**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, 2006**





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: $1,587,000





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the stock was sold,
      or the average bid and asked prices of such stock, as of March 5, 2007, is:
      $1,156,000





State
      the
      number of shares outstanding of each of issuer's classes of common equity,
      as of
      March 5, 2007: 8,257,214





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**


On
      September 22, 2006,Trestle
      Holdings, Inc. ("Trestle Holdings" or "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 the cancellation of the loans from Clarient and assumption of
      approximately $154,000 of liabilities.





As
      a
      result of such sale, we are 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.










***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, 2006, we had
      an
      accumulated deficit of approximately $52,323,000, of which
      approximately $37,635,000 was incurred prior to our acquisition of our tissue
      imaging and telemedicine business lines that we sold to Clarient as a
      non-operating company and approximately $52,193,000 was incurred prior to such
      sale to Clarient. We
      anticipate that our existing cash and cash equivalents will be sufficient to
      fund our business needs. 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.





***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.




***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





*-
            3
            -*







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, 2005.





***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.***





*-
            4
            -*





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





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





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





***We
      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 150,000,000 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 therefore. Any future issuances
      of
      common stock or preferred stock would further dilute the percentage ownership
      of
      our Company held by the public stockholders.




**ITEM
      2.    PROPERTIES**





We
      are
      currently not obligated under any leases. We currently pay $1,000 per month
      on a
      month to month basis for office space.




**ITEM
      3.    LEGAL PROCEEDINGS**





*-
            5
            -*





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





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





**BLANK**


**PART
      II**





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





**Market
      Prices**


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




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




**Quarterly
                period**
            **High**
            **Low**Fiscal
                year ended December 31, 2005:First
                Quarter
            $4.80
            $2.01Second
                Quarter
            $3.40
            $1.20Third
                Quarter
            $1.25
            $0.72Fourth
                Quarter
            $0.72
            $0.14Fiscal
                year ended December 31, 2006:First
                Quarter
            $0.29
            $0.17Second
                Quarter
            $0.23
            $0.13Third
                Quarter
            $0.16
            $0.09Fourth
                Quarter
            $0.13
            $0.11





**Holders**


As
      of
      March 8, 2007, there were approximately 750 holders of record of the Company's
      Common Stock.





**Dividends**


We
      have
      not paid any cash dividends on our common stock since our inception and do
      not
      anticipate paying any cash dividends on our common stock in the foreseeable
      future. 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.




**Equity
      Compensation Plan Information**


The
      following table sets forth certain information regarding the Company’s equity
      compensation plans as of December 31, 2006.




*-
          6
          -*


**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
            4,180,000
            $
                3.69
            0**Total**
            4,190,000
            $
                3.84
            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
      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
      1,815,000 shares were available for future grant at December 31, 2006.




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





**Overview**





On
      September 22, 2006, Trestle
      Holdings, Inc. ("Trestle Holdings" or "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 the cancellation of the loans from Clarient and assumption of
      approximately $154,000 of liabilities.





As
      a
      result of such sale, we are 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.




**Critical
      Accounting Policies and Estimates**





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





The
      Company recognizes revenue on product sales after shipment of the product to
      the
      customer and formal acceptance by the customer has been received. Depending
      upon
      the specific agreement with the customer, such acceptance normally occurs
      subsequent to one or more of the following events: receipt of the product by
      the
      customer, installation of the product by the Company and training of customer
      personnel by the Company. For
      sales
      to qualified distributors revenues





*-
            7
            -*





are
      recognized upon transfer of title which is generally upon shipment. Revenue
      collected in advance of product shipment or formal acceptance by the customer
      is
      reflected as deferred revenue. Revenue attributable to software maintenance
      and
      support is deferred and recognized ratably over the term of the maintenance
      agreement, generally one year.





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





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





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





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





**Recently
      Issued Accounting Pronouncements**





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





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





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





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid
      Financial Instruments.” SFAS 155 amends SFAS 133 to narrow the scope exception
      for interest-only and principal-only strips on debt instruments to include
      only
      such strips representing rights to





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            8
            -*





receive
      a
      specified portion of the contractual interest or principal cash flows. SFAS
      155
      also amends SFAS 140 to allow qualifying special-purpose entities to hold a
      passive derivative financial instrument pertaining to beneficial interests
      that
      itself is a derivative financial instrument. Generally, FASB Statement of
      Financial Accounting Standards SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” requires that a derivative embedded in a
      host contract that does not meet the definition of a derivative be accounted
      for
      separately (referred to as bifurcation) under certain conditions. That general
      rule notwithstanding, SFAS No. 133 (prior to amendments made to it by SFAS
      No.
      155) provides a broad exception for interest-only and principal-only strips
      initially resulting from the separation of rights to receive contractual cash
      flows of a financial instrument that itself does not contain an embedded
      derivative that would have been accounted for separately. SFAS 155 amends SFAS
      133 to restrict the scope exception to strips that represent rights to receive
      only a portion of the contractual interest cash flows or of the contractual
      principal cash flows of a specific debt instrument. Prior to amendments made
      by
      SFAS 155 , SFAS 140 , “Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities,” permitted a qualifying
      special-purpose entity (SPE) to hold only passive derivative financial
      instruments pertaining to beneficial interests (other than another derivative
      financial instrument) issued or sold to parties other than the transferor.
      SFAS
      155 amends SFAS 140 to allow a qualifying SPE to hold a derivative instrument
      pertaining to beneficial interests that itself is a derivative financial
      instrument. This
      statement is effective for all financial instruments acquired or issued after
      the beginning of the Company’s first fiscal year that begins after September 15,
      2006. This
      statement is not applicable to the Company.





In
      March
      2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This
      Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities,” with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This statement:


1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.


2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable.


3.
            Permits
                an entity to choose “Amortization method” or “Fair value measurement
                method” for each class of separately recognized servicing assets and
                servicing liabilities:


4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value.


5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities.


This
      statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the financial statements.




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





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
      standard establishes a standard definition for fair value, establishes a
      framework under generally accepted accounting principles for measuring fair
      value and expands disclosure requirements for fair value measurements. This
      standard is effective for financial statements issued for fiscal years beginning
      after November 15, 2007. This statement will not a significant impact on the
      Company’s results of operations or financial position.




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 132(R).” This standard requires an employer to
      recognize the overfunded or underfunded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur as a component of comprehensive income. The standard also requires
      an employer to measure the funded status of a plan as of the date of its
      year-end statement of financial position.




*-
            9
            -*




The
      requirement to recognize the funded status of a defined benefit postretirement
      plan is effective as of the end of the fiscal year ending after
      December 15, 2006. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for the fiscal years ending after
      December 15, 2008. This statement will not a significant impact on the
      Company’s results of operations or financial position.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements.* SAB 108
      provides guidance on the consideration of the effects of prior year unadjusted
      errors in quantifying current year misstatements for the purpose of a
      materiality assessment. It is effective for the fiscal year ending May 31,
      2007, and is not expected to materially impact our financial position or results
      of operations.





**Fiscal
      Year 2006 Compared to Fiscal Year 2005**





**Results
      From Operations**





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





*Revenues*


Revenues
        were $1,587,000 and $4,007,000 for the years ended December 31, 2006 and
        2005,
        respectively. Revenues consisted of $1,318,000 and $3,650,000 of installation
        revenues and $269,000 and $357,000 of software support revenues for the years
        ended December 31, 2006 and 2005, respectively. The decrease in revenue was
        primarily due to lower number of product unit sales partially offset by a
        greater percentage of direct sales for which the Company received a higher
        per
        unit revenues and the sale of our assets to Clarient which closed September
        22,
        2006. Revenues will decrease to zero due to the sale of substantially all
        the
        Company’s assets.




*Cost
      of Sales*


Cost
      of
      sales was $772,000 and $2,629,000 for the years ended December 31, 2006 and
      2005, respectively. The decrease in cost of sales was due lower product unit
      sales partially offset by an increase in margin on direct sales.




*Research
      and Development*


Research
      and development expenses were $1,078,000 and $2,184,000 for the years ended
      December 31, 2006 and 2005, respectively. The decrease of $1,106,000 in research
      and development expenses results mainly through cost cutting measures enacting
      at the Company. Research and development expenses will decrease to zero for
      the
      future due to the sale of substantially all the Company’s assets.




*Selling,
      General and Administrative Expenses*


Selling,
      general and administrative expenses were $2,314,000 and $4,870,000 for the
      years
      ended December 31, 2006 and 2005, respectively, a decrease of $2,556,000. The
      decrease resulted from a decrease in corporate expenses and a reduction in
      head
      count and various other fluctuations partially offset by significant increases
      in non-cash expense related to stock options and amortization of intangibles.
      Selling, general and administrative expenses have decreased significantly as
      we
      terminated all of our employees due to the sale of assets to Clarient and
      outsourced our administrative functions.





*Interest
      Income and Other, Net*


Interest
      income/(loss) and other, net was $(2,000) and $112,000 in the years ended
      December 31, 2006 and 2005, 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.




**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities was $2,352,000 and $4,003,000 in the years ended
      December 31, 2006 and 2005, respectively. The decrease of $1,651,000 in cash
      used by operating activities was primarily due to improved margins on sales
      and
      cost savings related to a reduction of employees, outside consultants and other
      corporate expenses.







*-
            10
            -*





Net
      cash
      provided by / (used in) investing activities was $2,845,000 and ($354,000)
      in
      the years ended December 31, 2006 and 2005, respectively. Investing activities
      for the year ended December 31 resulted from the purchase of fixed assets and
      cash used in the purchase of substantially all of the assets of InterScope.
      Investing activities for the year ended December 31, 2006 resulted from the
      sale
      of substantially all the Company’s assets.





Net
      cash
      provided by financing activities was zero and $2,291,000 in 2006 and 2005,
      respectively. The decrease of $2,291,000 in cash provided by financing
      activities was primarily due to the sale of common stock and warrants in
      2005.





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





On
      February 27, 2006, we entered into a Loan Agreement pursuant to which we
      borrowed $250,000 from Clarient which matured on September 22, 2006. On June
      19,
      2006, in connection with the execution of the Purchase Agreement and to provide
      us with additional working capital pending completion of the proposed
      Acquisition, Clarient entered into a Second Loan Agreement with Trestle pursuant
      to which Clarient loaned $250,000 to Trestle Holdings and agreed to, from time
      to time prior to the closing of the proposed Acquisition and upon conditions
      contained in the Second Loan Agreement, loan up to an additional $250,000 in
      two
      tranches of $125,000 to us pursuant to which Clarient loaned $125,000. This
      loan
      matured on September 22, 2006. These loans bore interest at the annual rate
      of
      8% and were secured by a lien on Trestle’s accounts receivable, inventory,
      software and intellectual property.





At
      the
      completion of the sale of our assets, these loans were canceled and all unpaid
      principal and accrued interest were offset against the purchase price paid
      by
      Clarient to Trestle.





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 the cancellation of the loans from Clarient
      and
      assumption of approximately $154,000 of liabilities.





The
      Company suffered recurring losses from operations and has an accumulated deficit
      of $52,323,000 at December 31, 2006. Currently, we are a non-operating public
      company. The Company is seeking out suitable candidates for a business
      combination with a private company.





**ITEM
      7. FINANCIAL STATEMENTS**





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





**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 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 has engaged the public accounting firm of Goldman
& Parks LLP. (‘the Firm’) 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





*-
            11
            -*




with
      the
      Firm , neither Trestle, nor anyone on its behalf, has consulted with the Firm
      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.** Disclosure
      controls are controls and procedures designed to reasonably assure that
      information required to be disclosed in our reports filed under the Exchange
      Act, such as this Quarterly Report, is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms. Disclosure controls are also designed to
      reasonably assure that such information is accumulated and communicated to
      our
      management, including the Interim President, as appropriate to allow timely
      decisions regarding required disclosure. Disclosure controls and procedures,
      no
      matter how well designed and implemented, can provide only reasonable assurance
      of achieving an entity’s disclosure objectives. The likelihood of achieving such
      objectives is affected by limitations inherent in disclosure controls and
      procedures. These include the fact that human judgment in decision-making can
      be
      faulty and that breakdowns in internal control can occur because of human
      failures such as simple errors, mistakes or intentional circumvention of the
      established processes.





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





**Changes
      in internal controls over financial reporting.** The
      Interim President has evaluated any changes in the Company’s internal control
      over financial reporting that occurred during the most recent fiscal quarter.
      Based on that evaluation, the Interim President has concluded that no change
      in
      our internal control over financial reporting (as defined in Rule 13a-15(f)
      under the Securities Exchange Act of 1934) occurred during the quarter ended
      September 30, 2005 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.





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





**PART
      III**





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





**Directors**





The
      Company’s directors at December 31, 2006 were:




Name
                of Nominee
            Age
            Position(s)
                with TrestleWilliam
                D. Dallas
            51
            DirectorMichael
                S. Doherty
            53
            Chairman
                of the BoardAllon
                Guez
            54
            DirectorCrosby
                Haffner
            34
            DirectorMichael
                S. Hope
            64
            Director










*-
            12
            -*


WILLIAM
        D. DALLAS was appointed as a Director of the Company in March 2001.  Mr.
        Dallas also served as a Director of the Company from May 2000 through December
        2000.  Mr. Dallas is currently Chairman of the Board of




MICHAEL
      S. DOHERTY has been a Director of the Company since December 1997 and Chairman
      of the Board since May 2003. Since November 1999, Mr. Doherty has been President
      of Doherty & Company, LLC, a firm specializing in venture capital and
      private equity funding for development stage companies. From February 1999
      to
      October 1999, Mr. Doherty served as Senior Managing Director of Spencer Trask
      Securities Incorporated. Mr. Doherty served as Managing Director and Director
      of
      Private Equity at Cruttenden Roth Incorporated from October 1996 to February
      1999. From 1992 to October 1996, he served as Vice President of Arnhold and
      S.
      Bleichroeder, Inc., a New York-based investment banking, brokerage and asset
      management firm. Mr. Doherty was a director of Zyan Communications, Inc. from
      July 1999 to December 2000, and Chairman of the Board of Directors from July
      1999 to March 2000; Zyan filed for Chapter 11 bankruptcy proceedings in December
      2000. Mr. Doherty was also a non-executive director of ACLN, Ltd. from January
      1999 to March 2002. ACLN was a foreign private issuer whose shares were
      suspended from the New York Stock Exchange following an order from the SEC
      and a
      subsequent enforcement action against ACLN and three of its
      officers.




ALLON
      GUEZ, PhD has been a Director of the Company since September 2004. Dr. Guez
      is a
      Professor of Electrical, Computer and Biomedical Engineering at Drexel
      University, a position he has held since 1984. At Drexel he is also the Director
      of the Robotics and Automation Lab.




CROSBY
      HAFFNER has been a Director of the Company since July 2004. Since November
      2003,
      Mr. Haffner has been a Managing Director of Doherty & Company. From November
      2003 to July 2004 he served as Interim President of the Company, and was a
      consultant to the Company from June 2003 through November 2003. From December
      2001 to October 2003, Mr. Haffner was a consultant to technology companies.
      Prior to these engagements, Mr. Haffner was the President and Chief Operating
      Officer at Zyan Communications, Inc. from 1995 to November 2000, and its
      Chairman and Chief Executive Officer from December 2000 to December 2001. Zyan
      filed for Chapter 11 bankruptcy proceedings in December 2000.




MICHAEL
      S. HOPE has been a Director of the Company since November 2003 and is Chairman
      of our Audit Committee. Mr. Hope has acted as a financial consultant to various
      companies since 1997, including acting as the Interim Chief Financial Officer
      and Corporate Secretary of the Company from March 1998 to April 1999. Prior
      to
      his various financial consulting assignments, Mr. Hope served as Executive
      Vice
      President of Metro-Goldwyn-Mayer Inc. from 1993 to 1997. Prior to joining MGM,
      Mr. Hope was Executive Vice President, Planning and Operations and Chief
      Financial Officer for Paramount Communications Inc. Mr. Hope was previously
      a
      member of the Board of Directors of Zyan Communications, which filed for Chapter
      11 bankruptcy proceedings in December 2000.




**Executives**




The
      Company’s executive officers at December 31, 2006 were:




Name
                of Nominee
            Age
            Position(s)
                with TrestleMichael
                S. Doherty
            52
            Chairman
                of the BoardEric
                Stoppenhagen
            33
            Interim
                President and Secretary




Certain
      information about Mr. Stoppenhagen is set forth below. Information about Mr.
      Doherty is provided above under Directors.




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. From 2001 to 2002, he served as Director of Finance
      for Stromberg Consulting Inc., a change management consulting firm.




*-
            13
            -*


**Audit
      Committee and Audit Committee Financial Expert**


The
      Audit
      Committee is currently comprised of two members: Michael Hope (Chairman) and
      William Dallas. Currently, Mr. Hope and Mr. Dallas are both independent as
      defined by the listing standard of NASDAQ as now in effect. The Board has
      identified Mr. Hope 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 which is attached to this Definitive Proxy Statement.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Not
      applicable.





**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, 2006, 2005, and 2004, to the Company's principal
      executive officer and each of the other executive officers whose salary exceeded
      $100,000 for the year ended December 31, 2006.





**SUMMARY
      COMPENSATION TABLE**





**Annual
                Compensation**
            **Long
                Term Compensation****Name
                and Principal Position(2)**
            **Year**
            **Salary**
            **Bonus**
            **Other
                Annual**
              **Compensation**
            **Awards
                of**
              **Stock,
                Options**
              **and
                Warrants**Michael
                Doherty
              Chairman
                of the Board
            2006
              2005
              2004
            $33,000(1)
              $194,000(1)
              $50,000(1)
            N/A
              $50,000(1)
              $150,000(1)
            N/A
              $88,425(1)
              $151,386(1)
            N/A
              25,000(1)
              10,000(1)Eric
                Stoppenhagen
              Interim
                President
            2006
            N/A
            N/A
            $40,500(2)
            N/AMaurizio
                Vecchione
              Chief
                Executive Officer
            2006
              2005
              2004
            $107,454
              $229,166
              $91,666
            N/A
              N/A
              $34,375
            N/A
              N/A
              $35,912(3)
            N/A
              10,000
              250,000(3)Barry
                Hall
              President
                and Chief Financial Officer
            2006
              2005
              2004
            $83,922
              $166,661
              $68,750
            N/A
              N/A
              $22,913
            N/A
              N/A
              $35,912(3)
            N/A
              10,000
              150,000(3)Jack
                Zeineh
              Chief
                Science Officer
            2006
              2005
              2004
            $209,179
              $186,666
              $200,000
            $70,429
              N/A
              N/A
            N/A
              N/A
              N/A
            N/A
              28,571
              N/A







(1)
            For
                2006, this represents $33,000 for chairman services. Mr. Doherty
                agreed to
                cancel the options and compensation received for his board service.
                For
                2005, this represents $194,000 for chairman services, $50,000 in
                fees paid
                to Doherty & Co, $73,425 in estimated fair market value of office
                space and parking provided at no cost and $15,000 for board compensation.
                For 2004 this represents $50,000 for chairman services, $150,000
                in bonus
                compensation, $51,286 for Doherty & Co. services and expenses, $80,100
                in estimated fair market value of office space and parking provided
                at no
                cost and $20,000 for board compensation.





*-
            14
            -*








(2)
            On
                September 25, 2006, the Company entered into an agreement with Eric
                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 receives a $1,000 allowance
                per
                month for office expenses.





(3)
            Maurizio
                Vecchione was appointed as Chief Executive Officer and Barry Hall
                was
                appointed as President, Chief Financial Officer and Secretary in
                July
                2004. Maurizio Vecchione and Barry Hall are principals in Synthetica,
                Ltd
                which provided consulting services to the company from May 15, 2004
                to
                July15, 2004. During that time Synthetica was paid $35,913 in fees
                and
                expenses reimbursement.Effective
                September 16, 2005, Maurizio Vecchione, Chief Executive Officer and
                Barry
                Hall, Chief Financial Officer voluntarily agreed to a reduction in
                their
                compensation equal to fifty percent of amount as contained in their
                employment contracts dated May 15, 2005. These reductions reduced
                cash
                compensation to $137,500 and $100,000 for Mr. Vecchione and Mr. Hall,
                respectively. In turn Mr. Vecchione and Mr. Hall were granted 10,000
                stock
                options under the Company’s Amended and Restated 2003 Stock Incentive
                Plan. The Options are exercisable at $1.00 per share and fully vested
                March 16, 2006.Mr. Vecchione and Mr. Hall canceled all of their options received
                from the
                Company.





**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 (2006) 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)**Michael
                Doherty
            0
            0
            0Eric
                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 2006 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
                12/31/06**
            **Value
                of Unexercised**
              **In-the-Money
                Options**
              **and
                Warrants**
              **at
                12/31/06**Michael
                Doherty
            0
            N/A
            439,668
            0Eric
                Stoppenhagen
            0
            N/A
            0
            0




**EMPLOYMENT
      AGREEMENTS**




The
      Company has entered into consulting agreements with Mr. Stoppenhagen to provide
      consulting services and serve as Interim President and Secretary for six months.
      Mr. Stoppenhagen will be paid $15,000 for the first month, $12,500 for the
      second month and $10,000 for every month thereafter.





*-
            15
            -*





**Compensation
        of Directors**
  During
        2006, non-employee directors of the Company were entitled to receive cash
        compensation for their services, along with reimbursement for their reasonable
        expenses in attending meetings of the Board of Directors or any




Directors
      of the Company who are neither employees of the Company nor of the Company's
      affiliates were entitled to receive $20,000 in cash each year for serving on
      the
      Board paid at the beginning of each quarter. Additionally, each Director
      receives 10,000 options at the beginning of each year. Committee chairpersons
      receive 10,000 options granted at the inception of such member's tenure and
      at
      the beginning of each year served. Committee members receive 5,000 options
      granted at the inception of such member's tenure and at the beginning of each
      year served. New Directors also receive a one-time option grant of 30,000 on
      the
      date of appointment. The exercise price of such stock option grants is set
      at
      market at the time of the grant and vest 25% at the end of each quarter.





In December 2006, all current directors of the Company agreed to cancel all
      stock options previously granted to them and to waive their board
      fees.





Directors
      who are employees of the Company do not receive additional compensation for
      their services as directors. During 2006, Mr. Vecchione was the only employee
      who served as a director.




**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, 2007** 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)**Allon
                Kohl Family CUB Investors(2)
            835,000
            9.69%Bristol
                Investment Fund(3)
            700,000
            8.18%Steve
                Emerson(4)
            834,182
            9.99%Paul
                Guez(5)
            908,558
            10.98%SF
                Capital Partners Ltd.(6)
            853,857
            9.99%Michael
                S. Doherty(7)
            491,066
            5.61%William
                Dallas(8)
            193,405
            2.34%Allon
                Guez(9)
            0
            0.00%Crosby
                Haffner(10)
            242,500
            2.86%Michael
                Hope(11)
            0
            0.00%Eric
                Stoppenhagen(12)
            50,000
            0.61%All
                Officers and Directors as a group(13) (6 persons)
            976,971
            10.95%







*  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 Allon Kohl Family CUB Investors is c/o Stephanie Cohen,
                450
                North Roxbury Drive, Suite 600, Beverly Hills, CA 90210. Percent
                of class
                of Common Stock includes exercisable options/warrants to purchase
                357,857
                shares of Common Stock within 60
                days.





(3)
            The
                address of Bristol Investment Fund is 10990 Wilshire Blvd., Suite
                1410,
                Los Angeles, CA 90024. Percent of class of Common Stock includes
                exercisable options/warrants to purchase 300,000 shares of Common
                Stock
                within 60 days.





*-
            16
            -*





(4)
            The
                address of Steven Emerson is c/o Steven Emerson, 1522 Ensley Avenue,
                Los
                Angeles, CA 90024. Percent of class of Common Stock includes exercisable
                options/warrants to purchase 85,682 shares of Common Stock within
                60
                days.





(5)
            The
                address of Paul Guez is c/o Trestle Holdings, Inc., 199 Technology
                Drive,
                Suite 105, Irvine, California 92618. Percent of class of Common Stock
                includes exercisable options/warrants to purchase 16,659 shares of
                Common
                Stock within 60 days.





(6)
            The
                address of SF Capital Partners Ltd. is c/o Todd Turrall, Stark Offshore
                Management, LLC, 3600 South Lake Drive, St. Francis, WI 53235. Percent
                of
                class of Common Stock includes exercisable options/warrants to purchase
                282,428 shares of Common Stock within 60
                days.





(7)
            The
                address of Michael Doherty 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 491,066 shares of Common
                Stock
                within 60 days.





(8)
            The
                address of William Dallas 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 2,353 shares of Common Stock
                within 60 days.





(9)
            The
                address of Allon Guez is c/o Trestle Holdings, Inc., P.O. Box 4198,
                Newport Beach, CA 92661-4198.





(10)
            The
                address of Crosby Haffner 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 217,500 shares of Common
                Stock
                within 60 days.





(11)
            The
                address of Michael Hope is c/o Trestle Holdings, Inc, P.O. Box 4198,
                Newport Beach, CA 92661-4198.





(12)
            The
                address of Eric Stoppenhagen is c/o Trestle Holdings, Inc., P.O.
                Box 4198,
                Newport Beach, CA 92661-4198. Mr. Stoppenhagen was appointed Interim
                President in September 2006.





(13)
            Includes
                the beneficial ownership of Messrs. Doherty, Dallas, Guez, Haffner,
                Hope
                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 976,971 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 10.34%.





**Changes
      in Control Arrangements**





There
      existed no change in control arrangements at December 31, 2006.





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





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





From
      August 2004 through May 2005, the Company retained Mr. Doherty's services
      as Chairman and paid Mr. Doherty $10,000 per month for ten months starting
      August 1, 2004. On
      May
      27, 2005, the Compensation Committee on behalf of the Company entered into
      a one
      year consulting agreement with Michael Doherty, the Company’s Chairman. Under
      this agreement, the Consultant would oversee the capitalization of the Company,
      investor relations and will provide strategic advice to the Chief Executive
      Officer. Michael Doherty was to be compensated $20,000 per month in advance.
      Additionally, the Consultant was paid a monthly allowance of $2,500 in advance
      to cover expenses related of an administrative assistant. Effective November
      1,
      2005, Michael Doherty, Executive Chairman of the Board of Directors voluntarily
      agreed to reduce his compensation by fifty-percent. Mr. Doherty continued to
      receive $2,500 in reimbursement for administrative costs. Additionally, Mr.
      Doherty received $2,000 per month for office space. In turn, Mr. Doherty was
      granted 10,000 stock options under the Company’s Amended and Restated 2003 Stock
      Incentive Plan. The options are exercisable at $1.00 per share and vest
      one-hundred percent after six months. On March 15, 2006, the companies mutually
      terminated the consulting agreement.





*-
            17
            -*





Effective
      September 1, 2004, the Company entered into an agreement to pay Doherty &
Company, LLC $10,000 per month for financial advisory services requested from
      time to time by the Company. Pursuant to this agreement Doherty & Company,
      LLC provided the Company with various financial advisory services, including
      but
      not limited to consulting with respect to proposed financings, advising the
      Company on potential mergers and acquisitions, and providing the Company with
      investor relations services. Prior to this agreement, the Company reimbursed
      Doherty & Company, LLC $11,250 for overhead incurred in providing
      administrative services to the Company in connection with the private placement
      transaction completed by the Company in July 2004. In addition, pursuant to
      the
      agreements governing Mr. Doherty’s services as Chairman to the Company, Mr.
      Doherty was entitled to use up to 3,500 square feet of office space, at the
      Company's expense, in the Company’s Los Angeles office, in connection with his
      services as Chairman and other activities. A portion of such space is being
      used
      by Doherty & Company, LLC.  This
      agreement was terminated in May 2005. On
      May 9,
      2005, the Compensation Committee on behalf of the Company entered into an
      agreement with Doherty & Company, LLC, an affiliate of Michael Doherty, the
      Company’s Chairman, to assist the Board of Directors in exploring a range of
      possible strategic opportunities and alternatives, including acquisitions,
      joint
      ventures, capital raises, merger or a possible sale of the Company. Under the
      agreement, the Company paid Doherty & Company a nonrefundable retainer of
      $50,000 upon signing.





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





On
      September 25, 2006, the Company entered into an agreement with Eric 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. As
      of
      December 31, 2006, Mr. Stoppenhagen has received $40,500 under this agreement.





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


ExhibitNumber
              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
              By-laws
                  of the Company (incorporated herein by reference to Appendix C
                  of
                  Company's definitive Proxy Statement dated May 30,
                  2002)*10.1
              The
                  Harvey Entertainment Company 1997 Stock Option Plan (incorporated
                  herein
                  by reference to the Company's 1997 definitive Proxy Statement)*10.2
              Lease
                  Agreement dated September 22, 1999 between the Company and Douglas
                  Emmett Realty Fund 1997, a California limited partnership (incorporated
                  by
                  reference to Exhibit 10.76 of the Company's Annual Report on
                  Form 10-KSB for the year ended December 31, 1999)*10.3
              Warrant
                  Agreement dated July 2, 2003, by and between the Company and Michael
                  Doherty. (incorporated by reference to Exhibit 10.3 of the Company's
                  Quarterly Report on Form 10-QSB for the quarter ended June 30,
                  2003)*10.4
              Warrant
                  Agreement dated September 26, 2003, by and between the Company
                  and Michael
                  Doherty. (incorporated by reference to Exhibit 10.2 of the Company's
                  Quarterly Report on Form 10-QSB for the quarter ended
                  September 30, 2003)*10.5
              Employment
                  agreement between the Company and Maurizio Vecchione dated May
                  18, 2004.
                  (incorporated by reference to Exhibit 99.2 of the Company's
                  Form 8-K dated May 19, 2004)*10.6
              Option
                  agreement between the Company and Maurizio Vecchione dated May
                  18, 2004.
                  (incorporated by reference to Exhibit 99.3 of the Company's
                  Form 8-K dated May 19, 2004)*10.7
              Employment
                  agreement between the Company and Barry Hall dated May 18, 2004.
                  (incorporated by reference to Exhibit 99.4 of the Company's
                  Form 8-K dated May 19, 2004)*10.8
              Option
                  agreement between the Company and Barry Hall dated May 18, 2004.
                  (incorporated by reference to Exhibit 99.5 of the Company's
                  Form 8-K dated May 19, 2004)
  *-
            18
            -*
  
 *10.9
              Warrant
                  agreement for private placement dated (incorporated by reference
                  to
                  Exhibit 99.3 of the Company's Form 8-K dated January 24,
                  2005)*10.10
              Asset
                  purchase agreement between the Company and InterScope Technologies,
                  Inc.
                  (incorporated by reference to Exhibit 99.2 of the Company's
                  Form 8-K dated March 16, 2005)*10.11
              Doherty
                  & Company Consulting Agreement (incorporated by reference to
                  Exhibit 99.2 of the Company's Form 8-K dated May 13,
                  2005)*10.12
              Michael
                  Doherty Consulting Agreement (incorporated by reference to
                  Exhibit 99.1 of the Company's Form 8-K dated May 31,
                  2005)*10.13
              Michael
                  Doherty Consulting Agreement Amendment (incorporated by reference
                  to
                  Exhibit 99.1 of the Company's Form 8-K dated September 22,
                  2005)*10.14
              Maurizio
                  Vecchione and Barry Hall Employment Agreement Amendment (incorporated
                  by
                  reference to Exhibit 99.2 and 99.3 of the Company's Form 8-K
                  dated September 22, 2005)*10.15
              Loan
                  Agreement (incorporated by reference to Exhibit 99.1 of the Company's
                  Form 8-K dated March 3, 2006)*10.16
              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)*10.17
              Eric
                  Stoppenhagen Consulting Agreement (incorporated by reference to
                  Exhibit 99.1 of the Company's Form 8-K dated September 25,
                  2006)21
              List
                  of subsidiaries of Company31
              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 Goldman & Parks, LLP for the audit of the Company’s
      consolidated financial statements for the years ended December 31, 2006 and
      2005, the reviews of the quarterly reports on Form 10-QSB for the same fiscal
      years and statutory and regulatory filings were $33,000 for 2006 and zero for
      2005.





The
      aggregate fees billed by Singer, Lewak, Greenbaum & Goldstein, LLP for the
      audit of the Company’s consolidated financial statements for the years ended
      December 31, 2006 and 2005, the reviews of the quarterly reports on Form 10-QSB
      for the same fiscal years and statutory and regulatory filings were $81,000
      for
      2006 and $109,000 for 2005.





*Audit-Related
      Fees*





There
      were no fees billed by Goldman & Parks, LLP or Singer, Lewak, Greenbaum
& Goldstein, LLP for audit-related services for the years ended December 31,
      2006 and 2005.





*Tax
      Fees*





There
      were no fees billed by Goldman & Parks, LLP or Singer, Lewak, Greenbaum
& Goldstein, LLP for tax related services for the years ended December 31,
      2005 and 2005.





*All
      Other Fees*





There
      were no fees billed by Goldman & Parks, LLP or Singer, Lewak, Greenbaum
& Goldstein, LLP for other services not described above for the years ended
      December 31, 2005 and 2005.





*-
            19
            -*





Our
      Audit
      Committee Charter provides that the Audit Committee shall pre-approve all
      services to be provided to the company by Goldman & Parks, LLP our current
      auditors.








*-
            20
            -*





**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 8, 2007
            
            
            By:
            /s/  
                MICHAEL DOHERTY
              -----------------------------------------------------------
              Name:
                MICHAEL DOHERTY
              *Title:
                Chairman of the Board*
              *(Principal
                Executive Officer)*Date:
                March 8, 2007
            
            
            By:
            /s/  
                ERIC STOPPENHAGEN
              -----------------------------------------------------------
              Name:
                Eric Stoppenhagen
              *Title:
                Interim President*
              *(Principal
                Financial and Accounting Officer)*





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





**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/  
                MICHAEL DOHERTY
              ------------------------------------
              Michael
                S. Doherty
            
            Director
              (Principal
                Executive Officer)
            
            March
                8, 2007/s/  
                ERIC STOPPENHAGEN
              ------------------------------------
              Eric
                Stoppenhagen
            
            Interim
                President
              (Principal
                Financial and Accounting Officer)
            
            March
                8, 2007/s/  
                WILLIAM DALLAS
              ------------------------------------
              William
                Dallas
            
            Director
            
            March
                8, 2007/s/
                ALLON GUEZ
              -------------------------------------
              Allon
                Guez
            
            Director
            
            March
                8, 2007/s/  
                CROSBY HAFFNER
              ------------------------------------
              Crosby
                Haffner
            
            Director
            
            March
                8, 2007/s/  
                MICHAEL HOPE
              ------------------------------------
              Michael
                Hope
            
            Director
            
            March
                8, 2007






*-
          21
          -*





**ITEM
      7.    FINANCIAL STATEMENTS**





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**TABLE
      OF CONTENTS**


**PAGE**REPORTS
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                
                F-2
                    to F-3CONSOLIDATED
                    FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31,
                    2006 AND
                    2004Consolidated
                    Balance Sheets
                
                F-4
                    to F-5Consolidated
                    Statements of Operations
                
                F-6Consolidated
                    Statements of Stockholders' Equity
                
                F-7Consolidated
                    Statements of Cash Flows
                
                F-8Notes
                    to Consolidated Financial Statements
                
                F-9
                    to F-19




















*F-1*





**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. and
      subsidiaries (the “Company”) as of December 31, 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 audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. We believe that
      our
      audit provides a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 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.











/s/
      GOLDMAN & PARKS LLP





Tarzana,
      California


March
      2,
      2007








*F-1*







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors


Trestle
      Holdings, Inc.


Irvine,
      California





We
      have
      audited the consolidated balance sheet of Trestle Holdings, Inc. and
      subsidiaries (the “Company”) as of December 31, 2005, 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 audit.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 2005, and 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 suffered recurring losses
      from operations and has an accumulated deficit. This raises substantial doubt
      about the Company's ability to continue as a going concern. Management's plans
      in regard to these matters are also described in Note 1. The consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.






/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Santa
      Ana, California


March
      28,
      2006





*F-2*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**








**December 31,****2006**
            
            **2005****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            798,000
            
            $
            305,000Accounts
                receivable, net of allowance for doubtful accounts of zero and $82,000
                in
                2006 and 2005, respectively
            
            
            —
            
            
            960,000Inventory
            
            
            —
            
            
            502,000Prepaid
                expenses and other assets
            
            
            118,000
            
            
            59,000TOTAL
                CURRENT ASSETS
            
            
            916,000
            
            
            1,826,000Other
                assets
            
            
            —
            
            
            15,000Fixed
                assets, net of accumulated depreciation of zero and $182,000 in 2006
                and
                2005, respectively
            
            
            —
            
            
            118,000Goodwill
            
            
            —
            
            
            1,514,000Intangible
                assets, net of accumulated amortization of zero and $933,000 in 2006
                and
                2005, respectively
            
            
            —
            
            
            975,000TOTAL
                ASSETS
            
            $
            916,000
            
            $
            4,448,000








See
      accompanying notes to consolidated financial statements.





(Continued)





*F-3*








**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**








**December 31,****2006**
            
            **2005****LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            22,000
            
            $
            996,000Accrued
                expenses
            
            
            37,000
            
            
            554,000Deferred
                revenue
            
            
            —
            
            
            303,000TOTAL
                CURRENT LIABILITIES
            
            
            59,000
            
            
            1,853,000COMMITMENTS
                AND CONTINGENCIES**STOCKHOLDERS'
                EQUITY:**Preferred
                stock, $10 par value, 4,675,000 shares authorized, zero and zero
                shares
                issued and outstanding at December 31, 2006 and 2005,
                respectively
            
            
            —
            
            
            —Series B
                Convertible Preferred Stock, $1,000 stated value, 250,000 shares
                authorized, zero and zero shares issued and outstanding at December
                31,
                2006 and 2004, respectively, liquidation preference of zero and zero
                at
                December 31, 2006 and 2005, respectively
            
            
            —
            
            
            —Common
                stock, $.001 par value, 150,000,000 shares authorized, 8,257,000
                and
                8,257,000 issued and outstanding at December 31, 2006 and 2005,
                respectively
            
            
            8,000
            
            
            8,000Additional
                paid in capital
            
            
            53,172,000
            
            
            52,915,000Deferred
                stock compensation
            
            
            —
            
            
            (3,000
            )Accumulated
                deficit
            
            
            (52,323,000
            )
            
            (50,325,000
            )Total
                stockholders' equity
            
            
            857,000
            
            
            2,595,000TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            916,000
            
            $
            4,448,000








See
      accompanying notes to consolidated financial statements.





*F-4*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Years
                  Ended December 31,****2006**
              
              **2005**REVENUESProduct
              
              $
              1,318,000
              
              $
              3,650,000Software
                  support
              
              
              269,000
              
              
              357,000Total
                  revenues
              
              
              1,587,000
              
              
              4,007,000COST
                  OF SALES
              
              
              772,000
              
              
              2,629,000GROSS
                  PROFIT
              
              
              815,000
              
              
              1,378,000OPERATING
                  EXPENSESResearch
                  and development
              
              
              1,078,000
              
              
              2,184,000Selling,
                  general and administrative expenses
              
              
              2,314,000
              
              
              4,870,000Total
                  operating expenses
              
              
              3,392,000
              
              
              7,054,000LOSS
                  FROM OPERATIONS
              
              
              (2,577,000
              )
              
              (5,676,000
              )Interest
                  income and other, net
              
              
              (2,000
              )
              
              112,000Gain
                  on sale of assets
              
              
              581,000
              
              
              —NET
                  LOSS BEFORE INCOME TAXES
              
              
              (1,998,000
              )
              
              (5,564,000
              )Provision
                  for income taxes
              
              
              —
              
              
              —NET
                  LOSS APPLICABLE TO COMMON STOCKHOLDERS
              
              $
              (1,998,000
              )
              $
              (5,564,000
              )NET
                  LOSS PER SHARE OF COMMON STOCK—Basic and diluted
              
              $
              (0.24
              )
              $
              (0.69
              )WEIGHTED
                  AVERAGE SHARES OUTSTANDING—Basic and diluted
              
              
              8,257,214
              
              
              8,083,000





See
      accompanying notes to consolidated financial statements.





*F-5*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2004**





**Series
                  B Preferred**
              
              **Common
                  Stock****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Additional**
                **Paid
                  in**
                **Capital**
              
              **Deferred
                  Stock Compensation**
              
              **Accumulated
                  Deficit**
              
              **Total**BALANCE,
                  DECEMBER 31, 2004
              
              
              0
              
              $
              0
              
              
              6,443,000
              
              $
              6,000
              
              $
              49,613,000
              
              
              (53,000
              )
              $
              (44,761,000
              )
              $
              4,805,000Issuance
                  of warrants and options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,000
              
              
              50,000
              
              
              
              
              
              63,000Cashless
                  exercise of warrants
              
              
              
              
              
              
              
              
              18,000Offering
                  costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (259,000
              )
              
              
              
              
              
              
              
              (259,000
              )Issuance
                  of common stock for cash
              
              
              
              
              
              
              
              
              1,458,000
              
              
              2,000
              
              
              2,548,000
              
              
              
              
              
              
              
              
              2,550,000Issuance
                  of common stock for purchase of InterScope’s assets
              
              
              
              
              
              
              
              
              338,000
              
              
              
              
              
              1,000,000
              
              
              
              
              
              
              
              
              1,000,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,564,000
              )
              
              (5,564,000
              )BALANCE,
                  DECEMBER 31, 2005
              
              
              0
              
              $
              0
              
              
              8,257,000
              
              $
              8,000
              
              $
              52,915,000
              
              $
              (3,000
              )
              $
              (50,325,000
              )
              $
              2,595,000Issuance
                  of warrants and options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              257,000
              
              
              3,000Cashless
                  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
              )
              $
              
              
              871,000





See
      accompanying notes to consolidated financial statements.











*F-6*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
                Ended December 31,****2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (1,998,000
            )
            $
            (5,564,000
            )Adjustments
                to reconcile net loss to net cash provided by/(used in) operating
                activities:Depreciation
                and amortization
            
            
            451,000
            
            
            713,000Provision
                for doubtful accounts
            
            
            (38,000
            )
            
            23,000Stock
                based compensation
            
            
            260,000
            
            
            63,000Gain
                on sale of assets
            
            
            (581,000
            )
            
            —Changes
                in operating assets and liabilities, net of effects from
                acquisition/disposition of business:Accounts
                receivable
            
            
            980,000
            
            
            (4,000
            )Inventory
            
            
            258,000
            
            
            48,000Prepaid
                expenses and other assets
            
            
            (44,000
            )
            
            326,000Accounts
                payable and accrued expenses
            
            
            (1,481,000
            )
            
            466,000Deferred
                revenue
            
            
            (159,000
            )
            
            (74,000
            )Net
                cash used in operating activities
            
            
            (2,352,000
            )
            
            (4,003,000
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Proceeds
                from the sale of assets
            
            
            2,845,000
            
            
            —Additions
                to fixed assets
            
            
            —
            
            
            (176,000
            )Acquisition
                of InterScope’s assets
            
            
            —
            
            
            (178,000
            )Net
                cash used in by investing activities
            
            
            2,845,000
            
            
            (354,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Offering
                costs on issuance of common stock
            
            
            —
            
            
            (259,000
            )Payment
                of note
            
            
            (625,000
            )
            
            —Net
                proceeds from issuance of common stock
            
            
            —
            
            
            2,550,000Net
                proceeds from issuance of note
            
            
            625,000
            
            
            —Net
                cash provided by financing activities
            
            
            0
            
            
            2,291,000NET
                INCREASE/(DECREASE) IN CASH
            
            
            493,000
            )
            
            (2,066,000
            )CASH,
                Beginning of period
            
            
            305,000
            
            
            2,371,000CASH,
                End of period
            
            $
            798,000
            
            $
            305,000





**Years
                Ended December 31,****2006**
            
            **2005****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                received/(paid) during the period for:Interest
            
            $
            (4,000
            )
            $
            18,000Income
                taxes
            
            
            —
            
            
            —





**NON-CASH
      FINANCING ACTIVITY:**





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




See
      accompanying notes to consolidated financial statements





*F-7*





**TRESTLE
      HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**





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





***Current
      Operations and Background*** —  On
      September 22, 2006, Trestle Holdings, Inc. ("Trestle Holdings" or
      "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 the cancellation of the loans from Clarient and assumption of
      approximately $154,000 of liabilities.





As
      a
      result of such sale, we are 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.




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





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




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





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





***Goodwill
      and Other Indefinite Lived Intangibles*** — ** In
      accordance with SFAS No. 141, “Business Combinations” and SFAS
      No. 142, *“Goodwill
      and Other Intangible Assets”* ,
      goodwill and other indefinite lived intangibles are not amortized, but are
      tested annually or on an interim basis if events or circumstances indicate
      that
      the fair value of the asset has decreased below its carrying value. No
      impairment losses were recorded for the year ended December 31, 2006 or for
      the
      year ending December 31, 2005.





***Revenue
      Recognition*** —
The
      Company recognizes revenue associated with its business on product sales after
      shipment of the product to the customer and formal acceptance by the customer
      has been received. Depending upon the





*F-8*





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





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





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





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





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





***Stock-Based
      Compensation—*** On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (“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 has chosen to adopt 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 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 quarters and the nine months
      ended
      September 30, 2006 and 2005 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





*F-9*





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





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





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





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid
      Financial Instruments.” SFAS 155 amends SFAS 133 to narrow the scope exception
      for interest-only and principal-only strips on debt instruments to include
      only
      such strips representing rights to receive a specified portion of the
      contractual interest or principal cash flows. SFAS 155 also amends SFAS 140
      to
      allow qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      financial instrument. Generally, FASB Statement of Financial Accounting
      Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” requires that a derivative embedded in a host contract that does
      not meet the definition of a derivative be accounted for separately (referred
      to
      as bifurcation) under certain conditions. That general rule notwithstanding,
      SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad
      exception for interest-only and principal-only strips initially resulting from
      the separation of rights to receive contractual cash flows of a financial
      instrument that itself does not contain an embedded derivative that would have
      been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope
      exception to strips that represent rights to receive only a portion of the
      contractual interest cash flows or of the contractual principal cash flows
      of a
      specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 ,
      “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities,” permitted a qualifying special-purpose entity (SPE) to hold
      only passive derivative financial instruments pertaining to beneficial interests
      (other than another derivative financial instrument) issued or sold to parties
      other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE
      to
      hold a derivative instrument pertaining to beneficial interests that itself
      is a
      derivative financial instrument. This
      statement is effective for all financial instruments acquired or issued after
      the beginning of the Company’s first fiscal year that begins after September 15,
      2006. This
      statement is not applicable to the Company.





In
      March
      2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets.” This
      Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities,” with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This statement:


1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.


2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable.


3.
            Permits
                an entity to choose “Amortization method” or “Fair value measurement
                method” for each class of separately recognized servicing assets and
                servicing liabilities:


4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value.


5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities.


This
      statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the financial statements.





*F-10*




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





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
      standard establishes a standard definition for fair value, establishes a
      framework under generally accepted accounting principles for measuring fair
      value and expands disclosure requirements for fair value measurements. This
      standard is effective for financial statements issued for fiscal years beginning
      after November 15, 2007. This statement will not a significant impact on the
      Company’s results of operations or financial position.




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 132(R).” This standard requires an employer to
      recognize the overfunded or underfunded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur as a component of comprehensive income. The standard also requires
      an employer to measure the funded status of a plan as of the date of its
      year-end statement of financial position.




The
      requirement to recognize the funded status of a defined benefit postretirement
      plan is effective as of the end of the fiscal year ending after
      December 15, 2006. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for the fiscal years ending after
      December 15, 2008. This statement will not a significant impact on the
      Company’s results of operations or financial position.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements.* SAB 108
      provides guidance on the consideration of the effects of prior year unadjusted
      errors in quantifying current year misstatements for the purpose of a
      materiality assessment. It is effective for the fiscal year ending May 31,
      2007, and is not expected to materially impact our financial position or results
      of operations.





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





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





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) 155 “Accounting for Certain Hybrid
      Financial Instruments”. SFAS 155 amends SFAS 133 to narrow the scope exception
      for interest-only and principal-only strips on debt instruments to include
      only
      such strips representing rights to receive a specified portion of the
      contractual interest or principal cash flows. SFAS 155 also amends SFAS 140
      to
      allow qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that itself is a derivative
      financial instrument. Generally, FASB Statement of Financial Accounting
      Standards SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities”, requires that a derivative embedded in a host contract that does
      not meet the definition of a derivative be accounted for separately (referred
      to
      as bifurcation) under certain conditions. That general rule





*F-11*





notwithstanding,
      SFAS No. 133 (prior to amendments made to it by SFAS No. 155) provides a broad
      exception for interest-only and principal-only strips initially resulting from
      the separation of rights to receive contractual cash flows of a financial
      instrument that itself does not contain an embedded derivative that would have
      been accounted for separately. SFAS 155 amends SFAS 133 to restrict the scope
      exception to strips that represent rights to receive only a portion of the
      contractual interest cash flows or of the contractual principal cash flows
      of a
      specific debt instrument. Prior to amendments made by SFAS 155 , SFAS 140 ,
      “Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities”, permitted a qualifying special-purpose entity (SPE) to hold
      only passive derivative financial instruments pertaining to beneficial interests
      (other than another derivative financial instrument) issued or sold to parties
      other than the transferor. SFAS 155 amends SFAS 140 to allow a qualifying SPE
      to
      hold a derivative instrument pertaining to beneficial interests that itself
      is a
      derivative financial instrument. Management is currently assessing the effect
      of
      SFAS 155 on the Company’s financial statement.





**NOTE
      2 - 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 - ACQUISITION OF INTERSCOPE**





On
      March
      11, 2005, we purchased substantially all of the assets of InterScope
      Technologies, Inc. (“InterScope”). InterScope’s business was historically in
      image acquisition. Interscope Technologies developed key software applications
      for improving the workflow of clinical and biopharma pathology, especially
      in
      data management applications for use in anatomic pathology, toxicology and
      genomic environments. These applications attempt to deliver integrated solutions
      and services to pathologists working in clinical and drug development
      applications.





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





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





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


The
                  Year Ended
                December
                  31, 2005Revenues
              
              $
              4,007,000Cost
                  of Sales
              
              
              1,980,000Gross
                  Profit
              
              
              857,000Operating
                  Expenses
              
              
              7,247,000Operating
                  Loss
              
              $
              (6,390,000
              )Loss
                  per shareBasic
                  and diluted EPS as reported
              
              $
              (0.70
              )Pro
                  forma basic and diluted EPS
              
              $
              (0.80
              )





**NOTE
      4 - INVENTORY**





Inventories
      are stated at the lower of cost (first-in, first-out) or market and consist
      of
      the following at December 31, 2006 and 2005:





*F-12*





Years
                        Ended December 31,2006
                    
                    2005Work-in-process
                    
                    $
                    —
                    
                    $
                    492,000Finished
                        goods
                    
                    
                    —
                    
                    
                    118,000Reserve
                        for obsolescence
                    
                    
                    —
                    
                    
                    (108,000
                    )Total
                    
                    $
                    —
                    
                    $
                    502,000


**NOTE
      5 - FIXED ASSETS**


Fixed
      assets comprised of the following at December 31, 2006 and 2005.





Years
                Ended December 31,2006
            
            2005Furniture,
                fixtures and equipment
            
            $
            —
            
            $
            300,000Less
                accumulated depreciation
            
            
            —
            
            
            (182,000
            )Total
            
            $
            —
            
            $
            118,000





**NOTE
      6 - INTANGIBLE ASSETS**





Intangible
      assets comprised of the following at December 31, 2006 and 2005.


Years
                    Ended December 31,2006
                
                2005Intangible
                    assets
                
                $
                —
                
                $
                1,908,000Less
                    accumulated amortization
                
                
                —
                
                
                (933,000
                )Net
                    intangible assets
                
                $
                —
                
                $
                975,000
  **NOTE
        7 - ACCRUED LIABILITIES**





Accrued
      liabilities for the years ended December 31, 2006 and 2005 consist of the
      following:


Years
                    Ended December 31,2006
                
                2005Accrued
                    bonus
                
                $
                —
                
                $
                269,000Accrued
                    paid time off
                
                
                —
                
                
                143,000Accrued
                    legal
                
                
                —
                
                
                43,000Other
                
                
                37,000
                
                
                99,000$
                37,000
                
                $
                554,000


**NOTE
      8 - INCOME TAX**





The
      income tax (benefit) expense for the years ended December 31, 2006 and 2005
      consist of the following:





Years
                Ended December 31,2006
            
            2005Current
            
            $
            —
            
            $
            —Change
                in deferred tax asset
            
            
            (463,000
            )
            
            674,000Change
                in valuation allowance
            
            
            463,000
            
            
            (674,000
            )Provision
                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, 2006 and 2005 differ as follows:





*F-13*


Years
                Ended December 31,2006
            
            2005Provision
                computed at the statutory rate
            
            $
            463,000
            
            $
            (674,000Change
                in valuation allowance
            
            
            (463,000
            )
            
            674,000
            )Income
                tax provision (benefit)
            
            $
            —
            
            $
            —







The
      following are the components of the Company's deferred tax assets and
      (liabilities) at December 31, 2006 and 2005:





Years
                Ended December 31,2006
            
            2005Federal
                net operating loss carryforward
            
            $
            10,987,000
            
            $
            10,232,000State
                net operating loss carryforward
            
            
            184,000
            
            
            400,000Accounts
                receivable
            
            
            —
            
            
            82,000Depreciation
            
            
            —
            
            
            34,000Capital
                loss carryforward
            
            
            1,356,000
            
            
            1,356,000Accrued
                vacation
            
            
            —
            
            
            49,000Goodwill
            
            
            —
            
            
            63,000Total
                deferred tax asset
            
            
            12,527,000
            
            
            12,216,000Goodwill
            
            
            —
            
            
            (85,000
            )Deferred
                state taxes
            
            
            —
            
            
            (498,000
            )Total
                deferred tax liability
            
            
            —
            
            
            (583,000
            )Net
                deferred tax asset
            
            
            12,527,000
            
            
            11,633,000Valuation
                allowance
            
            
            (12,527,000
            )
            
            (11,633,000
            )Net
                deferred tax asset/(liability)
            
            $
            —
            
            $
            —





At
      December 31, 2006, the Company has a net operating loss carryforward of
      approximately $32,314,000 and $394,000 for federal and state income tax
      purposes, respectively. These net operating loss carryforwards begin to expire
      in 2018 and 2007, respectively. The net operating losses can be carried forward
      to offset future taxable income, if any. Realization of the above carryforwards
      may be subject to utilization limitations, which may inhibit the Company's
      ability to use these carryforwards in the future.





**NOTE
      9 - COMMITMENTS AND CONTINGENCIES**





***Leases*** —The
      Company currently is not party to any leases





Rent
      expense charged to operations for the years ended December 31, 2006 and 2005
      was
      $248,000 and $603,000. Rent income from sublease arrangements for the years
      ended December 31, 2006 and 2005 was zero and $38,000. The Company does not
      expect significant income from sublease arrangements in the future.





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




***Consulting
      Agreements*** —
On
      September 25, 2006, the Company entered into an agreement with Eric Stoppenhagen
      to provide consulting services and serve as Interim President and Secretary
      for
      six months. Mr. Stoppenhagen will be paid $15,000 for the first month, $12,500
      for the second month and $10,000 for every month thereafter.





**NOTE
      10 - WARRANTS**





During
      the year ended December 31, 2006, the Company did not issue any warrants and
      73,074 warrants expired.  To account for such previous grants to
      non-employees, we recognized compensation expense of $3,000 for the year ended
      December 31, 2006. Compensation expense is recognized ratably over the term
      of
      the related services provided. Currently, we have 4, 179,784 warrants issued
      and
      outstanding.





*F-14*





During
      the year ended December 31, 2005, the Company issued 1,199,000 warrants to
      management, investors and consultants.  The weighted average exercise price
      of the grants during the year ending December 31, 2006 was $1.75. The vesting
      periods on these grants range from immediate to 3 years, and the lives range
      from 4 to 10 years.  To account for such grants to non-employees, we
      recorded deferred stock compensation of $13,000, and recognized compensation
      expense of $63,000 for the year ended December 31, 2005. Compensation expense
      is
      recognized ratably over the term of the related services provided.





As
      part
      of the 1999 Refinancing, the Company granted warrants to purchase 134,462 shares
      of common stock at prices ranging between $90 to $120 per share, of which 61,528
      were outstanding at December 31, 2006. The warrants had a fair value of
      $2,360,000 at the date of grant, are fully vested and expire six to eight years
      from their issuance date.





As
      a
      result of the refinancing that took place in 1999, the Company granted warrants,
      not covered by the employee stock purchase plans, to purchase 134,462 shares
      of
      common stock to certain employees, officers and directors of which 84,808 were
      outstanding at December 31, 2006. These warrants vest either on the grant date
      or over three years from the grant date. The options are exercisable at prices
      ranging from $90 to $120 per share and expire six to eight years from their
      issuance date.





**NOTE
      11 - 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 1,815,000 shares were available for future grant
      at
      December 31, 2006.





Prior
      to
      January 1, 2006 the Company accounted for its stock-based compensation using
      the
      intrinsic value method prescribed by Accounting Principles Board Opinion No.
      25,
“Accounting for Stock Issued to Employees,” and related interpretations. Under
      this method the Company did not record compensation expense for the year ended
      December 31, 2005 related to the issuance of employee and director stock option
      grants because the exercise price equaled the fair market value of the
      underlying common stock at the date of grant . The following table illustrates
      the effect on net loss and loss per share if the Company had applied the fair
      value recognition provisions of SFAS No. 123 to stock-based employee
      compensation for the year ended December 31, 2005. Periods ending in 2006 are
      included for comparative purposes.


Years
                  ended December 31,2006
              
              2005Net
                  lossAs
                  reported
              $
              (1,998,000
              )
              $
              (5,564,000)Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method for all awards, net of related tax effects
              —
              
              (540,000)Pro
                  forma
              $
              (1,998,000
              )
              $
              (6,104,000)Loss
                  per shareBasic
                  and diluted EPS as reported
              $
              (0.24
              )
              $
              (0.69)Pro
                  forma basic and diluted EPS
              $
              (0.24
              )
              $
              (0.76)


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





*F-15*





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.





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




2006
            
            2005Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %Volatility
            
            
            112
            %
            
            53
            %Average
                expected option life
            
            
            6.67
                years
            
            
            6.67
                yearsRisk-free
                interest rate
            
            
            4.30
            %
            
            3.93
            %





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 quarter was $0.25. The options vest 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
      follo wing
      table summarizes activity in the Company's stock option plans during the year
      ended December 31, 2006 and the year ended December 31, 2005:





Number
                of
              Shares
            
            Weighted
                Average Price Per ShareBalance
                at December 31, 2004
            
            
            745,000
            
            $
            3.80Granted
            
            
            501,000
            
            
            0.86Balance
                at December 31, 2005
            
            
            1,246,000
            
            $
            2.62Granted
            
            
            105,000
            
            
            0.25Canceled
            
            
            1,341,000
            
            
            2.43Balance
                at December 31, 2006
            
            
            10,000
            
            $
            67.50





In
      2006,
      as a result of the sale of all assets of the Company, all employees were
      terminated from 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.





*F-16*


The
      following summarizes pricing and term information for options issued to
      employees and directors which are outstanding as of December 31, 2006:





Options
                Outstanding
            
            Options
                ExercisableRange
                of Exercise Prices
            
            Number
                Outstanding at September 30, 2006
            
            Weighted
                Average Remaining Contractual
              Life
            
            Weighted
                Average Exercise Price
            
            Number
                Exercisable at September 30, 2006
            
            Weighted
                Average Exercise Price0.25
                - 1.00
            
            
            0
            
            
            0
            
            $
            0
            
            
            0
            
            $
            01.01
                - 10.00
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            045.00
                - 50.00
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            065.00
                - 72.50
            
            
            10,000
            
            
            2.75
            
            
            67.50
            
            
            10,000
            
            
            67.50105.00
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            00.50 - 105.00
            
            
            10,000
            
            
            2.75
            
            $
            67.50
            
            
            10,000
            
            $
            67.50





***Non-Plan
      Stock Options*** —
During
      the year ended December 31, 2005, the Company's issued 400,000 non-plan stock
      options with a strike price of $2.50 to Maurizio Vecchione and Barry Hall.
      During 2006, Mr. Vecchione and Mr. Hall agreed to cancel these non-plan options.





**NOTE
      12 - EARNINGS PER SHARE**





The
      following table sets forth common stock equivalents (potential common stock)
      for
      the years ended December 31, 2006 and 2005 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,****2006**
            
            **2005**Weighted
                average common stock equivalents:Plan
                Stock Options
            
            
            10,000
            
            
            1,246,000Non-Plan
                Stock Options
            
            
            —
            
            
            400,000Warrants
            
            
            4,180,000
            
            
            4,253,000





**NOTE
      13 - CONCENTRATION OF CREDIT RISK**





Although
      we are directly affected by the economic well being of significant customers
      listed in the following paragraph, we do not believe that significant credit
      risk exists at December 31, 2006. 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, 2006, the
      Company’s deposits exceeded insured amounts by $697,000. The Company has not
      experienced any losses in such accounts and believes it is not exposed to any
      significant credit risk on cash.





*F-17*


**NOTE
      14 - RELATED PARTIES**





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





From
      August 2004 through May 2005, the Company retained Mr. Doherty's services
      as Chairman and paid Mr. Doherty $10,000 per month for ten months starting
      August 1, 2004. On
      May
      27, 2005, the Compensation Committee on behalf of the Company entered into
      a one
      year consulting agreement with Michael Doherty, the Company’s Chairman. Under
      this agreement, the Consultant would oversee the capitalization of the Company,
      investor relations and will provide strategic advice to the Chief Executive
      Officer. Michael Doherty was to be compensated $20,000 per month in advance.
      Additionally, the Consultant was paid a monthly allowance of $2,500 in advance
      to cover expenses related of an administrative assistant. Effective November
      1,
      2005, Michael Doherty, Executive Chairman of the Board of Directors voluntarily
      agreed to reduce his compensation by fifty-percent. Mr. Doherty continued to
      receive $2,500 in reimbursement for administrative costs. Additionally, Mr.
      Doherty received $2,000 per month for office space. In turn, Mr. Doherty was
      granted 10,000 stock options under the Company’s Amended and Restated 2003 Stock
      Incentive Plan. The options are exercisable at $1.00 per share and vest
      one-hundred percent after six months. On March 15, 2006, the companies mutually
      terminated the consulting agreement.





Effective
      September 1, 2004, the Company entered into an agreement to pay Doherty &
Company, LLC $10,000 per month for financial advisory services requested from
      time to time by the Company. Pursuant to this agreement Doherty & Company,
      LLC provided the Company with various financial advisory services, including
      but
      not limited to consulting with respect to proposed financings, advising the
      Company on potential mergers and acquisitions, and providing the Company with
      investor relations services. Prior to this agreement, the Company reimbursed
      Doherty & Company, LLC $11,250 for overhead incurred in providing
      administrative services to the Company in connection with the private placement
      transaction completed by the Company in July 2004. In addition, pursuant to
      the
      agreements governing Mr. Doherty’s services as Chairman to the





*F-18*





Company,
      Mr. Doherty was entitled to use up to 3,500 square feet of office space, at
      the
      Company's expense, in the Company’s Los Angeles office, in connection with his
      services as Chairman and other activities. A portion of such space is being
      used
      by Doherty & Company, LLC.  This
      agreement was terminated in May 2005. On
      May 9,
      2005, the Compensation Committee on behalf of the Company entered into an
      agreement with Doherty & Company, LLC, an affiliate of Michael Doherty, the
      Company’s Chairman, to assist the Board of Directors in exploring a range of
      possible strategic opportunities and alternatives, including acquisitions,
      joint
      ventures, capital raises, merger or a possible sale of the Company. Under the
      agreement, the Company paid Doherty & Company a nonrefundable retainer of
      $50,000 upon signing.





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





On
      September 25, 2006, the Company entered into an agreement with Eric 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 $1,000 allowance for office expense. As of December 31,
      2006, Mr. Stoppenhagen has received $40,500 under this agreement.







*F-19*