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, 2007





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.)P.O.
      BOX 4198,
              NEWPORT
      BEACH, CALIFORNIA
              (Address
      of Principal Executive Offices)
            92661-4198
              (Zip
      Code)








Issuer's
Telephone Number, Including Area Code: 949-903-0468





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  [X]   No [  ]





State issuer's revenue for its most
recent fiscal year: zero





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 5, 2007, is: $330,000





State the number of shares outstanding
of each of issuer's classes of common equity, as of March 5, 2008:
143,257,214





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














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:





Since the sale of substantially all of
our assets to Clarient, we are a non-operating company and are seeking a
suitable transaction with a private company; however we may not find a suitable
candidate or transaction.  If we are unable to consummate a suitable
transaction we will be forced to liquidate and dissolve, which will take three
years to complete and may result in our distributing less cash to our
shareholders.  Additionally, we will be spending cash during the
winding down of the Company and may not have enough cash to distribute to our
shareholders.





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") is seeking out suitable candidates for a business
combination with a private company.  The Company previously developed
and sold digital tissue imaging and telemedicine applications linking dispersed
users and data primarily in the healthcare and pharmaceutical
markets.





On May 5,
2007, W-Net, Inc., a California corporation (“W-Net”), purchased 135,000,000
shares of the Company’s Common Stock, par value $0.001 per share (the “Common
Shares”) of the Company for an aggregate purchase price of $350,000.00, or
$0.00259 per share.





On September 22, 2006, the Company
consummated the sale of substantially all of its assets to Clarient, Inc. for
$3,000,000, consisting of approximately $2,203,000 in cash, $643,000 for the
cancellation of the loans from Clarient and assumption of approximately $154,000
of liabilities.





Employees





The Company currently has no full-time
employees.


-
2 -





Risk Factors





The following important factors, and
the important factors described elsewhere in 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, operations, results or
financial condition.





We
have a history of net losses and will not achieve or maintain
profitability.





We have a history of incurring losses
from operations. As of December 31, 2007, we had an accumulated deficit of
approximately $52,488,000, of which approximately $52,193,000 was incurred prior
to the sale of our tissue imaging and telemedicine business lines to
Clarient.  We anticipate that our existing cash and cash equivalents
will be sufficient to fund our business needs until June 2008. Our ability to
continue may prove more expensive than we currently anticipate and we may incur
significant additional costs and expenses in connection with seeking a suitable
transaction. In the event the Company uses all of its cash resources, W-Net,
Inc. has indicated the willingness to loan the Company funds at the prevailing
market rate until such business combination is consummated.





We
are a non-operating company seeking a suitable transaction and may not find a
suitable candidate or transaction.





Since the sale of substantially all of
our assets to Clarient, we are a non-operating company and are seeking a
suitable transaction with a private company; however, we may not find a suitable
candidate or transaction.  If we are unable to consummate a suitable
transaction we will be forced to liquidate and dissolve which will take three
years to complete and may result in our distributing less cash to our
shareholders.  Additionally, we will be spending cash during the
winding down of the Company and may not have enough cash to distribute to our
shareholders.





We
cannot assure you of the exact amount or timing of any future distribution to
our stockholders.





The precise nature, amount and timing
of any future distribution to our stockholders will depend on and could be
delayed by, among other things, the opportunities for a private company
transaction, administrative and tax filings during or associated with our
seeking a private company transaction or any subsequent dissolution, potential
claim settlements with creditors, and unexpected or greater than expected
operating costs associated with any potential private company transaction or any
subsequent liquidation. Furthermore, we cannot provide any assurances that we
will actually make any distributions.  Any amounts we actually
distribute to our stockholders may be less than the price or prices at which our
common stock has recently traded or may trade in the future.




We
will continue to incur claims, liabilities and expenses that will reduce the
amount available for distribution to stockholders.




Claims,
liabilities and expenses incurred while seeking a private company transaction or
any subsequent dissolution, such as legal, accounting and consulting fees and
miscellaneous office expenses, will reduce the amount of assets available for
future distribution to stockholders. If available cash and amounts received on
the sale of non-cash assets are not adequate to provide for our obligations,
liabilities, expenses and claims, we may not be able to distribute meaningful
cash, or any cash at all, to our stockholders.





We
will continue to incur the expenses of complying with public company reporting
requirements.




We have
an obligation to continue to comply with the applicable reporting requirements
of the Securities Exchange Act of 1934, as amended, even though compliance with
such reporting requirements is economically burdensome.


-
3 -




In
the event of liquidation, our Board of Directors may at any time turn management
of the liquidation over to a third party, and our directors may resign from our
board at that time.




If we are
unable to find or consummate a suitable private company transaction, our
directors may at any time turn our management over to a third party to commence
or complete the liquidation of our remaining assets and distribute the available
proceeds to our stockholders, and our directors may resign from our board at
that time. If management is turned over to a third party and our directors
resign from our board, the third party would have sole control over the
liquidation process, including the sale or distribution of any remaining
assets.




If
we are deemed to be an investment company, we may be subject to substantial
regulation that would cause us to incur additional expenses and reduce the
amount of assets available for distribution.




If we
invest our cash and/or cash equivalents in investment securities, we may be
subject to regulation under the Investment Company Act of 1940. If we are deemed
to be an investment company under the Investment Company Act because of our
investment securities holdings, we must register as an investment company under
the Investment Company Act. As a registered investment company, we would be
subject to the further regulatory oversight of the Division of Investment
Management of the Securities and Exchange Commission, and our activities would
be subject to substantial regulation under the Investment Company Act.
Compliance with these regulations would cause us to incur additional expenses,
which would reduce the amount of assets available for distribution to our
stockholders. To avoid these compliance costs, we intend to invest our cash
proceeds in money market funds and government securities, which are exempt from
the Investment Company Act but which currently provide a very modest
return.




If
we fail to create an adequate contingency reserve for payment of our expenses
and liabilities,  in the event of dissolution, our stockholders could
be held liable for payment to our creditors of each such stockholder’s pro rata
share of amounts owed to the creditors in excess of the contingency reserve, up
to the amount actually distributed to such stockholder.




In the event of dissolution or a
distribution of substantially all our assets, pursuant to the Delaware General
Corporation Law, we will continue to exist for three years after the dissolution
became effective or for such longer period as the Delaware Court of Chancery
shall direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets. Under the Delaware General Corporation Law, in the event we fail to
create an adequate contingency reserve for payment of our expenses and
liabilities during this three-year period, each stockholder could be held liable
for payment to our creditors of such stockholder’s pro rata share of amounts
owed to creditors in excess of the contingency reserve, up to the amount
actually distributed to such stockholder.





However, the liability of any
stockholder would be limited to the amounts previously received by such
stockholder from us (and from any liquidating trust or trusts) in the
dissolution. Accordingly, in such event a stockholder could be required to
return all distributions previously made to such stockholder. In such event, a
stockholder could receive nothing from us under the plan of dissolution.
Moreover, in the event a stockholder has paid taxes on amounts previously
received, a repayment of all or a portion of such amount could result in a
stockholder incurring a net tax cost if the stockholder’s repayment of an amount
previously distributed does not cause a commensurate reduction in taxes payable.
There can be no assurance that any contingency reserve established by us will be
adequate to cover any expenses and liabilities.





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 for the
year ended December 31, 2007.





-
4 -


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 pursue or consummate a private company
transaction.





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 engage in a private company
transaction. 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 engage in a private
company transaction 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:





·
            announcements
      concerning our strategy;





·
            litigation;
      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 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 Capital
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
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 1,500,000,000 shares of common stock and 5,000,000 shares of
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 therefor. Any future issuances of common stock or preferred stock would
further dilute the percentage ownership of our Company held by the public
stockholders.


-
5 -





ITEM
2.    PROPERTIES





We are
currently not obligated under any leases.  We currently pay $500 per
month on a month to month basis for office space.




ITEM
3.    LEGAL PROCEEDINGS





The Company is not currently involved
in any material legal proceedings.





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





None





PART
II





ITEM 5.    MARKET FOR
ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES





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
            LowFiscal
      year ended December 31, 2006:First
      Quarter
            $0.29
            $0.17Second
      Quarter
            $0.23
            $0.13Third
      Quarter
            $0.16
            $0.09Fourth
      Quarter
            $0.13
            $0.11Fiscal
      year ended December 31, 2007:First
      Quarter
            $0.11
            $0.18Second
      Quarter
            $0.03
            $0.20Third
      Quarter
            $0.05
            $0.10Fourth
      Quarter
            $0.03
            $0.10





Holders


As of March 19, 2008, there were
approximately 900 holders of record of the Company's Common Stock.





Dividends


With one
exception, 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.  Future dividend policy will be determined
periodically by our board of directors based upon conditions then existing,
including our financial condition, status of any transaction or liquidation and
other relevant factors.  On May 7, 2007, the Company paid a dividend
of $0.121712 per share from proceeds from the transaction with
Clarient.







-
6 -


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





Overview





The
Company is a non-operating public company and our operating results through
September 22, 2006 are not meaningful to our future results.  The
Company is seeking out suitable candidates for a business combination with a
private company.  The Company previously developed and sold digital
tissue imaging and telemedicine applications linking dispersed users and data
primarily in the healthcare and pharmaceutical markets.





On May 5,
2007, W-Net purchased 135,000,000 shares of the Company’s Common Shares for an
aggregate purchase price of $350,000.00, or $0.00259 per share.





On
September 22, 2006, the Company consummated the sale of substantially all of its
assets to Clarient for $3,000,000, consisting of approximately $2,203,000 in
cash, $643,000 for the cancellation of the loans from Clarient and assumption of
approximately $154,000 of liabilities.





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 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





Business Combinations-In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will
significantly change the accounting for business combinations. Under SFAS 141R,
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment for certain
specific items, including:





·  Acquisition
costs will be generally expensed as incurred;


·  Noncontrolling
interests (formerly known as “minority interests” – see SFAS 160 discussion
below) will be valued at fair value at the acquisition date;


·  Acquired
contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies;


·  In-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date;


·  Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date; and


·  Changes
in deferred tax asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense.





-
7 -


SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.





Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51-In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and cash
flows.




Fair Value Measurements-In
September 2006, FASB issued SFAS No. 157,“Fair Value
Measurements,”whichestablishes a framework
for measuring fair value, and expands disclosures about fair value measurements
required under the accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value.
Additionally, it establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for fiscal year, including financial statements for an interim period
within the fiscal year. The Company is currently evaluating the impact, if any,
that SFAS No. 157 will have on its financial statements.




Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132R-In September 2006, the FASB, issued SFAS, No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R,” which
requires employers to recognize the underfunded or overfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in the funded status in the year in
which the changes occur through accumulated other comprehensive income.
Additionally, SFAS No. 158 requires employers to measure the funded status of a
plan as of the date of its year-end statement of financial position. The new
reporting requirements and related new footnote disclosure rules of SFAS No. 158
are effective for fiscal years ending after December 15, 2006. We adopted the
provisions of SFAS No. 158 for the year end 2006, and the effect of recognizing
the funded status in accumulated other comprehensive income was not significant.
The new measurement date requirement applies for fiscal years ending after
December 15, 2008.




Reclassifications




Certain
reclassifications have been made to the prior fiscal year amounts disclosed in
the financial statements to conform to the presentation for the fiscal year
ended December 31, 2007. These reclassifications had no effect on the reported
net loss or stockholders’ equity.




-
8 -


Fiscal Year 2007 Compared to
Fiscal Year 2006





Results
from Operations





The
information below represents our historical numbers.  These numbers
are not meaningful going forward due to the sale of all of our business
lines.





Revenues


Revenues
were zero and $1,587,000 for the years ended December 31, 2007 and 2006,
respectively.  Revenues consisted of zero and $1,318,000 of
installation revenues and zero and $269,000 of software support revenues for the
years ended December 31, 2007 and 2006, respectively.  The decrease in
revenue was due to the sale of substantially all the Company’s
assets.




Cost
of Sales


Cost of
sales was zero and $772,000 for the years ended December 31, 2007 and 2006,
respectively.  The decrease in cost of sales was due to the sale of
substantially all the Company’s assets.




Research
and Development


Research
and development expenses were zero and $1,078,000 for the years ended December
31, 2007 and 2006, respectively.  The decrease in research and
development was due to the sale of substantially all the Company’s
assets.




Selling,
General and Administrative Expenses


Selling,
general and administrative expenses were $179,000 and $2,314,000 for the years
ended December 31, 2007 and 2006, respectively.  The decrease in
selling, general and administrative expenses were due to the sale of
substantially all the Company’s assets.





Interest
Income and Other, Net


Interest
income/(loss) and other, net was $14,000 and $(2,000) in the years ended
December 31, 2007 and 2006, respectively.




Gain
on Sale of Assets


Gain on
the sale of assets was $581,000 from the sale of substantially all the Company’s
assets to Clarient, Inc. in 2006.




Liquidity and Capital
Resources





Net cash used in operating activities
was $112,000 and $2,352,000 in the years ended December 31, 2007 and 2006,
respectively.  The decrease was primarily due to the sale of
substantially all the Company’s assets.





Net cash provided by investing
activities was zero and $2,845,000 in the years ended December 31, 2007 and
2006, respectively.  Investing activities for the year ended December
31, 2006 resulted from the sale of substantially all the Company’s
assets.





Net cash used in financing activities
was $655,000 and zero in 2007 and 2006, respectively.  The decrease of
$655,000 in cash used in financing activities was primarily due to the dividend
of $1,005,000 paid to the shareholders in 2007.





On May 5,
2007, W-Net, Inc., a California corporation (“W-Net”), purchased 135,000,000
shares of the Common Stock, par value $0.001 per share (the “Common Shares”) of
the Company for an aggregate purchase price of $350,000.00, or $0.00259 per
share.





On May 7,
2007, the Company paid a dividend of $1,005,000 to shareholders of record as of
April 19, 2007.





The Company suffered recurring losses
from operations and has an accumulated deficit of $52,488,000 at December 31,
2007.  Currently, we are a non-operating public company. The Company
is seeking out suitable candidates for a business combination with a private
company.  In the event the Company uses all of its cash resources,
W-Net, Inc. has indicated the willingness to loan the Company funds at the
prevailing market rate until such business combination is
consummated.


-
9 -





ITEM 7. FINANCIAL
STATEMENTS





See the Company’s audited financial
statements in pages F-1 through F-13.





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





On June
30, 2006, Trestle Holdings, Inc. (“the Company” or “Trestle”) received a
resignation letter from Singer Lewak Greenbaum & Goldstein LLP (“SLGG”)
dated June 29, 2006. SLGG’s letter did not state the reasons for ceasing the
relationship.  In conversations with Barry Hall, our former President
and Chief Financial Officer, SLGG stated that they were resigning due to lack of
resources available within SLGG at this time. Because of these circumstances,
they will be unable to provide timely services to the Company. The reports of
SLGG for the years ended December 31, 2005 and 2004 did not contain an adverse
opinion or disclaimer of opinion and were not modified as to uncertainty, audit
scope or accounting principles.





During
the Company’s two prior fiscal years, the first quarter ended March 31, 2006,
and the period from April 1, 2006 through the date of their resignation, there
were no disagreements with SLGG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to the satisfaction of SLGG, would have caused SLGG to make
reference to the subject matter of the disagreement in connection with their
reports on Trestle’s financial statements (as defined in Rule 304(a)(1)(iv)
(A) of Regulation S-B promulgated under the Securities Act of 1933, as
amended) or a reportable event (as defined in Rule 304(a)(1)(iv)
(B) of Regulation S-B).





The
Company’s Audit Committee engaged the public accounting firm of Goldman Parks
Kurland Mohidin LLP (“GPKM”) which is registered with the Public Company
Accounting Oversight Board (PCOAB) to become Trestle’s principal independent
accountant.  During the two most recent fiscal years and the
subsequent interim period preceding discussions with GPKM , neither Trestle, nor
anyone on its behalf, has consulted with GPKM regarding: (i) the
application of accounting principles to a specific completed or proposed
transaction, or the type of audit opinion that might be rendered on Trestle’s
financial statements, which consultation resulted in the providing of a written
report or oral advice concerning the same to Trestle that was an important
factor considered by Trestle in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either
the subject of a disagreement (as defined in Rule 304(a)(1)(iv) (A) of
Regulation S-B promulgated under the Securities Act of 1933, as amended) or
a reportable event (as defined in Rule 304(a)(1)(iv) (B) of
Regulation S-B).








ITEM
8A. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures.





Based on
their evaluation as of December 31, 2007, our interim President has concluded
that our disclosure controls and procedures (as defined in Rules 13a–15(e) and
15d–15(e) of the Securities Exchange Act of 1934) were effective.





Management’s
Annual Report on Internal Control over Financial Reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States.





Attestation
Report of the Registered Public Accounting Firm.





This
annual report does not include an attestation report by our registered public
accounting firm regarding internal control over financial reporting pursuant to
the temporary rules of the Securities and Exchange Commission, or SEC, that
permit us to provide only our management report in this annual
report.





-
10 -


Changes
in Internal Control over Financial Reporting.





There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.





Limitations
on the Effectiveness of Controls.





Our
disclosure controls and procedures provide our interim President reasonable
assurances that our disclosure controls and procedures will achieve their
objectives. However, our interim President does not expect that our disclosure
controls and procedures or our internal control over financial reporting can or
will prevent all human error. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, the design of a control
system must reflect the fact that there are internal resource constraints, and
the benefit of controls must be weighed relative to their corresponding costs.
Because of the limitations in all control systems, no evaluation of controls can
provide complete assurance that all control issues and instances of error, if
any, within our company are detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur due to human error or mistake. Additionally, controls, no matter how
well designed, could be circumvented by the individual acts of specific persons
within the organization. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
objectives under all potential future conditions.





We are a
non-accelerated filer and are 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 we are
working to comply with these requirements, we have only one consultant. Our lack
of employees make compliance with Section 404 - especially with segregation of
duty control requirements - very difficult and cost ineffective, if not
impossible.  While the SEC has indicated it expects to issue
supplementary regulations easing the burden of Section 404 requirements for
small entities like us, such regulations have not yet been issued.





ITEM
8B.   OTHER INFORMATION.





None


PART
III





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





Directors





The
Company’s directors at December 31, 2007 were:




Name of Nominee
            Age
            Position(s) with TrestleGary
      Freeman
            40
            DirectorSteven
      Walin
            51
            DirectorDavid
      Weiner
            50
            Chairman
      of the Board





GARY
FREEMAN was elected Co-President and Chief Financial Officer of the Company in
January 2003, and resigned the position of Co-President in September 2003 and
Chief Financial Officer in July 2004. Mr. Freeman is currently a Partner in
Bandari, Beach, Lim, & Cleland’s Audit and Accounting services division. Mr.
Freeman also serves as a director of GVI Security Solutions, Inc., a position on
which he has served since October 2006, and Trist Holdings, Inc., a position on
which he has served since July 2007. In conjunction with various consulting
engagements, Mr. Freeman has assumed interim senior level management roles at
numerous public and private companies during his career. Mr. Freeman was Vice
President and director of Kellogg & Andelson, a Southern California based
public accounting firm. In 2000, Mr. Freeman co-founded Catalyst Business
Systems, a consulting firm, which merged with Kellogg & Andelson in 2002.
From 1990 to 2000, Mr. Freeman worked at BDO Seidman, LLP in various capacities,
including as a partner from 1998 to 2000.







-
11 -


STEVEN
WALIN is the Chief Executive Officer and a Director of GVI Security Solutions,
Inc., a position in which he has served since March 2006. Mr. Walin has over 20
years of experience in the security industry. Most recently, from April 2003
until his appointment as Chief Executive Officer of GVI Security Solutions,
Inc., Mr. Walin served as the President of GE Security Enterprise Solutions, a
division of General Electric Company that provides security solutions, including
video monitoring, intrusion and access control systems. Prior to his employment
with GE, from July 2001, Mr. Walin served as the Senior Vice President - North
America Security for the Security Systems Division of Siemens Building
Technologies. Prior to that, Mr. Walin had been the President and Chief
Operating Officer of Securities Technology Group, Inc. until it was acquired by
Siemens in July 2001.




DAVID
WEINER is the President of W-Net Inc., an investment and consulting firm he
founded in 1998. Mr. Weiner is also a director of GVI Security Solutions, Inc.,
a position in which he has served since October 4, 2006. From December 2002 to
April 2003, Mr. Weiner was Co-President of the Company. In 1993, Mr. Weiner
joined K-tel, a music retailer, as Vice President of Corporate Development. He
advanced to the position of President in 1996, which he held until he left to
form W-Net in 1998.




Executives




The
Company’s executive officer at December 31, 2007 was:




Name of Nominee
            Age
            Position(s) with TrestleEric
      Stoppenhagen
            34
            Interim
      President and Secretary




Certain
information about Mr. Stoppenhagen is set forth below.




ERIC
STOPPENHAGEN was appointed President and Secretary in September 2006. From June
2003 to September 2006, Mr. Stoppenhagen served as Vice President of Finance for
Trestle Acquisition Corp.  Mr. Stoppenhagen has served in an executive
capacity for several other public and private companies; including President of
Trist Holdings, Inc., and Chief Financial Officer of Jardinier Corporation.
 He holds a Juris Doctorate and Masters of Business Administration both
from George Washington University.  Additionally, he holds a
Bachelor of Science in Finance and a Bachelor of Science in Accounting both from
Indiana University. Mr. Stoppenhagen is a certified public
accountant.




Audit Committee and Audit
Committee Financial Expert





The Audit
Committee is currently comprised of two members: Mr. Freeman (Chairman) and Mr.
Walin.  Currently, Mr. Freeman and Mr. Walin are both independent as
defined by the listing standard of NASDAQ as now in effect.  The Board
has identified Mr. Freeman as a financial expert within the meaning of
applicable regulatory standards.





The Audit
Committee pre-approves the performance of audit and non-audit services by the
Company’s accountants and reviews the Company’s internal control systems,
financial reporting procedures, the general scope of the Company’s annual audit,
the fees charged by the independent accountants, and the fairness of any
proposed transaction between any officer, director or other affiliate of the
Company and the Company. With respect to the foregoing, the Audit Committee
makes recommendations to the full Board and performs such further functions as
may be required or delegated to the Committee by the Board of
Directors.  The Board of Directors has adopted a written charter for
the Audit Committee. A copy of the Company’s Audit Committee Charter may be
obtained free of charge by contacting the Company at the address or telephone
number listed on the cover page hereof.




-
12 -


Director
Independence




Our board
of directors currently consists of three members: Gary Freeman, Steven Walin and
David Weiner.




We do not
have a separately designated compensation or nominating committee of our board
of directors and the functions customarily delegated to these committees are
performed by our full board of directors.  We are not a “listed
company” under SEC rules and are therefore not required to have separate
committees comprised of independent directors.  We have, however,
determined that Gary Freeman and Steven Walin are “independent” as that term is
defined in Section 4200 of the Marketplace Rules as required by the NASDAQ Stock
Market.




Section 16(a) Beneficial
Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires that our executive
officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, file reports of ownership and changes
in ownership with the SEC.  Executive officers, directors and
greater-than-ten percent stockholders are required by SEC regulations to furnish
us with all Section 16(a) forms they file.  Based solely on our review
of the copies of the forms received by us and written representations from
certain reporting persons that they have complied with the relevant filing
requirements, we believe that, during the year ended December 31, 2007, all of
our executive officers, directors and greater-than-ten percent stockholders
complied with all Section 16(a) filing requirements.





Code of
Ethics





The
Company has adopted a Code of Ethics that applies to its principal executive
officers, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of the Company’s
Code of Ethics may be obtained free of charge by contacting the Company at the
address or telephone number listed on the cover page hereof.








ITEM
10.    EXECUTIVE COMPENSATION





The
following table and related footnotes show the compensation paid during the
fiscal years ended December 31, 2007 and 2006 and to the Company's executive
officer.





SUMMARY
COMPENSATION TABLE





Annual Compensation
            Long Term CompensationName and Principal
      Position
            Year
            Salary
            Bonus
            Other
      Annual
              Compensation
            Awards
      of
              Stock,
      Options
              and WarrantsEric
      Stoppenhagen
              Interim
      President
            2007
              2006
            N/A
              N/A
            N/A
              N/A
            $61,000(1)
              $40,500(1)
            N/A
              N/A







(1)
            For
      2007, this represents amounts paid to Venor, Inc. for Eric Stoppenhagen to
      provide financial consulting services and serve as Interim President and
      Secretary.  For 2006, the Company entered into an agreement with
      Eric Stoppenhagen to provide consulting services and serve as Interim
      President and Secretary.  Mr. Stoppenhagen was paid $15,000 for
      the first month, $12,500 for the second month and $10,000 for every month
      thereafter.  Additionally, Mr. Stoppenhagen receives a $500
      allowance per month for office
expenses.





-
13 -


OPTION
AND WARRANT GRANTS IN LAST FISCAL YEAR





The following table and related
footnotes set forth the number of securities underlying options and warrants
granted in the last fiscal year (2007) and held by the Company's Executive
Officers.





Name
            Number
      of Securities
              Underlying
      Options
              and Warrants Granted
            Percent
      of Total
              Options
      and Warrants
              Granted in Fiscal Year
            Exercise
      or Base
              Price($/Share)Eric
      Stoppenhagen
            0
            0
            0





AGGREGATED
OPTION AND WARRANT EXERCISES IN THE LAST FISCAL YEAR


AND
FISCAL YEAR-END OPTION AND WARRANT VALUES





The following table and related
footnotes set forth option exercises in 2007 and year-end option values for the
Company's Executive Officers.





Name
            Shares
      Acquired
              on Exercise (#)
            Value Realized ($)
            Number
      of
              Securities
      Underlying
              Unexercised
      Options
              and
      Warrants
              at 12/31/07
            Value
      of Unexercised
              In-the-Money
      Options
              and
      Warrants
              at 12/31/07Eric
      Stoppenhagen
            0
            N/A
            0
            0





EMPLOYMENT
AGREEMENTS




On
September 25, 2006, we entered into an agreement with Mr. Stoppenhagen to
provide consulting services and serve as Interim President and Secretary for six
months.  Mr. Stoppenhagen was paid $15,000 for the first month,
$12,500 for the second month and $10,000 for every month
thereafter.  Additionally, Mr. Stoppenhagen received a $1,000
allowance per month for office expenses.  For the year ended December
31, 2006, Mr. Stoppenhagen received $40,500 under this agreement.





On June 18, 2007, we entered into an
agreement with Venor, Inc. to provide consulting services for six
months.  The agreement was dated to be effective as of May 25,
2007.  Mr. Stoppenhagen, a principle of Venor, Inc., will continue to
serve as Interim President and Secretary.  Venor, Inc. will be paid
$3,000 per month for consulting services and $500 per month for office
space.  For the year ended December 31, 2007, Mr. Stoppenhagen
received $61,450.





Compensation
of Directors




Directors
of the Company are entitled to receive $7,500 in cash each year for serving on
the Board paid at the beginning of each quarter.




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





The following table sets forth certain
information regarding beneficial ownership of our common stock as of March 5, 2008 by (i) each
person who "beneficially" owns more than
5% of all outstanding shares of our common stock, (ii) each director and the
executive officer identified above, and (iii) all directors and executive
officers as a group.





Name
      and Address of
              Beneficial
      Owner
            Amount
      of Common
              Stock
      and Nature of
              Beneficial Owner
            Percent
      of Class of
              Common Stock(1)W-Net
      (2)
            135,442,455
            95%Mr.
      Stoppenhagen (3)
            50,000
            *All
      Officers and Directors as a group(4) (4 persons)
            135,492,455
            95%





-
14 -




*           Represents
less than 1%.





(1)
            The
      percent of Common Stock owned is calculated using the sum of (A) the
      number of shares of Common Stock owned, and (B) the number of warrants and
      options of the beneficial owner that are exercisable within 60 days, as
      the numerator, and the sum of (Y) the total number of shares of Common
      Stock outstanding (8,257,214), and (Z) the number of warrants and options
      of the beneficial owner that are exercisable within 60 days, as the
      denominator.





(2)
            The
      address of W-Net is c/o Trestle Holdings, Inc., P.O. Box 4198, Newport
      Beach, CA 92661-4198. Percent of class of Common Stock includes
      exercisable options/warrants to purchase zero shares of Common Stock
      within 60 days. W-Net is beneficially owed by David Weiner the Company’s
      Chairman.





(3)
            The
      address of Mr. Stoppenhagen is c/o Trestle Holdings, Inc., P.O. Box 4198,
      Newport Beach, CA 92661-4198. Percent of class of Common Stock
      includes exercisable options/warrants to purchase zero shares of Common
      Stock within 60 days.





(4)
            Includes
      the beneficial ownership of Messrs. Weiner and Stoppenhagen. The
      beneficial ownership calculation includes the total number of
      options/warrants of such persons exercisable within 60 days held by such
      persons to purchase zero shares of common stock. Assuming that none of
      such persons exercises within 60 days any of such his respective options
      or warrants, the beneficial ownership of the group is approximately 95%.
      Messrs. Freeman and Walin do not have any beneficial ownership in the
      Company





Equity
Compensation Plan Information





The following table sets forth certain
information regarding the Company’s equity compensation plans as of December 31,
2007.


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
            10,000
            $
      67.50
            1,815,000Equity
      compensation plans not approved by security holders
            2,117,000
            $
      1.66
            0Total
            2,127,000
            $
      1.97
            1,815,000





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.




The 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 1,815,000 shares were available for future grant at December 31,
2007.







-
15 -


Changes in Control
Arrangements





There
existed no change in control arrangements at December 31, 2007.





ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Other
than as under the caption Employment Agreements above, 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.





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





Exhibit
      Number
            Description of Exhibit*3.1
            Third
      Amended and Restated Articles of Incorporation of the Company dated
      November 2, 2006 (incorporated herein by reference to Exhibit 3.1 of
      Company's Quarterly Report on Form 10-QSB for the quarter ended
      September 30, 2006)3.2
            Amendment
      to the Third Amended and Restated Articles of Incorporation of the Company
      dated August 17, 2007 (incorporated herein by reference to Exhibit 3.1 of
      Company's Form 8-K dated August 17, 2007)*3.3
            By-laws
      of the Company (incorporated herein by reference to Appendix C of
      Company's definitive Proxy Statement dated May 30,
    2002)*10.1
            Asset
      purchase agreement between the Company and Clarient, Inc. (incorporated by
      reference to Exhibit 10.1 of the Company's Form 8-K dated June
      19, 2006)*10.2
            Consulting
      agreement between the Company and Eric Stoppenhagen (incorporated by
      reference to Exhibit 99.1 of the Company's Form 8-K dated
      September 25, 2006)*10.3
            Share
      purchase agreement between the Company and W-Net, Inc. (incorporated by
      reference to Exhibit 10.1 of the Company's Form 8-K dated April
      20, 2007)*10.4
            Consulting
      agreement between the Company and Venor, Inc. (incorporated by reference
      to Exhibit 10.1 of the Company's Form 8-K dated June 18,
      2007)31
            Certification
      of President 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





Independent
Public Accountants





Audit
Fees





The
aggregate fees billed by GPKM for the audit of the
Company’s  financial statements in the years ended December 31, 2007
and 2006, the reviews of the quarterly reports on Form 10-QSB for the same
fiscal years and statutory and regulatory filings were $16,000 for 2007 and
$33,000  for 2006.





Audit-Related
Fees





There were no fees billed by GPKM for
audit-related services for the years ended December 31, 2007 and
2006.  The aggregate fees billed by Singer, Lewak, Greenbaum &
Goldstein, LLP for the audit related services of the
Company’s  financial statements for the years ended December 31, 2007
and 2006 were $6,000 and zero, respectively.





-
16 -


Tax
Fees





GPKM billed the Company $1,200 and zero
for tax related services for the years ended December 31, 2007 and 2006,
respectively.





All
Other Fees





There were no fees billed by GPKM or
Singer, Lewak, Greenbaum & Goldstein, LLP for other services not described
above for the years ended December 31, 2007 and 2006.





Our Audit Committee Charter provides
that the Audit Committee shall pre-approve all services to be provided to the
company by GPKM our current auditors.





-
17 -


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 19, 2008
            
            
            By:
            /s/  
      ERIC STOPPENHAGEN
              -----------------------------------------------------------
              Name:
      Eric Stoppenhagen
              Title:
      Interim President
              (Principal
      Executive Officer, Principal Financial and Accounting
Officer)


POWER OF
ATTORNEY




The
undersigned directors and officer of Trestle Holding, Inc. do hereby constitute
and appoint Eric Stoppenhagen with full power of substitution and
resubstitution, as their true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officer and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent, may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-KSB, including specifically but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto, and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.







SIGNATURE
            
            TITLE
            
            DATE/s/  
      ERIC STOPPENHAGEN
              ------------------------------------
              Eric
      Stoppenhagen
            
            Interim
      President
              (Principal Executive Officer,Principal Financial and Accounting Officer)
            
            March
      19, 2008/s/  
      DAVID WEINER
              ------------------------------------
              David
      Weiner
            
            Chairman
            
            March
      19, 2008/s/
      GARY FREEMAN
              -------------------------------------
              Gary
      Freeman
            
            Director
            
            March
      19, 2008/s/  
      STEVEN WALIN
              ------------------------------------
              Steven
      Walin
            
            Director
            
            March
      19, 2008





-
18 -


ITEM
7.    FINANCIAL STATEMENTS





TRESTLE
HOLDINGS, INC.





TABLE OF CONTENTS








PAGEREPORTS
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-2FINANCIAL
      STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND
      2006Balance
      Sheets
            F-3Statements
      of Operations
            F-4Statements
      of Stockholders' Equity
            F-5Statements
      of Cash Flows
            F-6Notes
      to  Financial Statements
            F-6
      to F-13





























REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors


Trestle
Holdings, Inc


Newport
Beach, California





We have
audited the consolidated balance sheets of Trestle Holdings, Inc. (the
“Company”) as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the year 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 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 provide a reasonable basis
for our opinion.





In our
opinion, the  financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and 2006, and the results of their operations and their cash flows for
the year 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 incurred significant losses
from operations and has an accumulated deficit of $52,488,000 as of December 31,
2007. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. These consolidated financial statements do not
include any adjustments that might result from such uncertainty.





/s/
Goldman Parks Kurland Mohidin





Encino,
California


March
      9, 2008





F-2





TRESTLE
HOLDINGS, INC.





CONSOLIDATED BALANCE
SHEETS







December 31,2007
              
              
              2006ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              31,000
              
              
              $
              798,000Prepaid
      expenses and other assets
              
              
              7,000
              
              
              
              118,000TOTAL
      CURRENT ASSETS
              
              
              38,000
              
              
              
              916,000TOTAL
      ASSETS
              
              $
              38,000
              
              
              $
              916,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              1,000
              
              
              $
              22,000Accrued
      expenses
              
              
              —
              
              
              
              37,000TOTAL
      CURRENT LIABILITIES
              
              
              1,000
              
              
              
              59,000STOCKHOLDERS'
      EQUITY:Preferred
      stock, $10 par value, 5,000,000 shares authorized, zero and zero shares
      issued and outstanding at December 31, 2007 and 2006,
      respectively
              
              
              —
              
              
              
              —Series B
      Convertible Preferred Stock, $1,000 stated value, 250,000 shares
      authorized, zero and zero shares issued and outstanding at December 31,
      2007 and 2006, respectively, liquidation preference of zero and zero at
      December 31, 2007 and 2006, respectively
              
              
              —
              
              
              
              —Common
      stock, $.001 par value, 1,500,000,000 shares authorized, 143,257,214 and
      8,257,000 issued and outstanding at December 31, 2007 and 2006,
      respectively
              
              
              143,000
              
              
              
              8,000Additional
      paid in capital
              
              
              52,382,000
              
              
              
              53,172,000Deferred
      stock compensation
              
              
              —
              
              
              
              —Accumulated
      deficit
              
              
              (52,488,000
              )
              
              
              (52,323,000Total
      stockholders' equity
              
              
              37,000
              
              
              
              857,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              38,000
              
              
              $
              916,000


See
accompanying notes to consolidated financial statements.


F-3


TRESTLE HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS








Years
      Ended December 31,2007
            
            
            2006REVENUESProduct
            
            $
            —
            
            
            $
            1,318,000Software
      support
            
            
            —
            
            
            
            269,000Total
      revenues
            
            
            —
            
            
            
            1,587,000COST
      OF SALES
            
            
            —
            
            
            
            772,000GROSS
      PROFIT
            
            
            —
            
            
            
            815,000OPERATING
      EXPENSESResearch
      and development
            
            
            —
            
            
            
            1,078,000Selling,
      general and administrative expenses
            
            
            179,000
            
            
            
            2,314,000Total
      operating expenses
            
            
            179,000
            
            
            
            3,392,000LOSS
      FROM OPERATIONS
            
            
            (179,000
            )
            
            
            (2,577,000
            )Interest
      income and other, net
            
            
            14,000
            
            
            
            (2,000Gain
      on sale of assets
            
            
            —
            
            
            
            581,000NET
      LOSS BEFORE INCOME TAXES
            
            
            (165,000
            )
            
            
            (1,998,000
            )Provision
      for income taxes
            
            
            —
            
            
            
            —NET
      LOSS APPLICABLE TO COMMON STOCKHOLDERS
            
            $
            (165,000
            )
            
            $
            (1,998,000
            )NET
      LOSS PER SHARE OF COMMON STOCK—Basic and diluted
            
            $
            (0.002
            )
            
            $
            (0.24
            )WEIGHTED
      AVERAGE SHARES OUTSTANDING—Basic and diluted
            
            
            96,284,000
            
            
            
            8,257,214




See
accompanying notes to consolidated financial statements.


F-4


TRESTLE HOLDINGS, INC. AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY


YEARS
ENDED DECEMBER 31, 2007 AND 2006











Series
      B Preferred
            
            Common
      StockShares
            
            Amount
            
            Shares
            Amount
            Additional
              Paid
      in
              Capital
            Deferred
      Stock Comp
            
            Accumulated
      Deficit
            
            TotalBALANCE,
      DECEMBER 31, 2005
            0
            
            $
            0
            
            8,257,000
            $
            8,000
            $
            52,915,000
            $
            (3,000
            )
            $
            (50,325,000
            )
            $
            2,595,000Issuance
      of warrants and options
            
            
            
            
            
            
            
            
            
            257,000
            
            3,000
            
            
            
            
            
            260,000Cashless
      exercise of warrantsOffering
      costsIssuance
      of common stock for cashNet
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,998,000
            )
            
            (1,998,000
            )BALANCE,
      DECEMBER 31, 2006
            0
            
            $
            0
            
            8,257,000
            $
            8,000
            $
            53,172,000
            $
            0
            
            $
            (52,323,000
            )
            $
            857,000Issuance
      of common stock for cash
            
            
            
            
            
            135,000,000
            
            135,000
            
            215,000
            
            
            
            
            
            
            
            350,000Dividends
      paid on company common stock
            
            
            
            
            
            
            
            
            
            (1,005,000)
            
            
            
            
            
            
            
            (1,005,000)Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (165,000)
            
            
            (165,000)BALANCE,
      DECEMBER 31, 2007
            0
            
            $
            0
            
            143,257,000
            $
            143,000
            $
            52,382,000
            $
            0
            
            $
            (52,488,000)
            
            $
            37,000




See
accompanying notes to consolidated financial statements.








F-5


TRESTLE
HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
      Ended December 31,2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (165,000
            )
            
            $
            (1,998,000
            )Adjustments
      to reconcile net loss to net cash provided by/(used in) operating
      activities:Depreciation
      and amortization
            
            
            —
            
            
            
            451,000Provision
      for doubtful accounts
            
            
            —
            
            
            
            (38,000
            )Stock
      based compensation
            
            
            —
            
            
            
            260,000Gain
      on sale of assets
            
            
            —
            
            
            
            (581,000
            )Changes
      in operating assets and liabilities, net of effects from
      acquisition/disposition of business:Accounts
      receivable
            
            
            —
            
            
            
            980,000Inventory
            
            
            —
            
            
            
            258,000Prepaid
      expenses and other assets
            
            
            111,000
            
            
            
            (44,000
            )Accounts
      payable and accrued expenses
            
            
            (58,000
            )
            
            
            (1,481,000
            )Deferred
      revenue
            
            
            —
            
            
            
            (159,000
            )Net
      cash used in operating activities
            
            
            (112,000
            )
            
            
            (2,352,000
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from the sale of assets
            
            
            —
            
            
            
            2,845,000Net
      cash provided by investing activities
            
            
            —
            
            
            
            2,845,000CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of note
            
            
            —
            )
            
            
            (625,000
            )Net
      proceeds from issuance of common stock
            
            
            350,000
            
            
            
            —Dividends
      paid on company common stock
            
            
            (1,005,000
            )
            
            
            625,000Net
      cash used in financing activities
            
            
            (655,000
            )
            
            
            —NET
      INCREASE/(DECREASE) IN CASH
            
            
            (767,000
            )
            
            
            493,000CASH,
      Beginning of year
            
            
            798,000
            
            
            
            305,000CASH,
      End of year
            
            $
            31,000
            
            
            $
            798,000





Years
      Ended December 31,2007
            
            2006SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      received/(paid) during the period for:Interest
            
            $
            14,000
            
            
            $
            (4,000
            )Income
      taxes
            
            
            —
            
            
            
            —





NON-CASH FINANCING
ACTIVITY:





None.





See
accompanying notes to consolidated financial statements


F-6


TRESTLE
HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2007 AND 2006





NOTE
1.    SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Current
Operations and Background— The Company is a non-operating public company
and our operating results through September 22, 2006 are not meaningful to our
future results.  The Company is seeking out suitable candidates for a
business combination with a private company.  The Company previously
developed and sold digital tissue imaging and telemedicine applications linking
dispersed users and data primarily in the healthcare and pharmaceutical
markets.





On May 5,
2007, W-Net purchased 135,000,000 shares of the Company’s Common Shares for an
aggregate purchase price of $350,000.00, or $0.00259 per share.





On
September 22, 2006, the Company consummated the sale of substantially all of its
assets to Clarient for $3,000,000, consisting of approximately $2,203,000 in
cash, $643,000 for the cancellation of the loans from Clarient and assumption of
approximately $154,000 of liabilities.





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 $52,488,000 at December 31, 2007.  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 financial statements
reflect the financial position, results of operations and cash flows of the
Company.  All significant intercompany accounts and transactions have
been eliminated on consolidation.  As of December 31, 2006, the
Company had dissolved all of its subsidiaries.





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. 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 extended credit to its customers. Collateral was
generally not required. Credit losses were provided for in the financial
statements based on management’s evaluation of historical and current industry
trends.





Factoring of
Receivable - The Company used a factor for working capital and
credit administration purposes. Under the factoring agreement, the factor
purchased a portion of the trade accounts receivable and assumed all credit risk
with respect to such accounts.





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





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





F-7


Revenue
Recognition — The Company recognized revenues associated with the Trestle
business on product sales after shipment of the product to the customer and
formal acceptance by the customer had been received.  Depending upon
the specific agreement with the customer, such acceptance normally occurred
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 was recognized upon transfer of title which is generally
upon shipment.  Revenue recognized for shipping was recognized when
the shipment arrived at its destination.





Income
Taxes —The Company records income taxes in accordance with the provisions
of Statement of Financial Accounting Standards (“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.





Stock-Based
Compensation— On January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which was issued in
December 2004. SFAS 123(R) revises SFAS No. 123, “Accounting for Stock Based
Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees,” and its related interpretations. SFAS 123(R) requires recognition
of the cost of employee services received in exchange for an award of equity
instruments in the financial statements over the period the employee is required
to perform the services in exchange for the award. SFAS 123(R) also requires
measurement of the cost of employee services received in exchange for an award.
SFAS 123(R) also amends SFAS No. 95, “Statement of Cash Flows,” to require the
excess tax benefits be reported as financing cash inflows, rather than as a
reduction of taxes paid, which is included within operating cash flows. The
Company adopted SFAS 123(R) using the modified prospective method. Accordingly,
prior period amounts have not been restated. Under this application, the Company
recorded the cumulative effect of compensation expense for the unvested portion
of previously granted awards that remain outstanding at the date of adoption and
recorded compensation expense for all awards granted after the date of
adoption.





SFAS 123(R) provides that income tax
effects of share-based payments are recognized in the financial statements for
those awards that will normally result in tax deduction under existing law.
Under current U.S. federal tax law, the Company would receive a compensation
expense deduction related to non-qualified stock options only when those options
are exercised and vested shares are received. Accordingly, the financial
statement recognition of compensation cost for non-qualified stock options
creates a deductible temporary difference which results in a deferred tax asset
and a corresponding deferred tax benefit in the income statement. The Company
does not recognize a tax benefit for compensation expense related to incentive
stock options unless the underlying shares are disposed in a disqualifying
disposition.





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
(“SEC”) 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 and warrants
have been excluded from the computation of basic and diluted earnings per share,
for the years ended December 31, 2007 and 2006 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.





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





F-8


Recently Issued
Accounting Pronouncements—


Business Combinations-In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:





·  Acquisition
costs will be generally expensed as incurred;


·  Noncontrolling
interests (formerly known as “minority interests” – see SFAS 160 discussion
below) will be valued at fair value at the acquisition date;


·  Acquired
contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies;


·  In-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date;


·  Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date; and


·  Changes
in deferred tax asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense.





SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.





Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51-In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption of
SFAS 160 on our consolidated financial position, results of operations and cash
flows.




Fair Value Measurements-In
September 2006, FASB issued SFAS No. 157,“Fair Value
Measurements,”whichestablishes a framework
for measuring fair value, and expands disclosures about fair value measurements
required under the accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value.
Additionally, it establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for fiscal year, including financial statements for an interim period
within the fiscal year. The Company is currently evaluating the impact, if any,
that SFAS No. 157 will have on its  financial statements.




F-9




Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132R-In September 2006, the FASB, issued SFAS, No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R,” which
requires employers to recognize the underfunded or overfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in the funded status in the year in
which the changes occur through accumulated other comprehensive income.
Additionally, SFAS No. 158 requires employers to measure the funded status of a
plan as of the date of its year-end statement of financial position. The new
reporting requirements and related new footnote disclosure rules of SFAS No. 158
are effective for fiscal years ending after December 15, 2006. We adopted the
provisions of SFAS No. 158 for the year end 2006, and the effect of recognizing
the funded status in accumulated other comprehensive income was not significant.
The new measurement date requirement applies for fiscal years ending after
December 15, 2008.




NOTE
2 – SALE OF ASSETS





On September 22, 2006, the Company
consummated the sale of substantially all of its assets to Clarient, Inc in
exchange for $3,000,000, consisting of approximately $2,203,000 in cash,
$643,000 for payment of loans and related interest  on the loans from
Clarient and assumption of approximately $154,000 of liabilities.  The
Company recorded a gain of $581,000 from this sale.





NOTE
3 - WARRANTS





During
the year ended December 31, 2007, the Company did not issue any warrants and
2,063,000 warrants expired.  We have 2,117,000 warrants issued and
outstanding.





NOTE
4 - 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 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 1,805,000 shares were available for future grant at December 31,
2007.





The
Company has elected to adopt the detailed method provided in SFAS No. 123(R) for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the income tax effects of employee stock-based compensation awards
that are outstanding upon the adoption of SFAS No. 123(R).





The fair
value of each stock option granted is estimated on the date of the grant using
the Black-Scholes option pricing model.  The Black-Scholes option
pricing model has assumptions for risk free interest rates, dividends, stock
volatility and expected life of an option grant.  The risk free
interest rate is based upon market yields for United States Treasury debt
securities at a 7-year constant maturity.  Dividend rates are based on
the Company’s dividend history.  The stock volatility factor is based
on the last 60 days of market prices prior to the grant date.  The
expected life of an option grant is based on management’s
estimate.  The fair value of each option grant, as calculated by the
Black-Scholes method, is recognized as compensation expense on a straight-line
basis over the vesting period of each stock option award.





F-10


The
following assumptions were used to determine the fair value of stock options
granted using the Black-Scholes option-pricing model in 2006:




2006Dividend
      yield
            
            
            0.0
            %Volatility
            
            
            112
            %Average
      expected option life
            
            6.67
      yearsRisk-free
      interest rate
            
            
            4.30
            %





During the year ended December 31,
2007, the Company granted no options.





During
the year ended December 31, 2006, the Company granted 105,000 options to
non-management board members.  The weighted average exercise price of
the grants during the year was $0.25. The options vested quarterly over the 2006
fiscal year with an expiration date of 10 years.  The Company has assumed
that all stock options issued during the year would vest.  To account
for such grants, we recorded deferred stock compensation of $23,000, and
recognized compensation expense of $17,000 related to this issuance and a total
compensation expense of $257,000 which includes the issuance of past employee
stock options vesting in this year.





The
following table summarizes activity in the Company's stock option plans during
the years ended December 31, 2007 and 2006:





Number
      of
              Shares
            
            
            Weighted
      Average Price Per ShareBalance
      at December 31, 2005
            
            
            1,246,000
            
            
            $
            2.62Granted
            
            
            105,000
            
            
            
            0.25Canceled
            
            
            1,341,000
            
            
            
            2.43Balance
      at December 31, 2006
            
            
            10,000
            
            
            $
            67.50Balance
      at December 31, 2007
            
            
            10,000
            
            
            $
            67.50





In 2006, as a result of the sale of all
assets of the Company, all employees were terminated by the
Company.  Options from these employees were cancelled as per the stock
option plan.  Additionally, the directors of the Company agreed to the
cancellation of all of their granted options.





The
following summarizes pricing and term information for options issued to
employees and directors which are outstanding as of September 30,
2007:





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Prices
            
            Number
      Outstanding at September 30, 2007
            
            Weighted
      Average Remaining Contractual
              Life
            
            Weighted
      Average Exercise Price
            
            Number
      Exercisable at December 31, 2007
            
            Weighted
      Average Exercise Price$67.50
            
            
            10,000
            
            
            1.75
            
            $
            67.50
            
            
            10,000
            
            $
            67.50





Non-Plan Stock
Options— During the year ended December 31, 2006, Mr. Vecchione and Mr.
Hall agreed to cancel their 400,000 non-plan stock options with a strike price
of $2.50.





F-11


NOTE
5 - EARNINGS PER SHARE





The following table sets forth common
stock equivalents (potential common stock) for the years ended December 31, 2007
and 2006 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 31,2007
            
            
            2006Weighted
      average common stock equivalents:Plan
      Stock Options
            
            
            10,000
            
            
            
            10,000Non-Plan
      Stock Options
            
            
            —
            
            
            
            —Warrants
            
            
            2,117,000
            
            
            
            4,180,000





NOTE 6 - INCOME TAX





The income tax (benefit) expense for
the years ended December 31, 2007 and 2006 consist of the
following:





Years
      Ended December 31,2007
            
            
            2006Current
            
            $
            —
            
            
            $
            —Change
      in deferred tax asset
            
            
            115,000
            
            
            
            (463,000
            )Change
      in valuation allowance
            
            
            (115,000
            )
            
            
            463,000Provision
      for income taxes
            
            $
            —
            
            
            $
            —





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,
2007 and 2006 differ as follows:





Years
      Ended December 31,2007
            
            2006Provision
      computed at the statutory rate
            
            $
            (115,000
            )
            
            $
            463,000Change
      in valuation allowance
            
            
            115,000
            
            
            
            (463,000
            )Income
      tax provision (benefit)
            
            $
            —
            
            
            $
            —








The
following are the components of the Company's deferred tax assets and
(liabilities) at December 31, 2007 and 2006:





Years
      Ended December 31,2007
            
            
            2006Federal
      net operating loss carryforward
            
            $
            11,043,000
            
            
            $
            10,987,000State
      net operating loss carryforward
            
            
            13,000
            
            
            
            184,000Total
      deferred tax asset
            
            
            11,056,000
            
            
            
            11,171,000Deferred
      state taxes
            
            
            —
            
            
            
            —Total
      deferred tax liability
            
            
            —
            
            
            
            —Net
      deferred tax asset
            
            
            11,056,000
            
            
            
            11,171,000Valuation
      allowance
            
            
            (11,056,000
            )
            
            
            (11,171,000
            )Net
      deferred tax asset/(liability)
            
            $
            —
            
            
            $
            —





F-12


At December 31, 2007, the Company has a
net operating loss carryforward of approximately $32,478,000 and $163,000 for
federal and state income tax purposes, respectively. These net operating loss
carryforwards begin to expire in 2018 and 2008, 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.  Because of the change in ownership, the
use loss carryforwards are limited per the IRS tax code.





NOTE
7 - COMMITMENTS AND CONTINGENCIES





Leases—The Company currently is not party to any leases





Rent expense charged to operations for
the years ended December 31, 2007 and 2006 was $8,000 and $248,000.





Litigation— The Company is currently not party to any legal
proceedings.





Consulting
Agreements— On September 25, 2006, the Company entered into an agreement
with Mr. Stoppenhagen to provide consulting services and serve as Interim
President and Secretary for six months.  Mr. Stoppenhagen was paid
$15,000 for the first month, $12,500 for the second month and $10,000 for every
month thereafter.  Additionally, Mr. Stoppenhagen received a $1,000
allowance per month for office expenses.  For the year ended December
31, 2006, Mr. Stoppenhagen received $40,500 under this agreement. On June 18,
2007, the Company entered into an agreement with Venor, Inc. to provide
consulting services for six months.  The agreement was dated to be
effective as of May 25, 2007.  Mr. Stoppenhagen, a principle of Venor,
Inc., will continue to serve as Interim President and
Secretary.  Venor, Inc. will be paid $3,000 per month.  For
the year ended December 31, 2007, Mr. Stoppenhagen received
$61,450.





NOTE
8 - 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, 2007. 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 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, 2007, the
Company’s deposits did not exceed insured amounts.  The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.





NOTE
9 - RELATED PARTIES





Other
than as listed below, we have not been a party to any significant transactions,
proposed transactions, or series of transactions, 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.





On September 25, 2006, the Company
entered into an agreement with Mr. Stoppenhagen to provide consulting services
and serve as Interim President and Secretary for six months.  Mr.
Stoppenhagen was paid $15,000 for the first month, $12,500 for the second month
and $10,000 for every month thereafter.  Additionally, Mr.
Stoppenhagen received a $1,000 allowance per month for office
expenses.  For the year ended December 31, 2006, Mr. Stoppenhagen
received $40,500 under this agreement. On June 18, 2007, the Company entered
into an agreement with Venor, Inc. to provide consulting services for six
months.  The agreement was dated to be effective as of May 25,
2007.  Mr. Stoppenhagen, a principle of Venor, Inc., will continue to
serve as Interim President and Secretary.  Venor, Inc. will be paid
$3,000 per month for consulting services and $500 per month for office
space.  For the year ended December 31, 2007, Mr. Stoppenhagen
received $61,450.


F-13