepathology products.





**MedMicro**




MedMicro
      is the Company's live digital tissue imaging product. In live digital tissue
      imaging, images are captured and viewed in real time while the slide is on
      the
      microscope. MedMicro allows multiple physicians and scientists to remotely
      view,
      navigate, and share high fidelity microscope images at sub-micron resolution
      over standard Internet connections in real-time. MedMicro is also available
      with
      the following options:





**SL50
      Slide Loader System** **TM** **-** Trestle's
      SL50 Slide Loader System allows remote, unattended access to up to 50 glass
      slides. This provides remote users with the ability to review multiple slides
      without the need for an attendant at the MedMicro device location. By automating
      the slide loading and unloading process, the pathologist has the flexibility
      to
      work with a large, virtual catalog of slides at any time.





**Integrated
      Grossing Station** **TM** **-** Trestle's
      Integrated Grossing Station connects to MedMicro and uses MedMicro's built
      in
      annotation, image editing and image archiving functions. The Integrated Grossing
      Station enables remote supervision, direction, and documentation of the
      processing of frozen sections and other gross specimens.





**DSM** ****




Digital
      Slide Module (“DSM”) is the Company's stored digital tissue imaging product. In
      stored digital tissue imaging, images are captured and stored in whole slide
      imaging format digital format for viewing at a later time without requiring
      the
      original slide to be on the microscope. DSM performs high-speed, whole-glass
      slide digitization. By creating whole slide digital images, DSM enables
      pathologists to access entire tissue samples at sub-micron resolution in digital
      format. DSM facilitates image analysis, data management, digital workflow and
      data association for clinical and research applications.





**Telemedicine
      Products Summary**





Telemedicine
      enables the remote delivery of patient care using integrated health information
      systems and telecommunications technologies.





**MedReach** ****





MedReach
      consists of proprietary software that integrates videoconferencing, clinical
      devices, medical images and patient data. MedReach allows healthcare providers
      to remotely examine, diagnose, and treat patients and enables improved service,
      increased patient traffic and improved patient access to specialists. MedReach
      was first released commercially in 1998. Although MedReach represented a
      significant percent of Trestle’s historical revenues, the Company has focused
      its marketing efforts in favor of its telepathology products, which are
      experiencing stronger growth. As a result, MedReach sales may
      decrease.





**Future
      Products and Services Summary**





Future
      products currently under development provide digital workflow applications
      and
      services, image acquisition and digitization services, data warehousing services
      and data mining applications and services for tissue informatics in support
      drug
      safety, drug discovery, drug development in biopharmaceutical applications
      as
      well as certain clinical applications.


*-
          3
          -*





**InterScope**





On
      March
      11, 2005, the Company acquired substantially all of the assets of InterScope
      Technologies, Inc. in exchange for 337,838 shares of Trestle common stock and
      $177,000 in cash. Concurrently, the Company hired four InterScope employees
      three of whom were technical personnel and one who was management. As a result
      of this transaction we anticipate that both research and development and
      selling, general and administrative expense will increase from their current
      levels.




InterScope
      had been developing a family of database applications designed to manage a
      digital workflow for anatomic pathology, quality control & peer review,
      toxicology and educational and reference users. Trestle intends to commercialize
      these applications in support of a newly created data mining and tissue
      informatics offering. It is anticipated that such new product will be licensed
      to end users as software applications as well as integrated into our Xcellerator
      service platform. However there can be no assurances that the Company will
      be
      successful in integrating, completing or commercializing such
      applications.





**Xcellerator** ****




The
      Company announced, in November 2004, the introduction of a service platform
      under the name of Xcellerator. The service platform provides image acquisition
      and digitization services. We plan to expand the service platform capabilities
      in the area of digital workflow; data warehousing; and data mining for tissue
      informatics in support drug safety, drug discovery, drug development in
      biopharmaceutical as well as certain clinical applications. However, there
      can
      be no assurances that we will be successful in developing and expanding this
      service platform product at a price and level of performance that would be
      acceptable to the market place or profitable






The
      current Xcellerator image acquisition service offers the digitization of
      whole-glass slides and their remote viewing through the internet. Xcellerator
      is
      designed to address the efforts of clinical laboratories and drug-development
      organizations to reduce the time and cost associated with processing and
      analyzing tissue slides, normally viewed under a microscope. The Company’s
      planned expansion of the Xcellerator platform into data-mining functions is
      expected to support digital archival functions to enhance workflow through
      such
      features as rapid side-by-side comparison, search and retrieval of digital
      archives and support for computer-assisted analysis in quantitative
      histo-pathology as well as reporting and interfaces into Laboratory Information
      Systems (“LIS”).






With
      Xcellerator, pathologists will be able to send Trestle their prepared tissue
      samples on glass slides, which will be converted to high-resolution digital
      slides which can be manipulated and viewed using the system’s on-line virtual
      microscopy functions. The digital slides can be stored on Trestle’s secure
      servers and are accessible via the internet for search, review, downloading
      and
      analysis. Xcellerator offers users control over the digital slides they view
      online, such as indexing, annotation, searching and image processing functions.






The
      Company offers the service platform as an “onsite” service with equipment on the
      premises of its customers or an “offsite” service, with the equipment outsourced
      to the Company’s facility. To date the Company has had minimal sales of its
      Xcellerator products.







**Product
      Distribution**





The
      Company sells its products either directly to end users and through exclusive
      distributors depending on the application and the geographical location of
      the
      customer. Generally, qualified distributors are already in the business of
      either selling bright field microscopes or equipment for medical analysis.
      Under
      the terms of the Company’s standard distribution agreements, distributors are
      assigned exclusive territories or markets and, in turn, commit to purchasing
      a
      minimum amount of Trestle products on either a quarterly or monthly
      basis.







*-
          4
          -*


***Industry
      Overview***





**Digital
      Tissue Imaging**





Digital
      tissue imaging is the process of creating virtual slides by building digital
      images of physical tissue samples. Digital tissue imaging allows drug
      developers, pathologists and researchers to be view and analyze tissue images
      through a computer or over a standard Internet connection and can be stored
      for
      later interpretation and archiving; and data mining in support of computer
      aided
      quantitative histopathology.





The
      digital tissue imaging markets can be categorized by type of tissue (human
      or
      animal) and use (diagnostic or research).





**Human
      Pathology**





The
      College of American Pathologists reports a total of 16,500 pathologists in
      the
      United States, with approximately two-thirds or 11,000 practicing anatomic
      pathology. These pathologists generally practice within one or more market
      segments, including hospital based pathology labs, integrated health systems,
      and commercial and academic research.





Pathologists
      focusing on human disease study the origin, course and indicators of disease.
      Pathology divides into clinical pathology the analysis of fluids such as urine
      and blood and Trestle's market, anatomic pathology the analysis of tissue.
      Clinical pathology market is dominated by large national laboratories that
      use
      large-scale automation and is generally a high volume, low margin business.
      The
      technology for the automation of anatomic pathology has lagged that of clinical
      pathology. As a result, anatomic pathology remains a less consolidated and
      higher margin industry.





**Animal
      (Veterinary) Pathology**





Animal
      pathology includes testing in research and diagnostic treatment of both pets
      and
      livestock. Animal pathology for treatment is mainly conducted by labs providing
      services to veterinary practices. The majority of animal pathology is conducted
      by pharmaceutical and biotechnology companies for drug development.





The
      dynamics of veterinary pathology for treatment resemble human diagnostic
      pathology. Veterinary pathologists seek to improve access to diagnostic
      specialists: and aim to improve management and archiving of data workflow and
      tissue analysis.





The
      pharmaceutical and biotechnology industries develop and market products for
      the
      treatment of disease and improvements in health. Potential drugs are eliminated
      prior to testing on humans through high volume animal toxicity testing.
      Companies seek to improve this process in order to eliminate toxic drugs early
      and speed effective compounds to market. Companies also address potential
      bottlenecks by streamlining the pathologist workflow and automating repetitive
      tasks.





The
      key
      market segments in animal pathology are pharmaceutical toxicology groups,
      academic and government research, contract research organizations (“CROs”), and
      biotechnology firms.





**Pharmaceutical
      Research**





Pharmaceutical
      companies are continually challenged by patent expirations, which eliminate
      exclusivity of their and result in products financial performance. As a result,
      they pour significant sums into research and development in search of the next
      blockbuster drug.





New
      drug
      development is both and expensive and time consuming process. According to
      the
      Boston Consulting Group, the average research and development cost associated
      with a successfully introduced drug in 1990 was nearly $500MM. This figure
      takes
      into account the cost of research failures and interest costs. In a recent
      study
      from the Tufts Center for the Study of Drug Development (CSDD), the cost of
      drug
      development including the cost of capita was as much as $802MM. According to
      the
      study, for every 5,000 compounds the industry screens, no more than 250 make
      it
      to animal testing and only five reach human testing in clinical trials. Because
      the complexity and number of trials per new drug application are growing, the
      average U.S. development time is increasing. Also, the total drug development
      time from synthesis to approval has increased markedly, from 8.1 years in the
      1960s to nearly 15 years in the 1990s, with virtually all of the increase coming
      from expanded pre-clinical work and longer clinical development in more complex
      trials.


*-
          5
          -*





In
      toxicology studies related to drug discovery and development tissue samples
      are
      placed on glass slides. Currently, most tissue samples have been reviewed by
      pathologists using traditional bright field microscopes. These reviews occur
      relying on expertise dispersed across global sites and are often outsourced
      to
      third parties called Clinical Research Organizations (CRO). Furthermore, there
      are few standardized quality control, common assessment measurement, and Good
      Laboratory Practice (GLP) compliant devices supporting these reviews. Reports
      are then generated manually and slides are reviewed by multiple pathologists
      for
      peer review, quality control, and consultative second opinions. These studies
      typically span various animal species and organ types requiring specialized
      expertise, and include studies in Safety Pharmacology, Toxico- and
      Pharmacokinetic, Single and Repeated Dose Studies, Toxicity, Local Tolerance
      Studies, Genotoxicity Studies, Carcinogenicity Studies, Reproduction Toxicity
      Studies and certain specialized studies for special purpose drugs (such as
      pediatric). Each of these studies produces raw data in the form of tissue
      samples. Studies fall broadly into two categories, pre-clinical and clinical.
      During the pre-clinical phases (animal studies) the studies are investigating
      short-term toxicity to determine if a drug is safe for clinical trials (non-GLP
      studies). During the clinical phases, the studies typically focus on long-term
      toxicity (GLP studies). It is estimated that each drug in pre-clinical animal
      studies generates approximately 10,000 slides for peer review.





The
      complexity and breadth of trials are an expensive distraction for most
      pharmaceutical manufacturers, which tend to emphasize core competencies in
      research over the administration of development. This area is where CROs
      alleviate much of the pain of the development process, leaving biopharma
      companies and drug manufacturers to focus their R&D staff on discovery. With
      the growing costs of drug development and the inherent risks associated therein,
      pharmaceutical companies have increased the front end work in clinical trials
      to
      increase the likelihood of approval on the back end. The average number of
      clinical trials per new drug application (NDA) has increased measurably, growing
      from 30 in the early 1980s to nearly 70 by the mid-1990s.





In
      order
      to successfully make it through the years of development and Phase I, II, and
      III trials, more patients need to participate in trials before the process
      reaches the NDA Phase. This condition, in turn, requires greater efficiencies
      from drug manufacturers and contract research organizations. Furthermore, the
      drug development process bears a striking resemblance to the health care
      industry in general, given the highly manual and paper intensive nature of
      Phases I, II, and III. The process takes on mammoth proportions when the company
      submits an NDA. This filing often exceeds 100,000 pages and has increased
      measurably from the late 1970s, when the typical filing had fewer than 40,000
      pages.





We
      believe that faster development times, quicker decisions to terminate
      unsuccessful compounds, and higher success rates, would enable drug firms to
      reap substantial savings in the cost of new drug development. We believe that
      significant savings could be realized by improving the efficiency of the drug
      development process.





**Digital
      Tissue Imaging Applications**





Digital
      tissue imaging products share common uses in both human and animal pathology,
      including consultation, communication and collaboration, education and
      publication, archiving and management, workflow, and analysis, as described
      below.





**Consultation,
      Communication and Collaboration**





Pathologists
      frequently consult with other pathologists and specialists in carrying out
      their
      daily work. There are often delays in consulting due to the transportation
      of
      slides or having to travel to distant locations in order to meet face-to-face.
      Trestle's products allow sharing of images real time, eliminating the need
      for
      slide transportation or travel. Pathologists and specialists are able to
      simultaneously view and manipulate the slides and provide consultation in
      real-time. In addition, communication is improved as multiple pathologists
      and
      specialists can view and manipulate the same slide simultaneously.





**Education
      and Publication**





Tissue
      images are critical to pathology publications and instruction. Traditional
      publications are limited to the inclusion of a snapshot of one location on
      the
      slide or references to glass slide archives. Trestle's products allow whole
      slides to be cited in publications and accessed in a digital format, improving
      the availability of high quality samples and facilitating sample access.





*-
          6
          -*


**Archiving
      and Management**





Viewing
      and accessing multiple tissue samples is critical to anatomic pathology
      workflow. Typically, tissue images are incomplete and stored in cumbersome
      formats with no efficient links to associated data. Trestle's products under
      development are designed to link a digital slide together with relevant data
      in
      a flexible and easily accessible digital archive.





**Workflow**





Pathologists
      work predominantly with traditional microscopes. Microscopes are both
      ergonomically inefficient and make cross-referencing images and other data
      difficult. Trestle's products under development will enable a pathologist to
      view multiple diagnostic-quality images and associated information
      simultaneously. Additionally, Trestle’s service offerings product, such as
      Xcellerator, could facilitate data mining of information designed to support
      drug discovery, drug development and drug safety and quantitative assays in
      support of quantitative histopathology.





**Analysis**





Analysis
      of tissue samples is still predominantly done by humans rather than computers.
      Limitations on automation have resulted from, among other things, the difficulty
      of capturing data, the complexity of data and the pattern recognition required
      for evaluation. Trestle's products and services facilitate the data capture
      process, features recognition and data mining enabling further development
      of
      digital analysis applications.





**Telemedicine
      Applications**





Telemedicine
      can be the use of communication equipment to link healthcare providers and
      patients in different locations. In contrast to the more traditional ways of
      providing medical care (e.g., face-to-face consultations or examinations),
      telemedicine is a cost-effective alternative. Telemedicine offers increased
      cost
      efficiency, reduced transportation expenses, improved patient access to
      specialists, improved quality of care, and better communication among providers.





Both
      the
      healthcare and pharmaceutical markets share common requirements, including:
      increased productivity; accelerated time to diagnosis; improved access to
      information; and automation of repetitive tasks.





Historically,
      customers have been slow to adopt telemedicine in their daily work environment
      due to limited telecommunications infrastructure and limited insurance
      reimbursement and physician licensure. However, as telecommunications costs
      decrease and access improves, and as reimbursement and regulatory policies
      improve, adoption of remote medicine tools is increasing.





Key
      market sectors in telemedicine include healthcare providers, biomedical and
      pharmaceutical companies, employers, prisons, and assisted living institutions.
      These market segments share the common goal of providing services via electronic
      networks rather than through physical presence. These market segments also
      share
      many of the goals of telemedicine, including:





·
            expansion
                of markets;





·
            generation
                of additional revenue;





·
            reduction
                of patient acquisition and retention costs; and





·
            reduction
                in staffing and operational costs.








*-
          7
          -*


***Products,
      Services and Technology***





**Digital
      Tissue Imaging Products and Services**





Digital
      tissue imaging is used in pathology for capturing, storing, and distributing
      digital images in two categories: live digital microscopy and stored virtual
      microscopy. In live digital microscopy, digital images are captured and viewed
      in real time while the slide is on the microscope. In stored virtual microscopy,
      an image is digitally captured, processed and stored electronically for viewing
      and analyzing at a later time. Thus, the original data source, the microscopic
      slide, does not need to be on the image acquisition device in order to be
      viewed.





Live
      and
      stored digital tissue imaging each have their strengths and weaknesses, with
      each serving particular needs in the pathology workplace. With MedMicro, DSM,
      InterScope, and Xcellerator, Trestle will have products and services that will
      address both applications. Taken together, they provide the foundation for
      a
      fully digital environment that combines live virtual microscopy and stored
      virtual microscopy to deliver a comprehensive solution for digital microscopy.





In
      areas
      of science and medicine other than pathology, transforming data from a physical
      format (such as paper or tissue) to a computer-based format (such as text or
      digital image) has not only enhanced existing methods of work, but also enabled
      whole new working techniques and applications. The Company believes the field
      of
      pathology will be no exception.





MedMicro,
      the Company's first digital microscopy product, provides live,
      easily-manipulated, diagnostic quality images from a remote microscope. MedMicro
      products consist of proprietary software combined with off-the-shelf automation
      components, laboratory microscopes, digital cameras, and a standard personal
      computer for operation. MedMicro customers may also upgrade their purchases
      with
      multi-slide loaders and additional objective lenses.




Additionally
      the Company expanded the service platform capabilities in the area of digital
      workflow; data warehousing; and data mining for tissue informatics in support
      drug safety, drug discovery, drug development in biopharmaceutical as well
      as
      certain clinical and educational applications.




The
      Xcellerator offering is positioned as a service platform and the Company expects
      to continually upgrade the capabilities and features of this service platform
      according to a multi-year development program. At this time the initial
      capabilities of the Xcellerator services focus on the digitization of
      whole-glass slides and their remote viewing across the internet. Additionally,
      digital tissue imaging devices for pathology are increasingly specialized and
      optimized for specific applications. Xcellerator offers customers a way to
      select technologies to best fit their needs.




**InterScope**





On
      March
      11, 2005, the Company acquired substantially all of the assets of InterScope
      Technologies, Inc.


InterScope
      had been developing a family of database applications designed to manage a
      digital workflow for anatomic pathology, quality control & peer review;
      toxicology and educational and reference users. Trestle intends to commercialize
      these applications in support of a newly created data mining and tissue
      informatics offering. It is anticipated that such new product will be licensed
      to end users as software applications as well as integrated into our Xcellerator
      service platform




**Telemedicine
      Products**





The
      Company's telemedicine product, MedReach, consists of proprietary software
      which
      integrates videoconferencing, clinical devices, medical images and patient
      data.
      MedReach enables healthcare organizations to remotely examine, diagnose and
      treat patients and allows improved service and increased patient traffic with
      minimal additional personnel or facilities. Recently, the Company released
      its
      new MedReach platform to make the platform more stable and less dependent on
      third-party software providers.





MedReach
      provides secure remote access to clinical data based on object-oriented design
      models. MedReach also enables compliance with healthcare-specific standards
      such
      as Health Insurance Portability and Accountability Act of 1996 and Digital
      tissue imaging and Communications in Medicine interfaces.





MedReach
      has been designed to meet workflow needs and legacy environments of healthcare
      institutions. An implementation is customized to meet the needs of the specific
      customers, and generally consists of the backbone WebServer software, hardware,
      various media applications, and client workstations.


*-
          8
          -*





***Competition***





The
      digital tissue imaging and telemedicine markets are highly competitive, and
      many
      of our competitors have greater resources and better name recognition than
      we
      do. We primarily compete on product functionality, price and
      service.





Our
      competitors in the digital tissue imaging market include, Aperio, Applied
      Imaging, Apollo Telemedicine, Bacus Labs, BioImagen, Clarient, D-metrix,
      Hamamatsu, Medical Solutions, Nikon, Olympus-SIS, and Zeiss.





Our
      competitors in the telemedicine market include, VitelNet, Polycom, Tandberg,
      Televital, Health Hero Networks, Healthcare Vision, Second Opinion, Phillips
      and
      Siemens.





***Regulatory
      Issues***





**Food
      and Drug Administration**





The
      United States Food and Drug Administration (the "FDA") regulates design,
      testing, manufacturing, labeling, distribution, marketing, sales and service
      of
      image analysis products and services. Such products and services are marketed
      in
      the U.S. according to premarket notifications to the FDA under
      Section 510(k) of the Federal Food, Drug and Cosmetic Act. Unless an
      exemption applies, each image analysis product that we wish to market in the
      U.S. must first receive either 510(k) clearance or premarket approval from
      the
      FDA.





Certain
      of Trestle's products can be considered medical devices and subject to
      regulation by the United States Food and Drug Administration ("FDA"). The FDA
      categorizes medical devices into three classes; these classes are referred
      to as
      Class I, Class II, and Class III. Class I devices ("general
      controls") are the lowest category and many are exempt from FDA pre-market
      notification or approval requirements. MedMicro is registered with the FDA
      as
      Class I Medical Device. The medical device components in MedReach have been
      registered by the manufacturing companies as Class I. It is the Company’s
      intention to obtain ISO 13485 certification for its products and services.
      ISO
      13485 is the ISO quality standard for Medical Equipment and Services. Certain
      next generation applications may require more detailed FDA approval processes.





Currently,
      the Company is attempting to obtain the FDA 510(k) certification for its
      Xcellerator product. The process for obtaining this certification includes
      a
      study to validate the use of digital images for primary diagnostic purposes.
      Based on the results of this study an application for certification was filed
      with the FDA. In January 2006, the Company received
      notification that its pre-market notification or 510(k) with the US Food and
      Drug Administration (FDA) for clearance of its digital pathology whole-slide
      imaging System as a Class II device last November had been denied. The FDA
      stated that it was seeking additional information related to the specificity
      and
      sensitivity of the clinical data submitted. The Company believes that it can
      supply such information and intends to submit a restated notification to the
      FDA.





The
      original submission sought to qualify the use of the Company’s proprietary and
      patented technology for performing primary clinical diagnoses as substantially
      equivalent to other devices used for this purpose. To date, this and other
      digital pathology imaging systems available in the market have been limited
      to
      usage only in the areas of research, education and in performing secondary
      diagnostic consultations. Further, the submission covered the complete imaging
      System including Trestle’s image capture hardware device and its intelligent
      software drivers. These software applications include a patented Region of
      Interest Detection technology, a Focal Mapping technology and a Digital Image
      Archiving and Clinical Workflow Management technology. Trestle intends to make
      additional equivalency submissions in the future to allow similar clearance
      for
      other imaging platforms in its product portfolio.





There
      can
      be no assurances that we will be successful in submitting a restated
      certification or in obtaining the 510(k) certification. Failure to obtain this
      certification may limit the use of this product in the market. Additionally,
      delays in obtaining clearances or approvals will adversely affect our ability
      to
      market and sell our image analysis products and services and may subject us
      to
      significant regulatory fines or penalties, which would result in a decline
      in
      revenue and profitability.








*-
          9
          -*


***Intellectual
      Property***





Trestle
      has four issued and fifteen pending patents on its products, including
      SmartFocus TM ,
      a
      continuous focus system improving the capture of accurate, in-focus tissue
      sample information at sub-micron resolution despite sample variations and
      defects, and while maintaining high speed. We also rely on trade secrets and
      proprietary know-how that we seek to protect, including with confidentiality
      agreements.





Our
      success is heavily dependent upon the development and protection of proprietary
      technology. We rely on patents, trade secrets, copyrights, know-how, trademarks,
      license agreements and contractual provisions to establish our intellectual
      property rights and protect our products and services. These legal means,
      however, afford only limited protection and may not adequately protect our
      rights. Litigation may be necessary in the future to enforce our intellectual
      property rights, protect our trade secrets or determine the validity and scope
      of the proprietary rights of others. Litigation could result in substantial
      costs and diversion of resources and management attention.





We
      cannot
      assure you that competitors or other parties have not filed or in the future
      will not file applications for, or have not received or in the future will
      not
      receive, patents or obtain additional proprietary rights relating to products
      and services or processes used or proposed to be used by us. In that case,
      our
      competitive position could be harmed and we may be required to obtain licenses
      to patents or proprietary rights of others.





In
      addition, the laws of some of the countries in which our products and services
      are or may be sold may not protect our products and services and intellectual
      property to the same extent as U.S. laws, if at all. We may be unable to protect
      our rights in proprietary technology in these countries.




***Employees***





The
      Company currently has 17 full-time employees.





**Risk
      Factors**





The
      following important factors, and the important factors described elsewhere
      in
      the this report or in our other filings with the SEC, could affect (and in
      some
      cases have affected) our results and could cause our results to be materially
      different from estimates or expectations. Other risks and uncertainties may
      also
      affect our results or operations adversely. The following and these other risks
      could materially and adversely affect our business, opertations, results or
      financial condition.





***We
      May Have Insufficient Resources to Continue
      Operations.***





At
      December 31, 2005, we had cash and cash equivalents of $305,000. The Company
      has
      suffered and continues to suffer recurring losses from operations. We have
      delayed payment of a substantial amount of accounts payable and accrued expenses
      and reduced our expenses to a minimal level. In February 2006, in connection
      with certain exploratory strategic discussions we borrowed $250,000 from
      Clarient, Inc., secured by our accounts receivable, inventory and intellectual
      property. This loan matures on May 30, 2006 subject to earlier maturity under
      certain circumstances. Unless we receive additional liquidity from new purchase
      orders, or obtain additional capital or loans or sell or license assets, we
      may
      not have sufficient liquidity to fund our operations beyond May 2006. In such
      event, we may be required to seek to reorganize our buiness or discontinue
      operations and liquidate our assets.





***Uncertainty
      of Market Acceptance and Product Development.***





The
      market for our technology is relatively new. Our success will depend upon the
      market acceptance of our various products and services. This may require in
      certain instances a modification to the culture and behavior of customers to
      be
      more accepting of technology and automation. Potential customers may be
      reluctant or slow to adopt changes or new ways of performing processes. There
      can be no assurance that our current or future products or services will gain
      widespread acceptance or that we will generate sufficient revenues to allow
      us
      to ever achieve profitability.





In
      addition, our products and services require continuing improvement and
      development. Some of our products and services, whether in the market or in
      development, may not succeed or may not succeed as intended. As a result, we
      may
      need to change our product offerings, discontinue certain products and services
      or pursue alternative product strategies. There can be no assurance that the
      Company will be able to successfully improve its current products and services
      or the Company will continue to develop or market some of its products and
      services.


*-
          10
          -*





Our
      Xcellerator service is in its early stages of product introduction and to date
      we have had limited sales of this product. In order for the Xellerator to be
      successful in the market we believe we will have to expand it capabilities.
      In
      order to achieve this we might have to outsource some of our development to
      third parties and this could introduce added costs and time. There can be no
      guarantees that we will be able to deliver market requirements on time or
      budget. If we are unsuccessful the Xcellerator product may not be
      viable.





***We
      have a history of net losses and may never achieve or maintain
      profitability.***





We
      have a
      history of incurring losses from operations. As of December 31, 2005, we had
      an
      accumulated deficit of approximately $50,325,000, of which
      approximately $37,635,000 was incurred prior to the acquisition of the
      predecessors to Trestle. We
      anticipate that our existing cash and cash equivalents will be sufficient to
      fund our operations through at least June 2006. Our independent auditors have
      expressed that substantial doubt exists about the Company’s ability to continue
      as a going concern. These efforts may prove more expensive than we currently
      anticipate and we may incur significant additional costs and expenses in
      connection with our business development activities. Such costs and expenses
      could prevent us from achieving or maintaining profitability in future periods.
      The Company is dependant on orders, continued financing or the completion of
      a
      strategic transaction to maintain solvency. If we do achieve profitability
      in
      any future period, we may not be able to sustain or increase our profitability
      on a quarterly or annual basis.





***Our
      auditors have expressed a going concern opinion.***





Primarily
      as a result of our recurring losses and our lack of liquidity, the Company
      received a report from our independent auditors that includes an explanatory
      paragraph describing the substantial uncertainty as to our ability to continue
      as a going concern.





***Due
      to uncertainties in our business and our history of operating losses, the
      capital on hand may not be sufficient to fund the company until we achieve
      positive cash flow.***





We
      have
      expended and will continue to expend substantial amounts of money for research
      and development, capital expenditures, working capital needs and manufacturing
      and marketing of our products and services. Our future research and development
      efforts, in particular, are expected to include development of additional
      applications of our current products and services and additional product lines
      including, digital backbone systems and image analysis systems, which will
      require additional funds. Our recent capital raising activities may not be
      sufficient to fund our spending.





The
      exact
      timing and amount of spending required cannot be accurately determined and
      will
      depend on several factors, including:





·
            progress
                of our research and development efforts,





·
            competing
                technological and market developments,





·
            commercialization
                of products currently under development by us and our competitors,
                and





·
            market
                acceptance and demand for our products and services.





We
      cannot
      assure you that additional financing will be available if needed or on terms
      acceptable to us. Any such financing may dilute the equity of existing
      stockholders and/or increase our debt burden. If adequate and acceptable
      financing is not available, we may have to delay development or
      commercialization of certain of our products and services or eliminate some
      or
      all of our development activities. We may also reduce our marketing or other
      resources devoted to our products and services. Any of these options could
      reduce our sales growth and result in continued net losses.





*-
          11
          -*


***If
      we lose key personnel or are unable to hire additional qualified personnel,
      it
      could impact our ability to grow our business.***





We
      believe our future success will depend in large part upon our ability to attract
      and retain highly skilled technical, managerial, sales and marketing, finance
      and operations personnel. We face intense competition for all such personnel,
      and we may not be able to attract and retain these individuals. Our failure
      to
      do so could delay product development, affect the quality of our products and
      services, and/or prevent us from sustaining or growing our business. In
      addition, employees may leave our company and subsequently compete against
      us.
      Our key personnel include Maurizio Vecchione, our Chief Executive Officer,
      Barry
      Hall, our President and Chief Financial Officer, Jack Zeineh, MD, our Chief
      Scientific Officer, and Steve Barbee our Vice President of Sales and Marketing.





We
      have
      taken steps to retain our key employees, including the granting of stock options
      and warrants that vest over time, and we have entered into employment agreements
      with some of our key employees. The loss of key personnel, especially if without
      advanced notice could harm our ability to maintain and build our business
      operations. Furthermore, we have no key man life insurance on any of our key
      employees.





***Potential
      growth may place significant demands on our
      personnel.***





We
      currently have limited management experience at the Company and administrative
      resources. If we are successful in implementing our strategy, we may experience
      a period of growth and expansion which could place significant additional
      demands on our management and administrative resources. Our management team's
      failure to manage this potential growth effectively could have a material
      adverse effect on our business.





***Undetected
      errors or failures in our software could result in loss or delay in the market
      acceptance for our product, lost sales or costly
      litigation.***





Because
      our software products and services are complex, they may contain errors that
      can
      be detected at any point in a product's lifecycle. While we continually test
      our
      products and services for errors, errors in our products and services may be
      found in the future even after our products and services have been commercially
      introduced. Detection of any significant errors may result in, among other
      things, loss of, or delay in, market acceptance and sales of our products and
      services, diversion of development resources, injury to our reputation,
      increased service and warranty costs or costly litigation. Because our products
      support or rely on other systems and applications, any software errors or bugs
      in these systems or applications may result in errors in the performance of
      our
      software, and it may be difficult or impossible to determine where the error
      resides. Product errors could harm our business and have a material adverse
      effect on our results of operations. Additionally, problems in system security,
      data corruption, access, connectivity and bandwidth may have a material adverse
      effect on our operations.





***A
      successful products liability claim could require us to pay substantial damages
      and result in harm to our business reputation.***





The
      manufacture and sale of our products and services involve the risk of product
      liability claims. We do not carry product liability insurance; however, the
      Company is currently seeking obtain insurance to protect against such claims.
      However, there can be no assurances that such coverage, if obtained, would
      be
      adequate to provide for any claims that may arise against us. A successful
      claim
      brought against us could require us to pay substantial damages and result in
      harm to our business reputation, remove our products and services from the
      market or otherwise adversely affect our business and operations. Even in the
      event that claims are made unsuccessfully, our business may be adversely
      affected by expenditure of personnel time and legal costs.





***Our
      products and services could infringe on the intellectual property rights of
      others, which may lead to costly litigation, lead to payment of substantial
      damages or royalties and/or prevent us from manufacturing and selling our
      current and future products and services.***





If
      third
      parties assert that our products and services or technologies infringe their
      intellectual property rights, our reputation and ability to license or sell
      our
      products and services could be harmed. Whether or not a claim has merit, it
      could be time consuming and expensive for us and divert the attention of our
      technical and management personnel from other work. In addition, these types
      of
      claims could be costly to defend and result in our loss of significant
      intellectual property rights.





*-
          12
          -*


A
      determination that we are infringing the proprietary rights of others could
      have
      a material adverse effect on our products and services, revenues and income.
      In
      the event of any infringement by us, we cannot assure you that we will be able
      to successfully redesign our products and services or processes to avoid
      infringement. Accordingly, an adverse determination in a judicial or
      administrative proceeding or failure to obtain necessary licenses could prevent
      us from manufacturing and selling our products and services and could require
      us
      to pay substantial damages and/or royalties.





The
      Company receives various claims, from time to time, from entities that believe
      their intellectual property might be infringed by the Company’s products and
      services. While the Company is not currently engaged in any litigation there
      is
      a potential risk of such litigation. To resolve such claims, the Company may
      elect to partner with, license from or outsource some or all of its products
      and
      services with entities who hold significant intellectual property, although
      there are no guarantees that such agreements can be entered into.





The
      Company may decide to upgrade its products and services by changing suppliers
      of
      certain key components, hardware or software. This could result in delays,
      changes in cost structure, pricing and margin pressures. This could also cause
      changes in manufacturing and distribution strategies. There can be no guarantees
      that such changes, if they occur might not affect the Company in a negative
      way.





***Any
      disruption or delay in the supply of components or custom subassemblies could
      require us to redesign our products***  ***and
      services or otherwise delay our ability to assemble our products, which could
      cause our sales to decline and result in continued net
      losses.***





We
      assemble our products and services from a combination of (i) commodity
      technology components, such as computers and monitors, (ii) custom
      subassemblies, (iii) third party hardware for scanning microscopy,
      (iv) commodity operating systems, and (v) proprietary applications
      software. While we typically use components and subassemblies that are available
      from alternate sources, any unanticipated interruption of the supply of these
      components or subassemblies could require us to redesign our products and
      services or otherwise delay our ability to assemble our products and services,
      which could cause our sales to decline and result in continued net losses.





***If
      we fail to accurately forecast component and material requirements for our
      products and services, we could incur additional costs and significant delays
      in
      shipments, which could result in loss of customers.***





We
      must
      accurately predict both the demand for our products and services and the lead
      times required to obtain the necessary components and materials. Lead times
      for
      components and materials that we order vary significantly and depend on factors
      including the specific supplier requirements, the size of the order, contract
      terms and current market demand for components. If we overestimate our component
      and material requirements, we may have excess inventory, which would increase
      our costs, impair our available liquidity and could have a material adverse
      effect on our business, operating results and financial condition. If we
      underestimate our component and material requirements, we may have inadequate
      inventory, which could interrupt and delay delivery of our products and services
      to our customers. Any of these occurrences would negatively impact our net
      sales, business and operating results and could have a material adverse effect
      on our business, operating results and financial condition.





***Risks
      Related To the Industry***





***If
      we fail to successfully introduce new products and services, our future growth
      may suffer. Certain products and services at an early stage of development
      are
      the areas of future growth for Trestle and sustainability of
      Trestle.***





As
      part
      of our strategy, we intend to develop and introduce a number of new products
      and
      services, including digital backbone systems and image analysis systems. Such
      products and services are currently in research and development, and we have
      generated no revenues from such potential products and services and may never
      generate revenues. A substantial portion of our resources have been and for
      the
      foreseeable future will continue to be dedicated to our research programs and
      the development of products and services. If we do not introduce these new
      products and services on a timely basis, or if they are not well accepted by
      the
      market, our business and the future growth of our business may suffer. There
      can
      be no assurance that we will be able to develop a commercial product from these
      projects. Our competitors may succeed in developing technologies or products
      and
      services that are more effective than ours.





*-
          13
          -*


***If
      we do not update and enhance our technologies, they will become obsolete or
      noncompetitive. Our competitors may succeed in developing products and services,
      and obtaining related regulatory approvals, faster than
      us.***





We
      operate in a highly competitive industry and competition is likely to intensify.
      Emerging technologies, extensive research and new product introductions
      characterize the market for our products and services. We believe that our
      future success will depend in large part upon our ability to conduct successful
      research in our fields of expertise, to discover new technologies as a result
      of
      that research, to develop products and services based on our technologies,
      and
      to commercialize those products and services. If we fail to stay at the
      forefront of technological development, we will be unable to compete
      effectively.





Certain
      of our existing and potential competitors possess substantial financial and
      technical resources and production and marketing capabilities greater than
      ours.
      We cannot assure you that we will be able to compete effectively with existing
      or potential competitors or that these competitors will not succeed in
      developing technologies and products and services that would render our
      technology and products and services obsolete and noncompetitive. Our position
      in the market could be eroded rapidly by our competitors' product advances.





In
      addition, because our products and services are dependent upon other operating
      systems, we will need to continue to respond to technological advances in these
      operating systems.





***Our
      success depends, in part, on attracting customers who will embrace the new
      technologies offered by our products and services.***





It
      is
      vital to our long-term growth that we establish customer awareness and persuade
      the market to embrace the new technologies offered by our products and services.
      This may require in certain instances a modification to the culture and behavior
      of customers to be more accepting of technology and automation. Organizations
      may be reluctant or slow to adopt changes or new ways of performing processes
      and instead may prefer to resort to habitual behavior within the organization.
      Our marketing plan must overcome this obstacle, invalidate deeply entrenched
      assumptions and reluctance to behavioral change and induce customers to utilize
      our products and services rather than the familiar options and processes they
      currently use. If we fail to attract additional customers at this early stage,
      our business and the future growth of our business may suffer.





***Our
      success depends, in part, on our ability to protect our intellectual property
      rights.***





Our
      success is heavily dependent upon the development and protection of proprietary
      technology. We rely on patents, trade secrets, copyrights, know-how, trademarks,
      license agreements and contractual provisions to establish our intellectual
      property rights and protect our products and services. These legal means,
      however, afford only limited protection and may not adequately protect our
      rights. Litigation may be necessary in the future to enforce our intellectual
      property rights, protect our trade secrets or determine the validity and scope
      of the proprietary rights of others. Litigation could result in substantial
      costs and diversion of resources and management attention.





We
      cannot
      assure you that competitors or other parties have not filed or in the future
      will not file applications for, or have not received or in the future will
      not
      receive, patents or obtain additional proprietary rights relating to products
      and services or processes used or proposed to be used by us. In that case,
      our
      competitive position could be harmed and we may be required to obtain licenses
      to patents or proprietary rights of others.





In
      addition, the laws of some of the countries in which our products and services
      are or may be sold may not protect our products and services and intellectual
      property to the same extent as U.S. laws, if at all. We may be unable to protect
      our rights in proprietary technology in these countries.





***We
      depend on third-party licenses for our products and
      services.***





We
      rely
      on certain software technology which we license from third parties and use
      in
      our products and services to perform key functions and provide additional
      functionality. Because our products and services incorporate software developed
      and maintained by third parties, we are, to a certain extent, dependent upon
      such third parties' ability to maintain or enhance their current products and
      services, to develop new products and services on a timely and cost-effective
      basis, and to respond to emerging industry standards and other technological
      changes. Further, these third-party technology licenses may not always be
      available to us on commercially reasonable terms or at all.





*-
          14
          -*


If
      our
      agreements with third-party vendors are not renewed or the third-party software
      fails to address the needs of our software products and services, we would
      be
      required to find alternative software products and services or technologies
      of
      equal performance or functionality. We cannot assure that we would be able
      to
      replace the functionality provided by third-party software if we lose the
      license to this software, it becomes obsolete or incompatible with future
      versions of our products and services or is otherwise not adequately maintained
      or updated.





***Certain
      of our customers rely on the availability of third-party reimbursement or
      third-party funding for the purchase of our products and services. Failure
      of
      sufficient reimbursement from third-party payors or sufficient funding could
      cause our sales and the future potential growth of our business to
      decline.***





Hospitals
      and other healthcare institutions in the U.S. that purchase our products and
      services generally rely on third-party payors and other sources for
      reimbursement of healthcare costs to reimburse all or part of the cost of the
      procedures in which our products and services are used. If hospitals and other
      healthcare institutions are unable to obtain adequate reimbursement from
      third-party payors for the procedures in which our products and services or
      products and services currently under development are intended to be used,
      our
      sales and future growth of our business could be adversely affected. We cannot
      estimate what amount of our product is eligible for reimbursement approval.
      In
      addition, changes in the healthcare system may affect the reimbursability of
      future products and services.





Market
      acceptance of our products and services and products and services under
      development in countries outside of the U.S. is also dependent on availability
      of reimbursement within prevailing healthcare payment systems in those
      countries. Reimbursement and healthcare payment systems in international markets
      vary significantly by country, and include both government-sponsored healthcare
      and private insurance. We cannot assure you that we will be able to obtain
      international reimbursement approvals in a timely manner, if at all. Failure
      to
      receive international reimbursement approvals could harm the market acceptance
      of our products and services in the international markets in which such
      approvals are sought.





Other
      consumers in industries such as pathology, pharmaceutical and biotechnology
      that
      purchase our products and services generally rely on funding or grants from
      governments and private foundations to fund the purchase of our products and
      services. If such consumers are unable to obtain adequate funding sources for
      the purchase of our products and services, our sales and future growth of our
      business could be adversely affected.





***The
      marketing and sale of our future products and services will require regulatory
      approval and on-going certifications. Failure to obtain and maintain required
      regulatory approvals and certifications could prevent or delay our ability
      to
      market and sell our future products and services and may subject us to
      significant regulatory fines or penalties.***





The
      United States Food and Drug Administration (the "FDA") regulates design,
      testing, manufacturing, labeling, distribution, marketing, sales and service
      of
      digital image analysis products and services. Such products and services are
      marketed in the U.S. according to premarket notifications to the FDA under
      Section 510(k) of the Federal Food, Drug and Cosmetic Act. Unless an
      exemption applies, each digital image analysis product that we wish to market
      in
      the U.S. must first receive either 510(k) clearance or premarket approval from
      the FDA. The process of obtaining required regulatory approval or clearance
      can
      be lengthy, expensive and uncertain. Moreover, regulatory clearance or approval,
      if granted, may include significant limitations on the indicated uses for which
      a product may be marketed.





Currently,
      the Company is attempting to obtain the FDA 510(k) certification for its
      InterScope machine. The process for obtaining this certification includes a
      study to validate the use of digital images for primary diagnostic purposes.
      Based on the results of this study an application for certification was filed
      with the FDA. There can be no assurances that we will be successful in obtaining
      acceptable results in the study. Additionally, should the study yield acceptable
      results there can be no assurance that the FDA will grant the 510(k)
      certification. Failure to obtain this certification may limit the use of this
      product in the market. Additionally, delays in obtaining clearances or approvals
      will adversely affect our ability to market and sell our image analysis products
      and services and may subject us to significant regulatory fines or penalties,
      which would result in a decline in revenue and profitability.





Failure
      to comply with applicable requirements in the United States can result in fines,
      recall or seizure of products and services, total or partial suspension of
      production, withdrawal of existing product approvals or clearances, refusal
      to
      approve or clear new applications or notices and criminal prosecution.





*-
          15
          -*


Our
      image
      analysis products and services are subject to similar regulation in other
      countries. Sales of our image analysis products and services outside the United
      States are subject to foreign regulatory requirements that vary from country
      to
      country. The time required to obtain approvals from foreign countries may be
      longer or shorter than that required for FDA approval, and requirements for
      foreign licensing may differ from FDA requirements.





***Our
      future products and services may require compliance with quality system
      regulations which is difficult and costly.***





In
      connection with the development of new products and services, we may be required
      to be in compliance with the quality regulation system, which include production
      design controls, testing, quality control, storage and documentation procedures.
      Compliance with quality system regulations is difficult and costly. We cannot
      assure you that we will be able to comply with quality system regulation
      requirements. If we do not achieve compliance, the FDA may deny marketing
      clearance which would harm our business. In addition, we may not be found to
      be
      compliant as a result of future changes in, or interpretations of, regulations
      by the FDA or other regulatory agencies. Currently, the Company is attempting
      to
      obtain the FDA 510(k) certification for its Xcellerator product. The process
      for
      obtaining this certification includes a study to validate the use of digital
      images for primary diagnostic purposes. Based on the results of this study
      an
      application for certification was filed with the FDA. In January 2006 the
      Company received
      notification that its pre-market notification or 510(k) with the US Food and
      Drug Administration (FDA) for clearance of its digital pathology whole-slide
      imaging System as a Class II device last November had been denied. The FDA
      stated that it was seeking additional information related to the specificity
      and
      sensitivity of the clinical data submitted. The company believes that it can
      supply such information and will submit a restated notification at the
      invitation of the FDA.





During
      2005 the Company began working on obtaining ISO 13485:2003 certification. This
      certification is the international standard for a quality management system
      where an organization needs to demonstrate its ability to provide medical
      devices and related services that consistently meet customer requirements and
      regulatory requirements applicable to medical devices and related services.
      The
      Company believes that obtaining this certification will help promote its
      products in the marketplace and allow it to further comply with the FDA’s CFR
      820 which sets forth Good Manufacturing Practices. However, due to staff
      cutbacks and shortage of capital the Company put it ISO certification activities
      on hold. It is unknown when or if the Company will have the resources to resume
      these activities.





***Risks
      Related to Our Common Stock***





***Any
      future sale of a substantial number of shares of our common stock could depress
      the trading price of our common stock, lower our value and make it more
      difficult for us to raise capital.***





Any
      sale
      of a substantial number of shares of our common stock (or the prospect of sales)
      may have the effect of depressing the trading price of our common stock. In
      addition, these sales could lower our value and make it more difficult for
      us to
      raise capital. Further, the timing of the sale of the shares of our common
      stock
      may occur at a time when we would otherwise be able to obtain additional equity
      capital on terms more favorable to us.





***Our
      stock price is likely to be highly volatile because of several factors,
      including a limited public float.***





The
      market price of our stock is likely to be highly volatile because there has
      been
      a relatively thin trading market for our stock, which causes trades of small
      blocks of stock to have a significant impact on our stock price. You may not
      be
      able to resell our common stock following periods of volatility because of
      the
      market's adverse reaction to volatility.





Other
      factors that could cause such volatility may include, among other things:





·
            actual
                or anticipated fluctuations in our operating results,





·
            announcements
                concerning our business or those of our competitors or customers,





·
            changes
                in financial estimates by securities analysts or our failure to perform
                as
                anticipated by the analysts,





·
            announcements
                of technological innovations,





·
            conditions
                or trends in the industry,





·
            introduction
                or withdrawal of products and
                services,


*-
          16
          -*





·
            variation
                in quarterly results due to the fact our revenues are generated by
                sales
                to a limited number of customers which may vary from period to period,





·
            litigation,





·
            patents
                or proprietary rights,





·
            departure
                of key personnel,





·
            failure
                to hire key personnel, and





·
            general
                market conditions.





***Because
      our common stock is considered a "penny stock" any investment in our common
      stock is considered to be a high-risk investment and is subject to restrictions
      on marketability.***





Our
      common stock is currently traded on the Over-The-Counter Bulletin Board ("OTC
      Bulletin Board") and is considered a "penny stock." The OTC Bulletin Board
      is
      generally regarded as a less efficient trading market than the NASDAQ SmallCap
      Market.





The
      SEC
      has adopted rules that regulate broker-dealer practices in connection with
      transactions in "penny stocks." Penny stocks generally are equity securities
      with a price of less than $5.00 (other than securities registered on certain
      national securities exchanges or quoted on the NASDAQ system, provided that
      current price and volume information with respect to transactions in such
      securities is provided by the exchange or system). The penny stock rules require
      a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
      from those rules, to deliver a standardized risk disclosure document prepared
      by
      the SEC, which specifies information about penny stocks and the nature and
      significance of risks of the penny stock market. The broker-dealer also must
      provide the customer with bid and offer quotations for the penny stock, the
      compensation of the broker-dealer and any salesperson in the transaction, and
      monthly account statements indicating the market value of each penny stock
      held
      in the customer's account. In addition, the penny stock rules require that,
      prior to a transaction in a penny stock not otherwise exempt from those 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 trading activity in the secondary market for our common stock.





Since
      our
      common stock is subject to the regulations applicable to penny stocks, the
      market liquidity for our common stock could be adversely affected because the
      regulations on penny stocks could limit the ability of broker-dealers to sell
      our common stock and thus your ability to sell our common stock in the secondary
      market. There is no assurance our common stock will be quoted on NASDAQ or
      the
      NYSE or listed on any exchange, even if eligible.





***We
      may experience volatility in the price of our common stock, which could
      negatively affect your investment, and you may not be able to resell your shares
      at or above the offering price.***





The
      market price of our common stock may fluctuate significantly in response to
      a
      number of factors, some of which are beyond our control, including:





·
            a
                quarterly variations in operating results;





·
            changes
                in financial estimates by securities analysts;





·
            changes
                in market valuations of other similar companies;





·
            announcements
                by us or our competitors of new products and services or of significant
                technical innovations, contracts, acquisitions, strategic partnerships
                or
                joint ventures;





·
            additions
                or departures of key personnel;





·
            any
                deviations in net sales or in losses from levels expected by securities
                analysts; and





·
            future
                sales of common stock.





In
      addition, the stock market has recently experienced extreme volatility that
      has
      often been unrelated to the performance of particular companies. These market
      fluctuations may cause our stock price to fall regardless of our performance.





***We
      have additional securities available for issuance, including preferred stock,
      which if issued could adversely affect the rights of the holders of our common
      stock.***





Our
      articles of incorporation authorize the issuance of 40,000,000 shares of common
      stock and 5,000,000 shares of preferred stock (of which 30,000 shares designated
      as Series A Convertible Preferred Stock and 30,000 shares designated as
      Series B Convertible Preferred Stock). The common stock and the preferred
      stock can be issued by, and the terms of the preferred stock, including dividend
      rights, voting rights, liquidation preference and conversion rights can
      generally be determined by, our board of directors without stockholder approval.
      Any issuance of preferred stock could adversely affect the rights of the holders
      of common stock by, among other things, establishing preferential dividends,
      liquidation rights or voting powers. Accordingly, our stockholders will be
      dependent upon the judgment of our management in connection with the future
      issuance and sale of shares of our common stock and preferred stock, in the
      event that buyers can be found therefore. Any future issuances of common stock
      or preferred stock would further dilute the percentage ownership of our Company
      held by the public stockholders. Furthermore, the issuance of preferred stock
      could be used to discourage or prevent efforts to acquire control of our Company
      through acquisition of shares of common stock.







**ITEM
      2.    PROPERTIES**





Our
      headquarters consists of approximately 7,000 square feet of office, production
      and warehouse space at 199 Technology Dr. Suite 105, Irvine, California 92618.
      In conjunction which the acquisition of InterScope’s assets, as of March 1, 2005
      the Company assumed the InterScope’s lease of 2,100 square feet at 12300 Perry
      Highway, Suite 110, Wexford, PA 15090 which expired January 31, 2006. We
      abandoned our offices located at 11835 W. Olympic Blvd., Suite 550, Los Angeles,
      California 90064 in November 2005 which consisted of approximately 14,000 square
      feet of general office space. We are currently in litigation with the landlord
      of the space in Los Angeles. We recorded rent expense of $603,000 for our
      executive and principal offices during the year ended December 31, 2005.




**ITEM
      3.    LEGAL PROCEEDINGS**





The
      Company is not currently involved in any material legal proceedings except
      to
      the extent discussed in Item 2.





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





**BLANK**





*-
          17
          -*


**PART
      II**





**ITEM
      5.    MARKET FOR ISSUER'S COMMON EQUITY AND RELATED
      SHAREHOLDER MATTERS**


**Market
      Prices**




The
      shares of our common stock have been listed and principally quoted on the OTC
      Bulletin Board under the trading symbol “TLHO.OB” since October 6, 2003. Prior
      to October 6, 2003, the Company’s common stock was traded on the OTC Bulletin
      Board under the symbol “SLDE.OB” and prior to August 9, 2002, the Company’s
      common stock was traded on the OTC Bulletin Board under the symbol
“SUNE.OB.”




The
      following table sets forth, for the fiscal quarters indicated, the high and
      low
      sale price for our common stock, as reported on the OTC Bulletin Board.




**Quarterly
                period**
            
            **High**
            
            **Low**Fiscal
                year ended December 31, 2004:First
                Quarter
            
            $
            5.50
            
            $
            4.00Second
                Quarter
            
            
            4.05
            
            
            2.40Third
                Quarter
            
            
            3.50
            
            
            1.50Fourth
                Quarter
            
            
            2.15
            
            
            1.25Fiscal
                year ended December 31, 2005:First
                Quarter
            
            $
            4.80
            
            $
            2.01Second
                Quarter
            
            
            3.40
            
            
            1.20Third
                Quarter
            
            
            1.25
            
            
            0.72Fourth
                Quarter
            
            
            0.72
            
            
            0.14





**Holders**


As
      of
      March 15, 2006, there were approximately 200 holders of record of the Company's
      Common Stock.





**Dividends**


We
      have
      not paid any cash dividends on our common stock since our inception and do
      not
      anticipate paying any cash dividends on our common stock in the foreseeable
      future. We expect to retain our earnings, if any, to provide funds for the
      expansion of our business. Future dividend policy will be determined
      periodically by our board of directors based upon conditions then existing,
      including our earnings and financial condition, capital requirements and other
      relevant factors.




**Equity
      Compensation Plan Information**


The
      following table sets forth certain information regarding the Company’s equity
      compensation plans as of December 31, 2005.





**Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            **Weighted-average
                exercise price of outstanding options, warrants and rights**
              **(b)**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column (a))**
              **(c)**Equity
                compensation plans approved by security holders
            1,350,607
            $
                1.79
            474,393Equity
                compensation plans not approved by security holders
            4,652,858
            $
                1.84
            0**Total**
            6,003,465
            $
                1.83
            474,393




Our
      current employee stock option plans (the “Plans”) provide for the grant of
      non-statutory or incentive stock options to the Company’s employees, officers,
      directors or consultants.




*-
          18
          -*


The
      Compensation Committee of our board of directors administers the Plans, selects
      the individuals to whom options will be granted, determines the number of
      options to be granted, and the term and exercise price of each option. Stock
      options granted pursuant to the terms of the Plans generally cannot be granted
      with an exercise price of less than 100% of the fair market value on the date
      of
      the grant (110% for awards issued to a 10% or more stockholder). The term of
      the
      options granted under the Plans cannot be greater than 10 years; 5 years for
      a
      10% or more stockholder. Options vest at varying rates generally over five
      years. An aggregate of 1,855,000 shares were reserved under the Plans, of which
      579,000 shares were available for future grant at December 31, 2005.







**ITEM
      6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





**Overview**





The
      Company through its wholly owned subsidiary, Trestle Acquisition Corp.
      ("Trestle"), develops and sells digital tissue imaging and telemedicine
      applications linking dispersed users and data primarily in the healthcare and
      pharmaceutical markets. Trestle's digital tissue imaging products provide a
      digital platform to share, store, and analyze tissue images. Trestle's
      telemedicine product provides healthcare organizations with a cost effective
      platform for remote examination, diagnosis, and treatment of patients.





On
      May 20, 2003, Trestle Holdings entered this line of business through its
      purchase of substantially all of the assets of Trestle Corporation, a Delaware
      corporation ("Old Trestle"), and certain assets of Med Diversified, Inc., a
      Nevada corporation and parent corporation of Old Trestle ("Med"), and two of
      Med's non-debtor subsidiaries.





On
      March
      11, 2005, the Company acquired substantially all of the assets of InterScope
      Technologies, Inc. in exchange for 337,838 shares of Trestle common stock and
      $177,000 in cash. Concurrently, the Company hired four InterScope employees
      three of whom were technical personnel and one who was management. For the
      year
      ended December 31, 2004, InterScope Technologies reported that they had revenues
      and net loss of approximately $310,000 and $1,067,000 respectively.




**Critical
      Accounting Policies and Estimates**





The
      preparation of the Company's financial statements in conformity with accounting
      principles generally accepted in the United States of America ("GAAP") requires
      management to make estimates, judgments and assumptions that affect the reported
      amounts of assets and liabilities, disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported amount
      of
      expenses during the reporting period. On an ongoing basis, the Company evaluates
      its estimates which are based on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances. The
      result of these evaluations forms the basis for making judgments about the
      carrying values of assets and liabilities and the reported amount of expenses
      that are not readily apparent from other sources. Actual results may differ
      from
      these estimates under different assumptions. The following accounting policies
      require significant management judgments and estimates:





The
      Company recognizes revenue on product sales after shipment of the product to
      the
      customer and formal acceptance by the customer has been received. Depending
      upon
      the specific agreement with the customer, such acceptance normally occurs
      subsequent to one or more of the following events: receipt of the product by
      the
      customer, installation of the product by the Company and training of customer
      personnel by the Company. For
      sales
      to qualified distributors revenues are recognized upon transfer of title which
      is generally upon shipment. Revenue
      collected in advance of product shipment or formal acceptance by the customer
      is
      reflected as deferred revenue. Revenue attributable to software maintenance
      and
      support is deferred and recognized ratably over the term of the maintenance
      agreement, generally one year.





The
      Company recognizes revenue on multiple element arrangements using the residual
      method. Under the residual method, revenue is recognized when Company-specific
      objective evidence of fair value exists for all of the undelivered elements
      in
      the arrangement, but does not exist for one or more of the delivered elements
      in
      the arrangement. At the outset of the arrangement with the customer, the Company
      defers revenue for the fair value of the undelivered elements such as consulting
      services and product maintenance, and recognizes the revenue for the remainder
      of the arrangement fee attributable to the elements initially delivered when
      the
      basic criteria in SOP 97-2 have been met. Revenue from consulting services
      is
      recognized as the related services are performed.





*-
          19
          -*


The
      Company accounts for its business acquisitions under the purchase method of
      accounting in accordance with SFAS 141, "Business Combinations." The total
      cost of acquisitions is allocated to the underlying net assets, based on their
      respective estimated fair values. The excess of the purchase price over the
      estimated fair value of the tangible net assets acquired is recorded as
      intangibles. Determining the fair value of assets acquired and liabilities
      assumed requires management's judgment and often involves the use of significant
      estimates and assumptions, including assumptions with respect to future cash
      inflows and outflows, discount rates, asset lives, and market multiples, among
      other items.





The
      Company assesses the potential impairment of long-lived assets and identifiable
      intangibles under the guidance of SFAS 144, "Accounting for the Impairment
      or Disposal of Long-Lived Assets." which states that a long-lived asset should
      be tested for recoverability whenever events or changes in circumstances
      indicate that the carrying amount of the long-lived asset exceeds its fair
      value. An impairment loss is recognized only if the carrying amount of the
      long-lived asset exceeds its fair value and is not recoverable.





The
      Company bases its estimates on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      There can be no assurance that actual results will not differ from these
      estimates.





**Recently
      Issued Accounting Pronouncements**




In
      November 2004, the FASB issued SFAS No. 151,”Inventory Costs”. SFAS No. 151
      amends the accounting for abnormal amounts of idle facility expense, freight,
      handling costs, and wasted material (spoilage) under the guidance in ARB No.
      43,
      Chapter 4,"Inventory Pricing”. Paragraph 5 of ARB No. 43, Chapter 4, previously
      stated that ". . . under some circumstances, items such as idle facility
      expense, excessive spoilage, double freight, and rehandling costs may be so
      abnormal as to require treatment as current period charges. . . ." This
      Statement requires that those items be recognized as current-period charges
      regardless of whether they meet the criterion of "so abnormal." In addition,
      this Statement requires that allocation of fixed production overheads to the
      costs of conversion be based on the normal capacity of the production
      facilities. This statement is effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. This statement is not applicable
      to
      the Company.




In
      December 2004, the FASB issued SFAS No. 152,”Accounting for Real Estate
      Time-Sharing Transactions”. The FASB issued this Statement as a result of the
      guidance provided in AICPA Statement of Position (SOP) 04-2,”Accounting for Real
      Estate Time-Sharing Transactions”. SOP 04-2 applies to all real estate
      time-sharing transactions. Among other items, the SOP provides guidance on
      the
      recording of credit losses and the treatment of selling costs, but does not
      change the revenue recognition guidance in SFAS No. 66,”Accounting for Sales of
      Real Estate”, for real estate time-sharing transactions. SFAS No. 152 amends
      Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152
      also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of
      Real Estate Projects”, to state that SOP 04-2 provides the relevant guidance on
      accounting for incidental operations and costs related to the sale of real
      estate time-sharing transactions. SFAS No. 152 is effective for years beginning
      after June 15, 2005, with restatements of previously issued financial statements
      prohibited. This statement is not applicable to the Company.




In
      December 2004, the FASB issued SFAS No. 153,”Exchanges of Nonmonetary Assets,”
an amendment to Opinion No. 29,”Accounting for Nonmonetary Transactions”.
      Statement No. 153 eliminates certain differences in the guidance in Opinion
      No.
      29 as compared to the guidance contained in standards issued by the
      International Accounting Standards Board. The amendment to Opinion No. 29
      eliminates the fair value exception for nonmonetary exchanges of similar
      productive assets and replaces it with a general exception for exchanges of
      nonmonetary assets that do not have commercial substance. Such an exchange
      has
      commercial substance if the future cash flows of the entity are expected to
      change significantly as a result of the exchange. SFAS No. 153 is effective
      for
      nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
      Earlier application is permitted for nonmonetary asset exchanges occurring
      in
      periods beginning after December 16, 2004. This statement is not applicable
      to
      the Company.




*-
          20
          -*


In
      December 2004, the FASB issued SFAS No. 123(R),”Share-Based Payment. SFAS 123(R)
      amends SFAS No. 123,”Accountung for Stock-Based Compensation”, and APB Opinion
      25,”Accounting for Stock Issued to Employees.” SFAS No.123(R) requires that the
      cost of share-based payment transactions (including those with employees and
      non-employees) be recognized in the financial statements. SFAS No. 123(R)
      applies to all share-based payment transactions in which an entity acquires
      goods or services by issuing (or offering to issue) its shares, share options,
      or other equity instruments (except for those held by an ESOP) or by incurring
      liabilities (1) in amounts based (even in part) on the price of the entity’s
      shares or other equity instruments, or (2) that require (or may require)
      settlement by the issuance of an entity’s shares or other equity instruments.
      This statement is effective (1) for public companies qualifying as SEC small
      business issuers, as of the first interim period or fiscal year beginning after
      December 15, 2005, or (2) for all other public companies, as of the first
      interim period or fiscal year beginning after June 15, 2005, or (3) for all
      nonpublic entities, as of the first fiscal year beginning after December 15,
      2005. For fiscal year end 2006, the company will have to recognize costs for
      share based compensation.





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
      Corrections. SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion
      No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements”, and changes the requirements for the accounting
      for and reporting of a change in accounting principle. This Statement applies
      to
      all voluntary changes in accounting principle. It also applies to changes
      required by an accounting pronouncement in the unusual instance that the
      pronouncement does not include specific transition provisions. When a
      pronouncement includes specific transition provision, those provisions should
      be
      followed.





Opinion
      20 previously required that most voluntary changes in accounting principle
      be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This Statement requires
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, this Statement requires
      that
      the new accounting principle be applied to the balances of assets and
      liabilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      opening balance of retained earnings (or other appropriate components of equity
      or net assets in the statement of financial position) for that period rather
      than being reported in an income statement. When it is impracticable to
      determine the cumulative effect of applying a change in accounting principle
      to
      all prior periods, this Statement requires that the new accounting principle
      be
      applied as if it were adopted prospectively from the earliest date
      practicable.





The
      correction of an error in previously issued financial statements is not an
      accounting change. However, the reporting of an error correction involves
      adjustments to previously issued financial statements similar to those generally
      applicable to reporting an accounting change retrospectively. Therefore, the
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by this Statement. This statement is not applicable
      to the Company.





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid
      Financial Instruments”. SFAS 155 amends SFAS 133 to narrow the scope exception
      for interest-only and principal-only strips on debt instruments to include
      only
      such strips representing rights to receive a specified portion of the
      contractual interest or principal cash flows. SFAS 155 also amends SFAS 140
      to
      allow qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      financial instrument. Generally, FASB Statement of Financial Accounting
      Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”, requires that a derivative embedded in a host contract that does
      not meet the definition of a derivative be accounted for separately (referred
      to
      as bifurcation) under certain conditions. That general rule notwithstanding,
      SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad
      exception for interest-only and principal-only strips initially resulting from
      the separation of rights to receive contractual cash flows of a financial
      instrument that itself does not contain an embedded derivative that would have
      been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope
      exception to strips that represent rights to receive only a portion of the
      contractual interest cash flows or of the contractual principal cash flows
      of a
      specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 ,
      “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities”, permitted a qualifying special-purpose entity (SPE) to hold
      only passive derivative financial instruments pertaining to beneficial interests
      (other than another derivative financial instrument) issued or sold to parties
      other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE
      to
      hold a derivative instrument pertaining to beneficial interests that itself
      is a
      derivative financial instrument. Management is currently assessing the effect
      of
      SFAS 155 on the Company’s financial statement.





*-
          21
          -*


The
      SEC
      recently issued Financial Reporting Release No. 60, "Cautionary Advice
      Regarding Disclosure About Critical Accounting Policies" ("FRR60"), suggesting
      companies provide additional disclosure and commentary on those accounting
      policies considered most critical. FRR 60 considers an accounting policy to
      be
      critical if it is important to the Company's financial condition and results
      of
      operations, and requires significant judgment and estimates on the part of
      management in its application. For a summary of the Company's significant
      accounting policies, including the critical accounting policies discussed below,
      see the accompanying notes to the consolidated financial statements in the
      section entitled " *Financial
      Statements.* "





**Fiscal
      Year 2005 Compared to Fiscal Year 2004**





**Results
      From Operations**


*Revenues*


Revenues
      were $4,007,000 and $4,807,000 for the years ended December 31, 2005 and 2004,
      respectively. Revenues consisted of $3,650,000 and $4,347,000 of installation
      revenues and $357,000 and $460,000 of software support revenues for the years
      ended December 31, 2005 and 2004, respectively. The decrease in revenue is
      primarily due to a strategic shift to establishing a dealer network and selling
      our MedMicro product through this network. This change in channel strategy
      results in recognizing only the wholesaler prices for the product, which is
      less
      than the price to the end user.




*Cost
      of Sales*


Cost
      of
      sales was $2,629,000 and $2,243,000 for the years ended December 31, 2005 and
      2004, respectively. The increase in cost of sales is due to the increase in
      number of units sold over the prior year.




*Research
      and Development*


Research
      and development expenses were $2,184,000 and $1,847,000 for the years ended
      December 31, 2005 and 2004, respectively. The increase in research and
      development results from the acquisition of InterScope in March of 2005.




*Selling,
      General and Administrative Expenses*


Selling,
      general and administrative expenses were $4,870,000 and $5,905,000 for the
      years
      ended December 31, 2005 and 2004, respectively, a decrease of $1,035,000. The
      decrease in selling, general and administrative expenses is principally
      attributed to a decrease in expenses due to our reduction of Trestle’s
      personnel, consultants and our attorney fees.




*Interest
      Income and Other, Net*


Interest
      income and other, net was $112,000 and $123,000 in the years ended December
      31,
      2005 and 2004, respectively. The decrease is principally attributed to the
      interest from the beneficial conversion feature of the convertible note in
      2004.




**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities was $4,003,000 and $3,812,000 in the years ended
      December 31, 2005 and 2004, respectively. The increase of $191,000 in cash
      used
      by operating activities was primarily due to the increase in expenses related
      to
      the purchase of InterScope in 2005 and our decrease in revenues.




Net
      cash
      used in investing activities was $354,000
      and $78,000 in the years ended December 31, 2005 and 2004, respectively. The
      decrease of $276,000 in cash used in investing activities was primarily due
      to
      the purchase of InterScope.





Net
      cash
      provided by financing activities was $2,291,000 and $5,899,000 in 2005 and
      2004,
      respectively. The decrease of $3,608,000 in cash provided by financing
      activities was primarily due to the sale of more common stock and warrants
      in
      2004.





*-
          22
          -*


During
      the second and third quarters of 2004, we sold 2,237,000 units in a private
      placement resulting in net proceeds of
      $4,474,000. Each unit consisted of one share of common stock and a warrant
      to
      purchase one half share of common stock for $2.00 per share. In March 2004,
      the
      Company raised $420,000 pursuant to a bridge financing agreement with Zaykowski
      Partners, LP to meet its short-term operating cash needs. Under this agreement,
      the company issued a convertible promissory note in the principal amount of
      $420,000, which was secured by all the assets of the Company, and a warrant
      to
      purchase 9,300 shares of common stock at $4.40 per share. In July 2004, the
      Company converted the convertible note payable in the private placement for
      $440,000.





On
      January 21, 2005, the Company completed a private placement. The placement
      was a
      unit offering to institutional and accredited investors, with each unit
      consisting of one share of the Company's common stock and a warrant to purchase
      0.75 shares of common stock. The Company paid commission of $19,600 to
      Scottsdale Capital and $137,597 to T.R. Winston & Company as non-exclusive
      agents on the funding.





On
      February 27, 2006 the Company entered into a Loan and Security Agreement (the
      “Loan Agreement”) with Clarient, Inc., a Delaware corporation (“Clarient”),
      pursuant to which the Company borrowed $250,000 from Clarient to be used for
      working capital purposes. The loan bears interest at an annual rate of 8% and
      is
      secured by a lien on the Company’s accounts receivable, inventory, software and
      intellectual property. The loan matures on the earlier of May 30, 2006 and
      the
      occurrence of an “Extraordinary Corporate Transaction” (which consists of
      certain extraordinary transactions involving the Company’s assets or
      securities), and is subject to acceleration by Clarient following and during
      the
      continuation of an event of default. The loan was provided in connection with
      certain exploratory strategic discussions between the parties but there is
      no
      assurance that any such discussions will be consummated.





The
      Company has suffered recurring losses from operations and has an accumulated
      deficit of $50,325,000 at December 31, 2005. Primarily
      as a result of our recurring losses and our lack of liquidity, the Company
      has
      received a report from our independent auditors that includes an explanatory
      paragraph describing the uncertainty as to our ability to continue as a going
      concern. We have delayed payment of a substantial amount of accounts payable
      and
      accrued expenses and reduced our expenses to a minimum level. Management
      anticipates that our existing cash and cash equivalents will be sufficient
      to
      fund our operations through at least May 2006. Unless we receive liquidity
      from
      new purchase orders, obtain additional capital, loans or sell or license assets,
      we maybe required to seek to reorganize our business or discontinue operations
      and liquidate our assets. There
      can
      be no assurance that the Company will be able to secure sufficient financing
      or
      on terms acceptable to the Company. If additional funds are raised through
      the
      issuance of equity securities, the percentage ownership of our current
      stockholders is likely to or will be reduced.





**Factors
      That Might Affect Future Results**





We
      have
      experienced significant fluctuations in our quarterly operating results in
      the
      past, and we expect to experience fluctuations in the future. Our customers,
      who
      are primarily public and private clinical laboratories, research organizations
      and hospitals, generally operate on annual budgets. Their spending practices,
      business cycles and budgeting cycles affect our revenues. Factors that may
      have
      an influence on our operating results in any particular quarter include: demand
      for our products, seasonality of our sales, new product introductions by us
      or
      our competitors, and the costs and time required for a transition to the new
      products, timing of orders and shipments for capital equipment sales, our mix
      of
      sales between our distributors and our direct sales force, competition
      (including pricing pressures), timing and amount of research and development
      expenses (including clinical trial-related expenditures), foreign currency
      fluctuations, delays between our incurrence of expenses to develop new products
      (including expenses related to marketing and service capabilities), and the
      timing of sales and payments received for the new products and the uncertainty
      of FDA or other domestic and international regulatory clearances or approvals.




Due
      to
      the factors noted above, our future earnings and stock price may be subject
      to
      significant volatility, particularly on a quarterly basis. It is possible that
      our future operating results will be below the expectations of public market
      analysts and investors. If our operating results fall below market expectations,
      the price of our common stock could decline significantly.




**ITEM
      7. FINANCIAL STATEMENTS**





See
      the
      Company’s audited financial statements in pages F-1 through F-19.





*-
          23
          -*


**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





Not
      Applicable





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





**Disclosure
      controls and procedures.** Disclosure
      controls are controls and procedures designed to reasonably assure that
      information required to be disclosed in our reports filed under the Exchange
      Act, such as this Annual Report, is recorded, processed, summarized and reported
      within the time periods specified in the Securities and Exchange Commission’s
      rules and forms. Disclosure controls are also designed to reasonably assure
      that
      such information is accumulated and communicated to our management, including
      the CEO and CFO, as appropriate to allow timely decisions regarding required
      disclosure. Disclosure controls and procedures, no matter how well designed
      and
      implemented, can provide only reasonable assurance of achieving an entity’s
      disclosure objectives. The likelihood of achieving such objectives is affected
      by limitations inherent in disclosure controls and procedures. These include
      the
      fact that human judgment in decision-making can be faulty and that breakdowns
      in
      internal control can occur because of human failures such as simple errors,
      mistakes or intentional circumvention of the established processes.





At
      the
      end of the period covered by this report and at the end of each fiscal quarter
      therein, Trestle’s management, with the participation of our Chief Executive
      Officer and Chief Financial Officer, carried out an evaluation of the
      effectiveness of our disclosure controls and procedures (as defined in Rule
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon
      that evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that these disclosure controls and procedures were effective at the
      reasonable assurance level described above as of the end of the period covered
      in this report.





**Changes
      in internal controls over financial reporting.** Management,
      with the participation of the Chief Executive Officer and Chief Financial
      Officer of the Company, has evaluated any changes in the Company’s internal
      control over financial reporting that occurred during the most recent fiscal
      quarter. Based on that evaluation, management, the Chief Executive Officer
      and
      the Chief Financial Officer of the Company have concluded that no change in
      our
      internal control over financial reporting (as defined in Rule 13a-15(f) under
      the Securities Exchange Act of 1934) occurred during the year ended December
      31,
      2005 that has materially affected, or is reasonably likely to materially affect,
      our internal control over financial reporting.





The
      Company is a non-accelerated filer and is required to comply with the internal
      control reporting and disclosure requirements of Section 404 of the
      Sarbanes-Oxley Act for fiscal years ending on or after July 15, 2007. Although
      the Company is working to comply with these requirements, the Company has only
      seventeen employees and these employees work at three locations. The Company's
      small number of employees and their geographical separation is expected to
      make
      compliance with Section 404 - especially with segregation of duty control
      requirements - very difficult and cost ineffective, if not impossible. While
      the
      SEC had indicated it expects to issue supplementary regulations easing the
      burden of Section 404 requirements for small entities like the Company, such
      regulations have not yet been issued.





**PART
      III**





**ITEM
      9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**





Information
      regarding our directors and executive officers is to be incorporated by
      reference from the Company’s 2006 Proxy Statement, which is to be filed with the
      Securities and Exchange Commission not later than April 30, 2006 (120 days
      after
      the end of the fiscal year covered by this Form 10-KSB).


**ITEM
      10.    EXECUTIVE COMPENSATION**





Information
      regarding the compensation of our directors and executive officers is to be
      incorporated by reference from the Company’s 2006 Proxy Statement, which is to
      be filed with the Securities and Exchange Commission not later than April 30,
      2006 (120 days after the end of the fiscal year covered by this Form
      10-KSB).


*-
          24
          -*


**ITEM
      11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





Information
      regarding the ownership of our common stock by certain persons is to be
      incorporated by reference from the Company’s 2006 Proxy Statement, which is to
      be filed with the Securities and Exchange Commission not later than April 30,
      2006 (120 days after the end of the fiscal year covered by this Form
      10-KSB).





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





Information
      regarding relationships or transactions between our affiliates and us is to
      be
      incorporated by reference from the Company’s 2006 Proxy Statement, which is to
      be filed with the Securities and Exchange Commission not later than April 30,
      2006 (120 days after the end of the fiscal year covered by this Form
      10-KSB).





*-
          25
          -*


**ITEM
      13. EXHIBITS LIST AND REPORTS ON FORM 8-K**





ExhibitNumber
            Description
                of Exhibit*3.1
            Second
                Amended and Restated Articles of Incorporation of the Company
                (incorporated herein by reference to Appendix B of Company's 2003
                definitive Proxy Statement dated August 1, 2003)*3.2
            By-laws
                of the Company (incorporated herein by reference to Appendix C of
                Company's definitive Proxy Statement dated May 30,
                2002)*10.1
            The
                Harvey Entertainment Company 1997 Stock Option Plan (incorporated
                herein
                by reference to the Company's 1997 definitive Proxy Statement)*10.2
            Warrant
                Agreement dated as of June 30, 1999 between the Company and Paul Guez
                (incorporated by reference to Exhibit 10.64 of the Company's
                Quarterly Report on Form 10-QSB for the quarter ended June 30,
                1999)*10.3
            Lease
                Agreement dated September 22, 1999 between the Company and Douglas
                Emmett Realty Fund 1997, a California limited partnership (incorporated
                by
                reference to Exhibit 10.76 of the Company's Annual Report on
                Form 10-KSB for the year ended December 31, 1999)*10.4
            Employment
                Term Sheet dated as of May 20, 2003, by and between the Registrant
                and
                Jack Zeineh. (incorporated by reference to Exhibit 10.2 of the
                Company's Form 8-K dated June 3 31, 2003)*10.5
            Warrant
                Agreement dated June 30, 2003, by and between the Company and W-Net,
                Inc.
                (incorporated by reference to Exhibit 10.4 of the Company's Quarterly
                Report on Form 10-QSB for the quarter ended June 30,
                2003)*10.6
            Warrant
                Agreement dated July 2, 2003, by and between the Company and Michael
                Doherty. (incorporated by reference to Exhibit 10.3 of the Company's
                Quarterly Report on Form 10-QSB for the quarter ended June 30,
                2003)*10.7
            Warrant
                Agreement dated September 26, 2003, by and between the Company and
                Michael
                Doherty. (incorporated by reference to Exhibit 10.2 of the Company's
                Quarterly Report on Form 10-QSB for the quarter ended
                September 30, 2003)*10.8
            Warrant
                agreement between the Company and Andrew Borsanyi dated October 31,
                2003.
                (incorporated by reference to Exhibit 99.1 of the Company's
                Form 8-K dated November 14, 2003)*10.9
            Warrant
                agreement between the Company and Crosby Haffner dated December 27,
                2003.
                (incorporated by reference to Exhibit 99.1 of the Company's
                Form 8-K dated December 27, 2003)*10.10
            Warrant
                agreement between Company and Zaykowski Partners, LP dated March
                3, 2004.
                (incorporated by reference to Exhibit 10.1 of the Company's Annual
                Report on Form 10-KSB for the year ended December 31,
                2003)*10.11
            Employment
                agreement between the Company and Maurizio Vecchione dated May 18,
                2004.
                (incorporated by reference to Exhibit 99.2 of the Company's
                Form 8-K dated May 19, 2004)*10.12
            Option
                agreement between the Company and Maurizio Vecchione dated May 18,
                2004.
                (incorporated by reference to Exhibit 99.3 of the Company's
                Form 8-K dated May 19, 2004)*10.13
            Employment
                agreement between the Company and Barry Hall dated May 18, 2004.
                (incorporated by reference to Exhibit 99.4 of the Company's
                Form 8-K dated May 19, 2004)*10.14
            Option
                agreement between the Company and Barry Hall dated May 18, 2004.
                (incorporated by reference to Exhibit 99.5 of the Company's
                Form 8-K dated May 19, 2004)*10.15
            Warrant
                agreement for private placement dated (incorporated by reference
                to
                Exhibit 99.3 of the Company's Form 8-K dated January 24,
                2005)*10.16
            Asset
                purchase agreement between the Company and InterScope Technologies,
                Inc.
                (incorporated by reference to Exhibit 99.2 of the Company's
                Form 8-K dated March 16, 2005)*10.17
            Doherty
                & Company Consulting Agreement (incorporated by reference to
                Exhibit 99.2 of the Company's Form 8-K dated May 13,
                2005)


*-
          26
          -*





*10.18
            Michael
                Doherty Consulting Agreement (incorporated by reference to
                Exhibit 99.1 of the Company's Form 8-K dated May 31,
                2005)*10.19
            Michael
                Doherty Consulting Agreement Amendment (incorporated by reference
                to
                Exhibit 99.1 of the Company's Form 8-K dated September 22,
                2005)*10.20
            Maurizio
                Vecchione and Barry Hall Employment Agreement Amendment (incorporated
                by
                reference to Exhibit 99.2 and 99.3 of the Company's Form 8-K
                dated September 22, 2005)*10.21
            Loan
                Agreement (incorporated by reference to Exhibit 99.1 of the Company's
                Form 8-K dated March 3, 2006)*21
            List
                of subsidiaries of Company (incorporated herein by reference to
                Exhibit 21 of Company's Registration Statement No. 333-119996)31.1
            Certification
                of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and
                15d-14
                as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of President and Chief Financial Officer pursuant to Exchange Act
                Rule
                13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley
                Act of 2002.32
            Certification
                of the Company’s Chief Executive Officer and Chief Financial Officer,
                pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.


*  Previously
      filed.





**ITEM
      14.****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





Information
      regarding the compensation to our Auditors is to be incorporated by reference
      from the Company’s 2006 Proxy Statement, which is to be filed with the
      Securities and Exchange Commission not later than April 30, 2006 (120 days
      after
      the end of the fiscal year covered by this Form 10-KSB).





*-
          27
          -*


**Signatures**





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





**Trestle
                Holdings, Inc.**Date:
                March 31, 2006
            
            
            By:
            /s/  
                MAURIZIO VECCHIONE
              -----------------------------------------------------------
              Name:
                Maurizio Vecchione
              *Title:
                Chief Executive Officer*
              *(Principal
                Executive Officer)*Date:
                March 31, 2006
            
            
            By:
            /s/  
                BARRY HALL
              -----------------------------------------------------------
              Name:
                Barry Hall
              *Title:
                President and Chief Financial Officer*
              *(Principal
                Financial and Accounting Officer)*





In
      accordance with the Exchange Act, this report has been signed below by the
      following person on behalf of the registrant and in the capacities and on the
      date indicated:





**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/  
                MAURIZIO VECCHIONE
              ------------------------------------
              Maurizio
                Vecchione
            
            Chief
                Executive Officer
              (Principal
                Executive Officer)
            
            March
                31, 2006/s/  
                BARRY HALL
              ------------------------------------
              Barry
                Hall
            
            Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)
            
            March
                31, 2006/s/  
                MICHAEL BECICH
              ------------------------------------
              Michael
                Becich
            
            Director
            
            March
                31, 2006/s/  
                WILLIAM DALLAS
              ------------------------------------
              William
                Dallas
            
            Director
            
            March
                31, 2006/s/  
                MICHAEL DOHERTY
              ------------------------------------
              Michael
                S. Doherty
            
            Director
            
            March
                31, 2006/s/  
ALLON
                GUEZ
              -------------------------------------
              Allon
                Guez
            
            Director
            
            March
                31, 2006/s/  
                CROSBY HAFFNER
              ------------------------------------
              Crosby
                Haffner
            
            Director
            
            March
                31, 2006/s/  
                MICHAEL HOPE
              ------------------------------------
              Michael
                Hope
            
            Director
            
            March
                31, 2006




*- 28
          -*


**ITEM
      7.    FINANCIAL STATEMENTS**





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**TABLE
      OF CONTENTS**





**PAGE**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
            F-2CONSOLIDATED
                FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2005
                AND 2004Consolidated
                Balance Sheets
            
            F-3
                to F-4Consolidated
                Statements of Operations
            
            F-5Consolidated
                Statements of Stockholders' Equity
            
            F-6Consolidated
                  Statements of Cash Flows
            
            F-7Notes
                to Consolidated Financial Statements
            
            F-8
                to F-20





























**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors


Trestle
      Holdings, Inc


Irvine,
      California





We
      have
      audited the consolidated balance sheets of Trestle holdings, Inc. and
      subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related
      consolidated statements of operations, stockholders’ equity and cash flows for
      each of the years then ended. These financial statements are the responsibility
      of the Company's management. Our responsibility is to express an opinion on
      these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. We believe that
      our
      audits provided a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 2005 and 2004, and the results of their operations and their cash flows
      for
      each of the years then ended, in conformity with U.S. generally accepted
      accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      consolidated financial statements, the Company has suffered recurring losses
      from operations and has an accumulated deficit. This raises substantial doubt
      about the Company's ability to continue as a going concern. Management's plans
      in regard to these matters are also described in Note 1. The consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.











/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Santa
      Ana, California


March
      28,
      2006





*-
          F-2
          -*


**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**




**December 31,****2005**
              
              **2004****ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              305,000
              
              $
              2,371,000Accounts
                  receivable, net of allowance for doubtful accounts of $82,000 and
                  $59,000
                  in 2005 and 2004, respectively
              
              
              960,000
              
              
              979,000Inventory
              
              
              502,000
              
              
              550,000Prepaid
                  expenses and other assets
              
              
              59,000
              
              
              85,000TOTAL
                  CURRENT ASSETS
              
              
              1,826,000
              
              
              3,985,000Other
                  assets
              
              
              15,000
              
              
              315,000Fixed
                  assets, net of accumulated depreciation of $182,000 and $342,000
                  in 2005
                  and 2004, respectively
              
              
              118,000
              
              
              117,000Goodwill
              
              
              1,514,000
              
              
              1,514,000Intangible
                  assets, net of accumulated amortization of $933,000 and $395,000
                  in 2005
                  and 2004, respectively
              
              
              975,000
              
              
              335,000TOTAL
                  ASSETS
              
              $
              4,448,000
              
              $
              6,266,000















See
      accompanying notes to consolidated financial statements.





(Continued)


*-
          F-3
          -*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**




**December 31,****2005**
              
              **2004****LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              996,000
              
              $
              540,000Accrued
                  expenses
              
              
              554,000
              
              
              544,000Deferred
                  revenue
              
              
              303,000
              
              
              377,000TOTAL
                  CURRENT LIABILITIES
              
              
              1,853,000
              
              
              1,461,000COMMITMENTS
                  AND CONTINGENCIES**STOCKHOLDERS'
                  EQUITY:**Preferred
                  stock, $10 par value, 4,675,000 shares authorized, zero and zero
                  shares
                  issued and outstanding at December 31, 2005 and 2004,
                  respectively
              
              
              —
              
              
              —Series B
                  Convertible Preferred Stock, $1,000 stated value, 250,000 shares
                  authorized, zero and zero shares issued and outstanding at
                  December 31, 2005 and 2004, respectively, liquidation preference of
                  zero and zero at December 31, 2005 and 2004, respectively
              
              
              —
              
              
              —Common
                  stock, $.001 par value, 40,000,000 shares authorized, 8,257,214
                  and
                  6,443,000 issued and outstanding at December 31, 2005 and 2004,
                  respectively
              
              
              8,000
              
              
              6,000Additional
                  paid in capital
              
              
              52,915,000
              
              
              49,613,000Deferred
                  stock compensation
              
              
              (3,000
              )
              
              (53,000
              )Accumulated
                  deficit
              
              
              (50,325,000
              )
              
              (44,761,000
              )Total
                  stockholders' equity
              
              
              2,595,000
              
              
              4,805,000TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              4,448,000
              
              $
              6,266,000










See
      accompanying notes to consolidated financial statements.


*-
          F-4
          -*


**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Years
                  Ended December 31,****2005**
              
              **2004**REVENUESProduct
              
              $
              3,650,000
              
              $
              4,347,000Software
                  support
              
              
              357,000
              
              
              460,000Total
                  revenues
              
              
              4,007,000
              
              
              4,807,000COST
                  OF SALES
              
              
              2,629,000
              
              
              2,243,000GROSS
                  PROFIT
              
              
              1,378,000
              
              
              2,564,000OPERATING
                  EXPENSESResearch
                  and development
              
              
              2,184,000
              
              
              1,847,000Selling,
                  general and administrative expenses
              
              
              4,870,000
              
              
              5,905,000Total
                  operating expenses
              
              
              7,054,000
              
              
              7,752,000LOSS
                  FROM OPERATIONS
              
              
              (5,676,000
              )
              
              (5,188,000
              )Interest
                  income and other, net
              
              
              112,000
              
              
              123,000NET
                  LOSS BEFORE INCOME TAXES
              
              
              (5,564,000
              )
              
              (5,065,000
              )Provision
                  for income taxes
              
              
              —
              
              
              —NET
                  LOSS APPLICABLE TO COMMON STOCKHOLDERS
              
              $
              (5,564,000
              )
              $
              (5,065,000
              )NET
                  LOSS PER SHARE OF COMMON STOCK—Basic and diluted
              
              $
              (0.69
              )
              $
              (1.24
              )WEIGHTED
                  AVERAGE SHARES OUTSTANDING—Basic and diluted
              
              
              8,083,000
              
              
              4,087,000









See
      accompanying notes to consolidated financial statements.


*-
          F-5
          -*


**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**YEARS
      ENDED DECEMBER 31, 2005 AND 2004**





**Series
                  B Preferred**
              
              **Common
                  Stock****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Additional**
                **Paid
                  in**
                **Capital**
              
              **Deferred
                  Stock Compensation**
              
              **Accumulated
                  Deficit**
              
              **Total**BALANCE,
                  DECEMBER 31, 2003
              
              
              0
              
              $
              0
              
              
              3,033,000
              
              $
              3,000
              
              $
              43,019,000
              
              $
              (486,000
              )
              $
              (39,696,000
              )
              $
              2,840,000Issuance
                  of warrants and options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              275,000
              
              
              433,000
              
              
              
              
              
              708,000Exercise
                  of options
              
              
              
              
              
              
              
              
              30,000
              
              
              
              
              
              19,000
              
              
              
              
              
              
              
              
              19,000Beneficial
                  conversion feature on convertible note payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              403,000
              
              
              
              
              
              
              
              
              403,000Offering
                  costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (574,000
              )
              
              
              
              
              
              
              
              (574,000
              )Issuance
                  of common stock on conversion of convertible note payable
              
              
              
              
              
              
              
              
              220,000
              
              
              
              
              
              440,000
              
              
              
              
              
              
              
              
              440,000Issuance
                  of common stock for cash
              
              
              
              
              
              
              
              
              3,160,000
              
              
              3,000
              
              
              6,031,000
              
              
              
              
              
              
              
              
              6,034,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,065,000
              )
              
              (5,065,000
              )BALANCE,
                  DECEMBER 31, 2004
              
              
              0
              
              $
              0
              
              
              6,443,000
              
              $
              6,000
              
              $
              49,613,000
              
              $
              (53,000
              )
              $
              (44,761,000
              )
              $
              4,805,000Issuance
                  of warrants and options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,000
              
              
              50,000
              
              
              
              
              
              63,000Cashless
                  exercise of warrants
              
              
              
              
              
              
              
              
              18,000Offering
                  costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (259,000
              )
              
              
              
              
              
              
              
              (259,000
              )Issuance
                  of common stock for cash
              
              
              
              
              
              
              
              
              1,458,000
              
              
              2,000
              
              
              2,548,000
              
              
              
              
              
              
              
              
              2,550,000Issuance
                  of common stock for purchase of InterScope’s assets
              
              
              
              
              
              
              
              
              338,000
              
              
              
              
              
              1,000,000
              
              
              
              
              
              
              
              
              1,000,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,564,000
              )
              
              (5,564,000
              )BALANCE,
                  DECEMBER 31, 2005
              
              
              0
              
              $
              0
              
              
              8,257,000
              
              $
              8,000
              
              $
              52,915,000
              
              $
              (3,000
              )
              $
              (50,325,000
              )
              $
              2,595,000










See
      accompanying notes to consolidated financial statements.








*-
          F-6
          -*


**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
                Ended December 31,****2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (5,564,000
            )
            $
            (5,065,000
            )Adjustments
                to reconcile net loss to net cash provided by/(used in) operating
                activities:Depreciation
                and amortization
            
            
            713,000
            
            
            375,000Provision
                for doubtful accounts
            
            
            23,000
            
            
            85,000Deferred
                stock compensation
            
            
            63,000
            
            
            691,000Interest
                on fixed conversion features
            
            
            —
            
            
            440,000Changes
                in operating assets and liabilities, net of effects from
                acquisition/disposition of business:Accounts
                receivable
            
            
            (4,000
            )
            
            (559,000
            )Inventory
            
            
            48,000
            
            
            (327,000
            )Prepaid
                expenses and other assets
            
            
            326,000
            
            
            709,000Income
                taxes receivableAccounts
                payable and accrued expenses
            
            
            466,000
            
            
            16,000Deferred
                revenue
            
            
            (74,000
            )
            
            (177,000
            )Net
                cash used in operating activities
            
            
            (4,003,000
            )
            
            (3,812,000
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Additions
                to fixed assets
            
            
            (176,000
            )
            
            (78,000
            )Acquisition
                of InterScope’s assets
            
            
            (178,000
            )
            
            —Net
                cash used in by investing activities
            
            
            (354,000
            )
            
            (78,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from exercise of common stock options
            
            
            —
            
            
            19,000Offering
                costs on issuance of common stock
            
            
            (259,000
            )
            
            (574,000
            )Net
                proceeds from issuance of common stock
            
            
            2,550,000
            
            
            6,034,000Net
                proceeds from issuance of convertible note payable
            
            
            —
            
            
            420,000Net
                cash provided by financing activities
            
            
            2,291,000
            
            
            5,899,000NET
                INCREASE/(DECREASE) IN CASH
            
            
            (2,066,000
            )
            
            2,009,000CASH,
                Beginning of period
            
            
            2,371,000
            
            
            363,000CASH,
                End of period
            
            $
            305,000
            
            $
            2,371,000





**Years
                Ended December 31,****2005**
            
            **2004****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                received/(paid) during the period for:Interest
            
            $
            18,000
            
            $
            29,000




**NON-CASH
      FINANCING ACTIVITY:**





See
      Note
      2 for disclosure of non-cash financing activities.




See
      accompanying notes to consolidated financial statements


*-
          F-7
          -*


**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED DECEMBER 31, 2005 AND 2004**





**NOTE
      1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Current
      Operations and Background*** — Trestle
      Holdings (Delaware), Inc. ("Trestle Holdings" or "Company"), through its
      wholly owned subsidiary, Trestle Acquisition Corp. ("Trestle"), develops and
      sells digital tissue imaging and telemedicine applications linking dispersed
      users and data primarily in the healthcare and pharmaceutical markets. Trestle's
      digital tissue imaging products provide a digital platform to share, store,
      and
      analyze tissue images. Trestle's telemedicine product provides healthcare
      organizations with a cost effective platform for remote examination, diagnosis,
      and treatment of patients.





On
      May 20, 2003, Trestle Holdings entered this line of business through its
      purchase of substantially all of the assets of Trestle Corporation, a Delaware
      corporation ("Old Trestle"), and certain assets of Med Diversified, Inc., a
      Nevada corporation and parent corporation of Old Trestle ("Med"), and two of
      Med's non-debtor subsidiaries.





On
      March
      11, 2005, the Company acquired substantially all of the assets of InterScope
      Technologies, Inc. in exchange for 337,838 shares of Trestle common stock and
      $177,000 in cash.




***Going
      Concern*** ** **—** The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. The Company has suffered recurring losses
      from
      operations since its inception and has an accumulated deficit of
      $50,325,000 **** at
      December 31, 2005.





The
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability and classification of recorded asset amounts or amounts and
      classifications of liabilities that might be necessary should the Company be
      unable to continue its existence. The recovery of the Company’s assets is
      dependent upon continued operations of the Company.





In
      addition, the Company's recovery is dependent upon future events, the outcome
      of
      which is undetermined. The Company intends to continue to attempt to raise
      additional capital, but there can be no certainty that such efforts will be
      successful.





***Basis
      of Presentation and Principles of Consolidation*** —
The
      consolidated financial statements reflect the financial position, results of
      operations and cash flows of the Company and its wholly owned subsidiaries.
      All
      significant intercompany accounts and transactions have been eliminated on
      consolidation.





***Use
      of Estimates*** —The
      preparation of financial statements in conformity with generally accepted
      accounting principles in the United States of America requires management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. These estimates are sensitive to change and
      therefore actual results could differ from those estimates.





***Cash
      and Cash Equivalents*** —
The
      Company considers investments with original maturities of 90 days or less
      to be cash equivalents.





***Accounts
      Receivable -*** The
      Company extends credit to its customers. Collateral is generally not required.
      Credit losses are provided for in the financial statements based on management’s
      evaluation of historical and current industry trends. Although the Company
      expects to fully collect amounts due, actual collections may differ from
      estimated amounts.





***Factoring
      of Receivable -***  The
      Company use a factor for working capital and credit administration purposes.
      Under the factoring agreement, the factor purchases a portion of the trade
      accounts receivable and assumes all credit risk with respect to such accounts.
      The Company includes the amount in accounts receivable. The amounts advanced
      are
      included in current liabilities.





***Inventory*** -
      Inventory is valued at the lower of cost or market. Cost is determined using
      standard costs, which approximates first-in, first-out method
      assumption.




*-
          F-8
          -*


***Fixed
      Assets*** —
Fixed
      assets are stated at cost and are depreciated using the straight-line method
      over their estimated useful lives, ranging from one to five years. Leasehold
      improvements are amortized over the shorter of the lease term or the estimated
      life of the improvement.





***Intangible
      Assets*** *—* In
      accordance with Statement of Financial Accounting Standards (“SFAS”)
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,
      the Company evaluates long-lived assets, including intangible assets other
      than
      goodwill, for impairment when indicators of impairment are present and the
      undiscounted cash flows estimated to be generated by those assets are less
      then
      the assets’ carrying amounts. Factors considered important which could trigger
      an impairment review include, but are not limited to, significant
      underperformance relative to expected historical or projected future operating
      results, significant changes in the manner of use of the assets or the strategy
      for the Company’s overall business and significant negative industry or economic
      trends. If such assets are identified to be impaired, the impairment to be
      recognized is the amount by which the carrying value of the asset exceeds the
      fair value of the asset.





***Goodwill
      and Other Indefinite Lived Intangibles*** — ** In
      accordance with SFAS No. 141, “Business Combinations” and SFAS
      No. 142, *“Goodwill
      and Other Intangible Assets”* ,
      goodwill and other indefinite lived intangibles are not amortized, but are
      tested annually or on an interim basis if events or circumstances indicate
      that
      the fair value of the asset has decreased below its carrying value. No
      impairment losses were recorded for the years ending December 31, 2005 and
      2004.





***Revenue
      Recognition*** —
The
      Company recognizes revenues associated with the Trestle business on product
      sales after shipment of the product to the customer and formal acceptance by
      the
      customer has been received. Depending upon the specific agreement with the
      customer, such acceptance normally occurs subsequent to one or more of the
      following events: receipt of the product by the customer, installation of the
      product by the Company and/or training of customer personnel by the Company.
      For
      sales to qualified distributors revenues are recognized upon transfer of title
      which is generally upon shipment. Revenue recognized for shipping is recognized
      when the shipment arrives at its destination. Revenue collected in advance
      of
      product shipment or formal acceptance by the customer is reflected as deferred
      revenue. Revenue attributable to software maintenance and support is deferred
      and recognized ratably over the term of the maintenance agreement, generally
      one
      year.





The
      Company recognizes revenue on multiple element arrangements using the residual
      method. Under the residual method, revenue is recognized when Company-specific
      objective evidence of fair value exists for all of the undelivered elements
      in
      the arrangement, but does not exist for one or more of the delivered elements
      in
      the arrangement. At the outset of the arrangement with the customer, the Company
      defers revenue for the fair value of the undelivered elements such as consulting
      services and product maintenance, and recognizes the revenue for the remainder
      of the arrangement fee attributable to the elements initially delivered when
      the
      basic criteria in SOP 97-2 have been met. Revenue from consulting services
      is
      recognized as the related services are performed.





***Shipping
      and Handling Costs*** — The
      Company records the revenue related to shipping and handling costs charged
      to
      customers in net sales. The related expense is recorded in cost of sales in
      the accompanying statements of income.





***Research
      and Development*** —
The
      Company charges research and development expenses to operations as
      incurred.





***Income
      Taxes*** —The
      Company records income taxes in accordance with the provisions of SFAS
      No. 109, "Accounting for Income Taxes." The standard requires, among other
      provisions, an asset and liability approach to recognize deferred tax
      liabilities and assets for the expected future tax consequences of temporary
      differences between the financial statement carrying amounts and tax basis
      of
      assets and liabilities. Valuation allowances are provided if, based upon the
      weight of available evidence, it is more likely than not that some or all of
      the
      deferred tax assets will not be realized.





*-
          F-9
          -*


***Stock-Based
      Compensation—*** We
      account for stock-based employee compensation arrangements in accordance with
      the provisions of Accounting Principles Board (“APB”) Opinion No. 25, *“Accounting
      for Stock Issued to Employees,”* as
      amended by SFAS No. 148 “Accounting for Stock-based Compensation—Transition and
      Disclosure” using the intrinsic value method. Under APB No. 25, compensation
      expense is based on the difference, if any, between the fair value of our stock
      and the exercise price on the date of the grant, if the exercise price is less
      than the fair value of the stock.





We
      account for equity instruments issued to non-employees in accordance with the
      provisions SFAS No. 123 “Accounting for Stock-based Compensation” and Emerging
      Issues Task Force (“EITF”) Issue No. 96-18, *“Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring
      or
      in Conjunction With Selling Goods and Services.”*





The
      Company recorded no compensation expense for the year ended December 31, 2005
      related to the stock option grants. The following table illustrates what the
      Company’s loss would have been if the Black-Scholes option-pricing method had
      been used to calculate employee compensation expense. **





**Years
                Ended December 31,****2005**
            
            **2004**Net
                LossAs
                reported
            
            $
            (5,564,000
            )
            $
            (5,065,000
            )Total
                stock-based employee compensation expense determined under fair value
                based method for all awards, net of related tax effects
            
            
            (540,000
            )
            
            (591,000
            )Pro
                forma
            
            .$
            (6,104,000
            )
            $
            (5,656,000
            )Loss
                per shareBasic
                and diluted EPS as reported
            
            $
            (0.70
            )
            $
            (1.24
            )Pro
                forma basic and diluted EPS
            
            $
            (0.76
            )
            $
            (1.38
            )





The
      fair
      value of option grants is estimated on the date of grant utilizing the
      Black-Scholes option-pricing model with the following weighted average
      assumptions for grants during the year ended December 31, 2005: expected life
      of
      option 6.67 years, expected volatility of 184%, risk free interest rate of
      4.57%
      based upon the date of grant and a 0% dividend yield. The fair value, at date
      of
      grant, using these assumptions range from $0.21 to $2.86, and the weighted
      average was $1.74.





***Net
      Income (Loss) Per Share*** —
The
      Company computes net loss per share in accordance with SFAS No. 128, “Earnings
      per Share,” and Securities and Exchange Commission Staff Accounting Bulletin No.
      98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic and
      diluted net loss per share is computed by dividing the net loss available to
      common stockholders for the period by the weighted average number of shares
      of
      common stock outstanding during the period.  Common equivalent shares
      related to stock options, warrants and convertible preferred stock have been
      excluded from the computation, for the years ended December 31, 2005 and 2004
      because their effect is anti-dilutive.





***Concentration
      of Credit Risk*** —
      Financial instruments that potentially subject the Company to a concentration
      of
      credit risk consist of cash and accounts receivable. The Company maintains
      its
      cash with high credit quality financial institutions; at times, such balances
      with any one financial institution may exceed FDIC insured limits. Concentration
      of credit risk associated with accounts receivable is significant due to the
      limited number of customers, as well as their dispersion across geographic
      areas. The Company performs ongoing credit evaluations of its customers and
      generally requires partial deposits. Although the Company has a diversified
      customer base, a substantial portion of its debtors' ability to honor their
      contracts is dependent upon financial conditions in the healthcare
      industry.





***Financial
      Instruments*** —The
      Company's financial instruments consist of cash, accounts receivable, accounts
      payable and accrued expenses. The carrying values of cash and cash equivalents,
      accounts receivable, accounts payable, accrued expenses and notes payable are
      representative of their fair values due to their short-term maturities.





*-
          F-10
          -*




***Recently
      Issued Accounting Pronouncements*** ** — In
      November 2004, the FASB issued SFAS No. 151,”Inventory Costs”. SFAS No. 151
      amends the accounting for abnormal amounts of idle facility expense, freight,
      handling costs, and wasted material (spoilage) under the guidance in ARB No.
      43,
      Chapter 4,"Inventory Pricing”. Paragraph 5 of ARB No. 43, Chapter 4, previously
      stated that ". . . under some circumstances, items such as idle facility
      expense, excessive spoilage, double freight, and rehandling costs may be so
      abnormal as to require treatment as current period charges. . . ." This
      Statement requires that those items be recognized as current-period charges
      regardless of whether they meet the criterion of "so abnormal." In addition,
      this Statement requires that allocation of fixed production overheads to the
      costs of conversion be based on the normal capacity of the production
      facilities. This statement is effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. This statement is not applicable
      to
      the Company.






In
      December 2004, the FASB issued SFAS No. 152,”Accounting for Real Estate
      Time-Sharing Transactions”. The FASB issued this Statement as a result of the
      guidance provided in AICPA Statement of Position (SOP) 04-2,”Accounting for Real
      Estate Time-Sharing Transactions”. SOP 04-2 applies to all real estate
      time-sharing transactions. Among other items, the SOP provides guidance on
      the
      recording of credit losses and the treatment of selling costs, but does not
      change the revenue recognition guidance in SFAS No. 66,”Accounting for Sales of
      Real Estate”, for real estate time-sharing transactions. SFAS No. 152 amends
      Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152
      also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of
      Real Estate Projects”, to state that SOP 04-2 provides the relevant guidance on
      accounting for incidental operations and costs related to the sale of real
      estate time-sharing transactions. SFAS No. 152 is effective for years beginning
      after June 15, 2005, with restatements of previously issued financial statements
      prohibited. This statement is not applicable to the Company.






In
      December 2004, the FASB issued SFAS No. 153,”Exchanges of Nonmonetary Assets,”
an amendment to Opinion No. 29,”Accounting for Nonmonetary Transactions”.
      Statement No. 153 eliminates certain differences in the guidance in Opinion
      No.
      29 as compared to the guidance contained in standards issued by the
      International Accounting Standards Board. The amendment to Opinion No. 29
      eliminates the fair value exception for nonmonetary exchanges of similar
      productive assets and replaces it with a general exception for exchanges of
      nonmonetary assets that do not have commercial substance. Such an exchange
      has
      commercial substance if the future cash flows of the entity are expected to
      change significantly as a result of the exchange. SFAS No. 153 is effective
      for
      nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
      Earlier application is permitted for nonmonetary asset exchanges occurring
      in
      periods beginning after December 16, 2004. This statement is not applicable
      to
      the Company.




In
      December 2004, the FASB issued SFAS No. 123(R),”Share-Based Payment. SFAS 123(R)
      amends SFAS No. 123,”Accountung for Stock-Based Compensation”, and APB Opinion
      25,”Accounting for Stock Issued to Employees.” SFAS No.123(R) requires that the
      cost of share-based payment transactions (including those with employees and
      non-employees) be recognized in the financial statements. SFAS No. 123(R)
      applies to all share-based payment transactions in which an entity acquires
      goods or services by issuing (or offering to issue) its shares, share options,
      or other equity instruments (except for those held by an ESOP) or by incurring
      liabilities (1) in amounts based (even in part) on the price of the entity’s
      shares or other equity instruments, or (2) that require (or may require)
      settlement by the issuance of an entity’s shares or other equity instruments.
      This statement is effective (1) for public companies qualifying as SEC small
      business issuers, as of the first interim period or fiscal year beginning after
      December 15, 2005, or (2) for all other public companies, as of the first
      interim period or fiscal year beginning after June 15, 2005, or (3) for all
      nonpublic entities, as of the first fiscal year beginning after December 15,
      2005. For fiscal year end 2006, the company will have to recognize costs for
      share based compensation.





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
      Corrections. SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion
      No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements”, and changes the requirements for the accounting
      for and reporting of a change in accounting principle. This Statement applies
      to
      all voluntary changes in accounting principle. It also applies to changes
      required by an accounting pronouncement in the unusual instance that the
      pronouncement does not include specific transition provisions. When a
      pronouncement includes specific transition provision, those provisions should
      be
      followed.





*-
          F-11
          -*


Opinion
      20 previously required that most voluntary changes in accounting principle
      be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This Statement requires
      retrospective application to prior periods’ financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, this Statement requires
      that
      the new accounting principle be applied to the balances of assets and
      liabilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      opening balance of retained earnings (or other appropriate components of equity
      or net assets in the statement of financial position) for that period rather
      than being reported in an income statement. When it is impracticable to
      determine the cumulative effect of applying a change in accounting principle
      to
      all prior periods, this Statement requires that the new accounting principle
      be
      applied as if it were adopted prospectively from the earliest date
      practicable.





The
      correction of an error in previously issued financial statements is not an
      accounting change. However, the reporting of an error correction involves
      adjustments to previously issued financial statements similar to those generally
      applicable to reporting an accounting change retrospectively. Therefore, the
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by this Statement. This statement is not applicable
      to the Company.





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid
      Financial Instruments”. SFAS 155 amends SFAS 133 to narrow the scope exception
      for interest-only and principal-only strips on debt instruments to include
      only
      such strips representing rights to receive a specified portion of the
      contractual interest or principal cash flows. SFAS 155 also amends SFAS 140
      to
      allow qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      financial instrument. Generally, FASB Statement of Financial Accounting
      Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”, requires that a derivative embedded in a host contract that does
      not meet the definition of a derivative be accounted for separately (referred
      to
      as bifurcation) under certain conditions. That general rule notwithstanding,
      SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad
      exception for interest-only and principal-only strips initially resulting from
      the separation of rights to receive contractual cash flows of a financial
      instrument that itself does not contain an embedded derivative that would have
      been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope
      exception to strips that represent rights to receive only a portion of the
      contractual interest cash flows or of the contractual principal cash flows
      of a
      specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 ,
      “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities”, permitted a qualifying special-purpose entity (SPE) to hold
      only passive derivative financial instruments pertaining to beneficial interests
      (other than another derivative financial instrument) issued or sold to parties
      other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE
      to
      hold a derivative instrument pertaining to beneficial interests that itself
      is a
      derivative financial instrument. Management is currently assessing the effect
      of
      SFAS 155 on the Company’s financial statement.















**NOTE
      2 - ACQUISITION OF INTERSCOPE**





On
      March
      11, 2005, the Company, by and through its wholly-owned subsidiary, Trestle
      Acquisition Corp., purchased substantially all of the assets of InterScope
      Technologies, Inc. (“InterScope”). InterScope’s business was historically in
      image acquisition. Interscope Technologies developed key software applications
      for improving the workflow of clinical and biopharma pathology, especially
      in
      data management applications for use in anatomic pathology, toxicology and
      genomic environments. These applications support the direction Trestle has
      embarked on to deliver integrated solutions and services to pathologists working
      in clinical and drug development applications. With this acquisition we expect
      to accelerate the deployment and scaling of such solutions. Interscope’s
      workflow products should allow us to increase our range of applications.





Under
      the
      terms of the acquisition, we, through our wholly-owned subsidiary, paid the
      Sellers $178,000 in cash and 338,000 shares of the Company’s common stock valued
      at $1,000,000. The Company’s common stock was valued using the Company’s average
      closing price over the 60 days prior to the signing date of the asset purchase
      agreement. Additionally, we hired four former InterScope employees and its
      former chairman.





*-
          F-12
          -*


The
      total
      purchase price as allocated to assets and liabilities was based upon estimated
      fair market values. This allocation included the recording of approximately
      $1,178,000 to identifiable intangible assets to be amortized over 3
      years.





The
      following summarized unaudited pro forma consolidated results of operations
      reflect the effect of the InterScope as if it had occurred at the beginning
      of
      the period presented. The unaudited pro forma consolidated results of operations
      presented below are not necessarily indicative of operating results which would
      have been achieved had the acquisition been consummated as of the beginning
      of
      the periods presented and should not be construed as representative of future
      operations:








The
                Year Ended
              December
                31, 2005
            
            The
                Year Ended
              December
                31, 2004Revenues
            
            $
            4,007,000
            
            $
            5,359,000Cost
                of Sales
            
            
            1,980,000
            
            
            2,354,000Gross
                Profit
            
            
            857,000
            
            
            2,795,000Operating
                Expenses
            
            
            7,247,000
            
            
            8,897,000Operating
                Loss
            
            $
            (6,390,000
            )
            $
            (6,102,000
            )Loss
                per shareBasic
                and diluted EPS as reported
            
            $
            (0.70
            )
            $
            (1.24
            )Pro
                forma basic and diluted EPS
            
            $
            (0.80
            )
            $
            (1.49
            )





**NOTE
      3 - ACCOUNTS RECEIVABLE**





We
      use a
      factor for working capital and credit administration purposes. Under the
      factoring agreement, the factor purchases a portion of the trade accounts
      receivable and assumes all credit risk with respect to such accounts. The factor
      agreement provides that Trestle can borrow an amount up to 80% of the value
      of
      its approved factored customer invoices. In the event the account debtor does
      not pay within ninety days, Trestle may be required to repurchase the invoice.
      As of December 31, 2005, the factor holds $112,500 of accounts receivable
      purchased from us and has made advances to us of $90,000 against those
      receivables of which is included in current liabilities.





**NOTE
      4 - INVENTORY**





Inventories
      are stated at the lower of cost (first-in, first-out) or market and consist
      of
      the following at December 31, 2005 and 2004:





Years
                Ended December 31,2005
            
            2004Work-in-process
            
            $
            492,000
            
            $
            438,000Finished
                goods
            
            
            118,000
            
            
            168,000Reserve
                for obsolescence
            
            
            (108,000
            )
            
            (56,000
            )Total
            
            $
            502,000
            
            $
            550,000








*-
          F-13
          -*


**NOTE
      5 - FIXED ASSETS**




Depreciation
      expense was $150,000 and $131,000 in the years ended December 31, 2005 and
      2004,
      respectively. We removed $227,000 of fully depreciated leasehold improvements
      in
      accordance with our accounting for fixed assets. We wrote off an additional
      $10,500 of leasehold improvements upon vacating our Los Angeles office. Fixed
      assets are comprised of the following at December 31, 2005 and 2004.





Years
                Ended December 31,2005
            
            2004Furniture,
                fixtures and equipment
            
            $
            17,000
            
            $
            231,000Leasehold
                improvements
            
            
            283,000
            
            
            228,000300,000Less
                accumulated depreciation
            
            
            (182,000
            )
            
            459,000
              (342,000
            )Total
            
            $
            118,000
            
            $
            117,000








**NOTE
      6 - INTANGIBLE ASSETS**





Amortization
      expense was $538,000 and $243,000 in the years ended December 31, 2005 and
      2004,
      respectively. Intangible assets are comprised of the following at December
      31,
      2005 and 2004.





Years
                Ended December 31,2005
            
            2004Intangible
                assets
            
            $
            1,908,000
            
            $
            730,000Less
                accumulated amortization
            
            
            (933,000
            )
            
            (395,000
            )Net
                intangible assets
            
            $
            975,000
            
            $
            395,000





The
      estimated amortization on these intangible assets for the years ended December
      31, 2006, 2007, 2008, 2009, and 2010 will be $494,000, $393,000, $98,000, zero,
      and zero.





**NOTE
      7 - ACCRUED LIABILITIES**





Accrued
      liabilities for the years ended December 31, 2005 and 2004 consist of the
      following:





Years
                Ended December 31,2005
            
            2004Accrued
                bonus
            
            
            269,000
            
            
            131,000Accrued
                paid time off
            
            
            143,000
            
            
            135,000Accrued
                legal
            
            
            43,000
            
            
            85,000Other
            
            
            99,000
            
            
            193,000Net
                intangible assets
            
            $
            554,000
            
            $
            544,000





**NOTE
      8 - INCOME TAX**





The
      income tax (benefit) expense for the years ended December 31, 2005 and 2004
      consist of the following:





Years
                Ended December 31,2005
            
            2004Current
            
            $
            —
            
            $
            —Change
                in deferred tax asset
            
            
            674,000
            
            
            (920,000
            )Change
                in valuation allowance
            
            
            (674,000
            )
            
            920,000Provision
                for income taxes
            
            $
            —
            
            $
            —





*-
          F-14
          -*


Income
      tax (benefit) expense computed at the statutory federal income tax rate of
      34%
      and the provision for income tax (benefit) expense in the financial statements
      for the years ended December 31, 2005 and 2004 differ as follows:





Years
                Ended December 31,2005
            
            2004Provision
                computed at the statutory rate
            
            $
            (674,000
            )
            $
            920,000Change
                in valuation allowance
            
            
            674,000
            
            
            (920,000
            )Income
                tax provision (benefit)
            
            $
            —
            
            $
            —







The
      following are the components of the Company's deferred tax assets and
      (liabilities) at December 31, 2005 and 2004:





Years
                Ended December 31,2005
            
            2004Federal
                net operating loss carryforward
            $
            10,232,000
            
            $
            8,433,000State
                net operating loss carryforward
            
            400,000
            
            
            714,000Accounts
                receivable
            
            82,000
            
            
            20,000Charitable
                contributions
            
            —
            
            
            3,000Depreciation
            
            34,000
            
            
            110,000Equity
                based charges
            
            —
            
            
            800,000Capital
                loss carryforward
            
            1,356,000
            
            
            1,356,000Accrued
                vacation
            
            49,000
            
            
            41,000Goodwill
            
            63,000
            
            
            66,000Total
                deferred tax asset
            
            12,216,000
            
            
            11,543,000Goodwill
            
            (85,000
            )
            
            (85,000
            )Deferred
                state taxes
            
            (498,000
            )
            
            (498,000
            )Total
                deferred tax liability
            
            (583,000
            )
            
            (583,000
            )Net
                deferred tax asset
            
            11,633,000
            
            
            10,960,000Valuation
                allowance
            $
            (11,633,000
            )
            $
            (10,960,000
            )Net
                deferred tax asset/(liability)
            
            
            
            $
            —
            
            $
            —





At
      December 31, 2005, the Company has a net operating loss carryforward of
      approximately $30,100,000 and $5,000,000 for federal and state income tax
      purposes, respectively. These net operating loss carryforwards begin to expire
      in 2018 and 2006, respectively. The net operating losses can be carried forward
      to offset future taxable income, if any. Realization of the above carryforwards
      may be subject to utilization limitations, which may inhibit the Company's
      ability to use these carryforwards in the future.





**NOTE
      9 - STOCKHOLDERS' EQUITY**





**Warrants**


During
      the year ended December 31, 2005, the Company issued 1,199,000 warrants to
      management, investors and consultants.  The weighted average exercise price
      of the grants during the year ending December 31, 2005 was $1.75. The vesting
      periods on these grants range from immediate to 3 years, and the lives range
      from 4 to 10 years.  To account for such grants to non-employees, we
      recorded deferred stock compensation of $13,000, and recognized compensation
      expense of $63,000 for the year ended December 31, 2005. Compensation expense
      is
      recognized ratably over the term of the related services provided.





*-
          F-15
          -*


During
      the year ended December 31, 2004, the Company issued 2,123,000 warrants to
      management, investors and consultants.  The weighted average exercise price
      of the grants during the year ending December 31, 2004 was $1.98. The vesting
      periods on these grants range from immediate to 3 years, and the lives range
      from 4 to 10 years.  To account for such grants to non-employees, we
      recorded deferred stock compensation of $258,000, and recognized compensation
      expense of $691,000 for the year ended December 31, 2004. Compensation expense
      is recognized ratably over the term of the related services
      provided.





As
      part
      of the 1999 Refinancing, the Company granted warrants to purchase 134,462 shares
      of common stock at prices ranging between $90 to $120 per share, of which 61,528
      were outstanding at December 31, 2005. The warrants had a fair value of
      $2,360,000 at the date of grant, are fully vested and expire six to eight years
      from their issuance date.





As
      a
      result of the refinancing that took place in 1999, the Company granted warrants,
      not covered by the employee stock purchase plans, to purchase 134,462 shares
      of
      common stock to certain employees, officers and directors of which 84,808 were
      outstanding at December 31, 2005. These warrants vest either on the grant date
      or over three years from the grant date. The options are exercisable at prices
      ranging from $90 to $120 per share and expire six to eight years from their
      issuance date.





**NOTE
      10 - COMMITMENTS AND CONTINGENCIES**





***Leases*** —The
      Company leases office space and office equipment under operating leases expiring
      through 2007. Future minimum lease payments due under non-cancelable operating
      leases at December 31, 2005 are as follows:








Years
                Ended December 31,2006
            $
            563,0002007
            
            2,0002008
            
            0Total
                minimum lease payments
            $
            565,000




Rent
      expense charged to operations for the years ended December 31, 2005 and 2004
      was
      $603,000 and $770,000. Rent income from sublease arrangements for the years
      ended December 31, 2005 and 2004 was $38,000 and $322,000. The Company does
      not
      expect significant income from sublease arrangements in the future.





***Litigation*** —
The
      Company is party to legal proceedings, which are routine and incidental to
      the
      business. The Company believes these proceedings are without merit and the
      results of such litigation will not have a material adverse effect on the
      Company's financial condition or results of operations. However, there can
      be no
      assurances that such litigation may not arise in the future. Currently, we
      are
      disputing claims made in litigation by the landlord of the space in Los Angeles
      due to our abandonment of our offices located at 11835 W. Olympic Blvd., Suite
      550, Los Angeles, California 90064 in November 2005.








***Employment
      Agreements*** —
The
      Company entered into an employment agreement with Maurizio Vecchione, the
      Company’s Chief Executive Officer, effective as of July of 2004, pursuant to
      which he is entitled to receive a base salary of $200,000 per year. Mr.
      Vecchione is also entitled to a guaranteed bonus payable $6,250 per month and
      an
      annual incentive bonus of up to $200,000 upon achieving revenue and earnings
      before interest, depreciation, taxes and depreciation targets ranging between
      90% and 150% of budgeted levels. Mr. Vecchione is also entitled to four weeks
      paid vacation per year and to have his benefits reimbursed. The agreement
      expires, if not earlier terminated, on December 31, 2006. The Company agreed
      to
      appoint Mr. Vecchione to the board of directors and to use its best efforts
      to
      cause him to be re-elected during the term of his employment agreement. Mr.
      Vecchione is entitled to receive one year’s salary and guaranteed bonus if he is
      terminated or resigns within six months of a change of control of the Company.
      Mr. Vecchione also received non-plan options to acquire 250,000 shares of common
      stock at an exercise price of $2.50. The option vests 1/30 th per
      month commencing July 31, 2004, or, to the extent not vested, upon a change
      of
      control. The option expires the earlier of the eighth anniversary of the date
      of
      grant or five years after fully vesting.





*-
          F-16
          -*


The
      Company entered into an employment agreement with Barry Hall, the Company’s
      President and Chief Financial Officer, effective as of July of 2004, pursuant
      to
      which he is entitled to receive a base salary of $150,000 per year. Mr. Hall
      is
      also entitled to a guaranteed bonus payable $4,166 per month and an annual
      incentive bonus of up to $150,000 upon achieving revenue and earnings before
      interest, depreciation, taxes and depreciation targets ranging between 90%
      and
      150% of budgeted levels. Mr. Hall is also entitled to four weeks paid vacation
      per year and to participate in the employee benefit plan. The agreement expires,
      if not earlier terminated, on December 31, 2006. Mr. Hall is entitled to receive
      one year’s salary and guaranteed bonus if he is terminated or resigns within six
      months of a change of control of the Company. Mr. Hall also received non-plan
      options to acquire 150,000 shares of common stock at an exercise price of $2.50.
      The option vests 1/30 th per
      month commencing July 31, 2004, or, to the extent not vested, upon a change
      of
      control. The option expires the earlier of the eighth anniversary of the date
      of
      grant or five years after fully vesting.





Effective
      September 16, 2005, Maurizio Vecchione, Chief Executive Officer and Barry Hall,
      Chief Financial Officer voluntarily agreed to a reduction in their compensation
      equal to fifty percent of amount as contained in their employment contracts
      dated May 15, 2005. These reductions reduce cash compensation to $137,500 and
      $100,000 for Mr. Vecchione and Mr. Hall, respectively. In turn Mr. Vecchione
      and
      Mr. Hall were granted 10,000 stock options under the Company’s Amended and
      Restated 2003 Stock Incentive Plan. The Options are exercisable at $1.00 per
      share and vest one-hundred percent after six months.





In
      September 2005, the Company offered stay bonuses to several key employees which
      become payable upon the earlier of a change in control or one year. This is
      accrued in our current liabilities.





Effective
      May 20, 2003, the Company entered into an employment agreement with Old
      Trestle’s Chief Science Officer for a term of three years at a salary of
      $200,000 per year. In addition, under this employment agreement the executive
      is
      entitled to a bonus under certain performance criteria and was granted 187,000
      stock options.







**NOTE
      11 - STOCK OPTION PLANS**





***Stock
      Option Plans*** —
The
      Company's employee stock option plans (the "Plans") provide for the grant of
      non-statutory or incentive stock options to the Company's employees, officers,
      directors or consultants.





The
      Compensation Committee of the Company’s Board of Directors administers the
      Plans, selects the individuals to whom options will be granted, determines
      the
      number of options to be granted, and the term and exercise price of each option.
      Stock options granted pursuant to the terms of the Plans generally cannot be
      granted with an exercise price of less than 100% of the fair market value on
      the
      date of the grant. The term of the options granted under the Plans cannot be
      greater than 10 years. Options vest at varying rates generally over three
      to five years. An aggregate of 1,855,000 shares were reserved under the Plans,
      of which 579,000 shares were available for future grant at December 31, 2005.





The
      following table summarizes activity in the Company's stock option plans during
      the years ended December 31, 2005 and 2004:





**Number
                of**
              **Shares**
            
            **Weighted
                Average Price Per Share**Balance
                at December 31, 2003
            
            393,000
            $
            3.48Granted
            
            382,000
            
            3.81Exercised
            
            (30,000)
            
            0.62Balance
                at December 31, 2004
            
            745,000
            $
            3.80Granted
            
            501,000
            
            0.86Balance
                at December 31, 2005
            
            1,246,000
            $
            2.62







*-
          F-17
          -*


The
      following summarizes pricing and term information for options issued to
      employees and directors which are outstanding as of December 31, 2005:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number
                Outstanding at December 31, 2005**
            
            **Weighted
                Average Remaining Contractual**
              **Life**
            
            **Weighted
                Average Exercise Price**
            
            **Number
                Exercisable at December 31, 2005**
            
            **Weighted
                Average Exercise Price**$
            0.50
                - 1.00
            
            450,000
            
            8.67
            
            $
            0.67
            
            290,000
            
            $
            0.621.01
                - 10.00
            
            783,000
            
            8.50
            
            
            2.91
            
            400,000
            
            
            3.9745.00
                - 50.00
            
            1,000
            
            4.42
            
            
            45.00
            
            1,000
            
            
            45.0065.00
                - 72.50
            
            11,000
            
            3.80
            
            
            67.45
            
            11,000
            
            
            67.45105.00
            
            1,000
            
            2.42
            
            
            105.00
            
            1,000
            
            
            105.00$
            0.50 - 105.00
            
            1,246,000
            
            8.51
            
            $
            2.79
            
            703,000
            
            $
            3.78




***Non-Plan
      Stock Options*** —
During
      the year ended December 31, 2004, the Company's issued 400,000 non-plan stock
      options with a strike price of $2.50 to Maurizio Vecchione and Barry Hall.
      See
      Note 9 Employment Agreements for further details.





**NOTE
      12 - EARNINGS PER SHARE**





The
      following table sets forth common stock equivalents (potential common stock)
      for
      the years ended December 31, 2005 and 2004 that are not included in the loss
      per
      share calculation above because their effect would be anti-dilutive for the
      periods indicated:





**Year
                Ended December 31,****2005**
            
            **2004**Weighted
                average common stock equivalents:Plan
                Stock Options
            
            
            1,246,000
            
            
            745,000Non-Plan
                Stock Options
            
            
            400,000
            
            
            400,000Warrants
            
            
            4,253,000
            
            
            3,181,000





**NOTE
      13 - CONCENTRATION OF CREDIT RISK**





Although
      we are directly affected by the economic well being of significant customers
      listed in the following paragraph, we do not believe that significant credit
      risk exists at December 31, 2005. We perform ongoing evaluations of our
      customers and require letters of credit or other collateral arrangements as
      appropriate. Accordingly, trade receivable credit losses have not been
      significant.





The
      Company had one customer that accounted for 23% of the Company’s revenues for
      the year ended December 31, 2005. As of December 31, 2005, the accounts
      receivable for this customer as a percentage of the Company’s total accounts
      receivable was 19%. The Company had two customers that accounted for 10% and
      8%
      of the Company’s revenues for the year ended December 31, 2004. As of December
      31, 2004, the accounts receivable for these customers as a percentage of the
      Company’s total accounts receivable was 42% and 16% of
      respectively.





The
      Company maintains its cash balances in various financial institutions that
      from
      time to time exceed amounts insured by the Federal Deposit Insurance Corporation
      up to $100,000, per financial institution.  As of December 31, 2005, the
      Company’s deposits exceeded insured amounts by $260,000. The Company has not
      experienced any losses in such accounts and believes it is not exposed to any
      significant credit risk on cash.








*-
          F-18
          -*


**NOTE
      14 - RELATED PARTIES**





Other
      than as listed below, we have not been a party to any significant transactions,
      proposed transactions, or series of transactions, and in which, to our
      knowledge, any of our directors, officers, five percent beneficial security
      holder, or any member of the immediate family of the foregoing persons has
      had
      or will have a direct or indirect material interest.





During
      the year ended December 31, 2005 and 2004, our Company incurred consulting
      fees and tax return preparation expenses in the amount of zero and $69,000,
      respectively. The consulting fees and tax return preparation expenses were
      charged by Kellogg & Andelson, a Southern California based public
      accounting firm. Gary Freeman, our former Chief Financial Officer, is currently
      a Vice President and director of Kellogg & Andelson.





Pursuant
      to a consulting agreement with our company, our Company paid consulting fees
      in
      the amount of $170,000 from November 1, 2003 to July 15, 2004 to
      Crosby Haffner, who then served as the Company’s Interim President. As
      compensation for his services as the Company's Interim President, we granted
      to
      Mr. Haffner 115,000 warrants with exercise prices between $2.60 and $5.40
      per share.





Additionally,
      on September 26, 2003, we granted to Michael Doherty, our Chairman,
      warrants to purchase 406,714 shares of our common stock at an exercise price
      of
      $0.62 per share. Fifty percent of those warrants become exercisable on
      May 5, 2004 and the remainder will vest in equal monthly installments on
      the last day of each month over the following 12 months. On August 19,
      2004, the Company granted Mr. Doherty a bonus of $150,000 in recognition
      for his services. From August 2004 through May 2005, the Company retained
      Mr. Doherty's services as Chairman and paid Mr. Doherty $10,000 per
      month for ten months starting August 1, 2004.





Certain
      former employees and directors of the Company are or were affiliated with
      Doherty & Company, LLC. Michael Doherty, the Chairman of the Company, is the
      president and controlling member of Doherty & Company, LLC. Crosby Haffner,
      a director of the Company and formerly the Company’s Interim President, was a
      Managing Director of Doherty & Company, LLC. Brandon Rockow, a full time
      employee of the Company who provides support for the Company’s financing,
      industry research, mergers and acquisitions, and investor relations activities,
      also maintains his securities license at and consults on specific projects
      to
      Doherty & Company, LLC. Tina Maddela, a part time employee of the Company
      who provides assistance to Roger Burlage, the Company’s former Chairman and
      Chief Executive Officer, pursuant to Mr. Burlage's employment contract with
      the
      Company, is also a part time employee of Doherty & Company,
      LLC.





On
      May
      27, 2005, the Compensation Committee on behalf of the Company entered into
      a one
      year consulting agreement with Michael Doherty, the Company’s Chairman. Under
      this agreement, the Consultant would oversee the capitalization of the Company,
      investor relations and will provide strategic advice to the Chief Executive
      Officer. Michael Doherty was to be compensated $20,000 per month in advance.
      Additionally, the Consultant was paid a monthly allowance of $2,500 in advance
      to cover expenses related of an administrative assistant. Effective November
      1,
      2005, Michael Doherty, Executive Chairman of the Board of Directors voluntarily
      agreed to reduce his compensation by fifty-percent. Mr. Doherty will continue
      to
      receive $2,500 in reimbursement for administrative costs. Addionally, Mr.
      Doherty received $2,000 per month for office space. In turn, Mr. Doherty was
      granted 10,000 stock options under the Company’s Amended and Restated 2003 Stock
      Incentive Plan. The options are exercisable at $1.00 per share and vest
      one-hundred percent after six months. On March 15, 2006, the companies mutually
      terminated the consulting agreement.





Effective
      September 1, 2004, the Company entered into an agreement to pay Doherty &
Company, LLC $10,000 per month for financial advisory services requested from
      time to time by the Company. Pursuant to this agreement Doherty & Company,
      LLC provided the Company with various financial advisory services, including
      but
      not limited to consulting with respect to proposed financings, advising the
      Company on potential mergers and acquisitions, and providing the Company with
      investor relations services. Prior to this agreement, the Company reimbursed
      Doherty & Company, LLC $11,250 for overhead incurred in providing
      administrative services to the Company in connection with the private placement
      transaction completed by the Company in July 2004. In addition, pursuant to
      the
      agreements governing Mr. Doherty’s services as Chairman to the Company, Mr.
      Doherty was entitled to use up to 3,500 square feet of office space, at the
      Company's expense, in the Company’s Los Angeles office, in connection with his
      services as Chairman and other activities. A portion of such space is being
      used
      by Doherty & Company, LLC.  This
      agreement was terminated in May 2005.





*-
          F-19
          -*


On
      May 9,
      2005, the Compensation Committee on behalf of the Company entered into an
      agreement with Doherty & Company, LLC, an affiliate of Michael Doherty, the
      Company’s Chairman, to assist the Board of Directors in exploring a range of
      possible strategic opportunities and alternatives, including acquisitions,
      joint
      ventures, capital raises, merger or a possible sale of the Company. Under the
      agreement, the Company paid Doherty & Company a nonrefundable retainer of
      $50,000 upon signing.





Maurizio
      Vecchione and Barry Hall are principals in Synthetica, Ltd which provided
      consulting services to the Company from May 15, 2004 to July15, 2004.
      During that time Synthetica was paid $35,913 in fees and expenses reimbursement.




**NOTE
      15 - SUBSEQUENT EVENT**





As
      of
      January 13, 2006, we entered litigation with the landlord of the space in Los
      Angeles due to our abandonment of our offices located at 11835 W. Olympic Blvd.,
      Suite 550, Los Angeles, California 90064 in November 2005.





On
      February 27, 2006 the Company entered into a Loan and Security Agreement (the
      “Loan Agreement”) with Clarient, Inc., a Delaware corporation (“Clarient”),
      pursuant to which the Company borrowed $250,000 from Clarient to be used for
      working capital purposes. The loan bears interest at an annual rate of 8% and
      is
      secured by a lien on the Company’s accounts receivable, inventory, software and
      intellectual property. The loan matures on the earlier of May 30, 2006 and
      the
      occurrence of an “Extraordinary Corporate Transaction” (which consists of
      certain extraordinary transactions involving the Company’s assets or
      securities), and is subject to acceleration by Clarient following and during
      the
      continuation of an event of default. The loan was provided in connection with
      certain exploratory strategic discussions between the parties but there is
      no
      assurance that any such discussions will be consummated.





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          F-20
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