SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-QSB

ý    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended September 30, 2007

or

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission File Number 0-23000

Trestle Holdings, Inc.

(Exact name of small business issuer as specified in its charter)

Delaware	95-4217605
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
PO Box 4198, Newport Beach, California 92661
(Address of principal executive offices)
Issuer’s telephone number:    (949) 903-0468
Former name, former address and former fiscal year, if changed since last report:

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý    NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES ý    NO o

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Class	Outstanding at November 1, 2007
Common Stock, $.001 par value	146,577,362

Transitional Small Business Disclosure Format (Check one):  YES o   NO ý

TRESTLE HOLDINGS, INC.

INDEX

ITEM 1.  FINANCIAL STATEMENTS:

Consolidated Balance Sheets — September 30, 2007 (Unaudited) and December 31, 2006

Consolidated Statements of  Operations (Unaudited) — Quarters and nine months ended September 30, 2007 and 2006

Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2007 and 2006

Notes to Consolidated Financial Statements

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.  CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

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

ITEM 6.  EXHIBITS

TRESTLE HOLDINGS, INC.

ITEM I — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2007			2006
ASSETS	(Unaudited)
CURRENT ASSETS
Cash	$	65,000		$	798,000
Prepaid expenses and other current assets		—			118,000
TOTAL CURRENT ASSETS		65,000			916,000
TOTAL ASSETS	$	65,000		$	916,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	—		$	22,000
Accrued expenses		8,000			37,000
TOTAL CURRENT LIABILITIES		8,000			59,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value, 1,500,000,000 shares authorized, 146,577,362 and 8,257,362 issued and outstanding at September 30, 2007 and December 31, 2006, respectively		143,000			8,000
Additional paid in capital		52,382,000			53,172,000
Accumulated deficit		(52,468,000	)		(52,323,000	)
Total stockholders’ equity		57,000			857,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	65,000		$	916,000

See accompanying notes to consolidated financial statements.

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TRESTLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Quarter Ended September 30,							Nine Months Ended September 30,
	2007			2006				2007			2006
REVENUES
Product	$	—		$	309,000			$	—		$	1,318,000
Software support	—			75,000				—			269,000
Total revenues	—			384,000				—			1,587,000
COST OF SALES	—			172,000				—			772,000
GROSS PROFIT	—			212,000				—			815,000
OPERATING EXPENSES
Research and development	—			263,000				—			1,078,000
Selling, general and administrative expenses	46,000			561,000				159,000			2,158,000
Total operating expenses	46,000			824,000				159,000			3,236,000
LOSS FROM OPERATIONS	(46,000		)	(612,000			)	(159,000		)	(2,421,000		)
Interest income and other, net	1,000			573,000				14,000			553,000
NET LOSS	$	(45,000	)	$	(39,000		)	$	(145,000	)	$	(1,868,000	)
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted	$	(0.00	)	$		(0.00	)	$	(0.00	)	$	(0.22	)
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted	143,257,000			8,257,000				80,757,000			8,257,000

See accompanying notes to consolidated financial statements.

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TRESTLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from operations	$	(145,000	)	$	(1,868,000	)
Adjustments to reconcile loss from operations to net cash provided by/(used in) operating activities:
Depreciation and amortization		—			495,000
Provision for doubtful accounts		—			80,000
Stock based compensation		—			59,000
Gain on sale of assets					(581,000	)
Changes in operating assets and liabilities, net of effects from acquisition/disposition of business:
Accounts receivable		—			952,000
Inventory		—			258,000
Prepaid expenses and other assets		118,000			54,000
Accounts payable and accrued expenses		(51,000	)		(1,409,000	)
Deferred revenue		—			(159,000	)
Net cash used in operating activities		(78,000	)		(2,080,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets		—			2,845,000
Net cash provided by investing activities		—			2,845,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of note		—			625,000
Payment of note		—			(625,000	)
Net proceeds from issuance of common stock		350,000			—
Dividends paid on company common stock		(1,005,000	)		—
Net cash provided by/(used in) financing activities		(655,000	)		—
NET DECREASE IN CASH AND CASH EQUIVALENTS		(733,000	)		(765,000	)
CASH AND CASH EQUIVALENTS, Beginning of period		798,000			305,000
CASH AND CASH EQUIVALENTS, End of period	$	65,000		$	1,070,000

	Nine Months Ended  September 30,
	2007			2006
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash received/(paid) during the period for:
Interest		$	13,000		$	(14,000	)
Income taxes		$	—		$	—
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS

See accompanying notes to consolidated financial statements.

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TRESTLE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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. These estimates are sensitive to change and therefore actual results could differ from these estimates.

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

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

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

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

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

Revenue Recognition — The Company recognized revenues associated with the Trestle business on product sales after shipment of the product to the customer and formal acceptance by the customer had been received.  Depending upon the specific agreement with the customer, such acceptance normally occurred subsequent to one or more of the following events:  receipt of the product by the customer, installation of the product by the Company and/or training of customer personnel by the Company.  For sales to qualified distributors revenues was recognized upon transfer of title which is generally upon shipment.  Revenue recognized for shipping was recognized when the shipment arrived at its destination.

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

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

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

Net Income (Loss) Per Share — The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period.  Common equivalent shares related to stock options and warrants have been excluded from the computation of basic and diluted earnings per share, for the quarters and the nine months ended September 30, 2007 and 2006 because their effect is anti-dilutive.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and accounts receivable.  The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed FDIC insured limits.

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

Recently Issued Accounting Pronouncements

Fair Value Measurements

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

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R

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

Fair Value Option for Financial Assets and Financial Liabilities

In February of 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.”  The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company is analyzing the potential accounting treatment.

NOTE 2 - WARRANTS

During the quarter and nine months ended September 30, 2007, the Company did not issue any warrants and 336,000 warrants expired.  We have 2,974,148 warrants issued and outstanding.

NOTE 3 - STOCK OPTION PLANS

The Company's employee stock option plans (the "Plans") provide for the grant of non-statutory or incentive stock options to the Company's employees, officers, directors or consultants.  The Compensation Committee of our board of directors administers the Plans, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option.  Stock options granted pursuant to the terms of the Plans generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant (110% for awards issued to a 10% or more stockholder).  The term of the options granted under the Plans cannot be greater than 10 years; 5 years for a 10% or more stockholder.  Options vest at varying rates generally over five years.  An aggregate of 1,855,000 shares were reserved under the Plans, of which 1,805,000 shares were available for future grant at September 30, 2007.

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

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

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

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

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During the nine months ended September 30, 2007, the Company granted zero options.

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

The following table summarizes activity in the Company's stock option plans during the nine months ended September 30, 2007 and the year ended December 31, 2006:

	Number of Shares		Weighted Average Price Per Share
Balance at December 31, 2006		1,246,000	$	2.62
Granted		105,000		0.25
Canceled		1,341,000		2.43
Balance at December 31, 2006		10,000	$	67.50
Balance at September 30, 2007		10,000	$	67.50

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

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

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at September 30, 2007		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable at September 30, 2007		Weighted Average Exercise Price
67.50		10,000		2.50		67.50		10,000		67.50

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

NOTE 4 – EARNINGS PER SHARE

The following table sets forth common stock equivalents (potential common stock) for the quarters and the nine months ended September 30, 2007 and 2006 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:

	Quarter Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Weighted average common stock equivalents:
Stock options		10,000		1,060,000		10,000		1,279,000
Warrants		2,974,000		4,179,000		3,778,000		4,216,000

NOTE 5 – CONCENTRATION OF CREDIT RISK

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 September 30, 2007, the Company’s deposits exceeded insured amounts by $65,000.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion  contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.  Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission.  The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this report.

Overview

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.

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

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

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.

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:

For the Quarters Ended September 30, 2007 and 2006

Results of Operations

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

Revenues

Revenues were zero and $384,000 for the quarters ended September 30, 2007 and 2006, respectively.  Revenues for the quarters ended September 30, 2007 and 2006 consisted of zero and $309,000 for product and software sales and zero and $75,000 for software support, respectively.  Revenues will remain at zero due to the sale of substantially all the Company’s assets.

Cost of Sales

Cost of sales was zero and $172,000 for the quarters ended September 30, 2007 and 2006, respectively.  Cost of sales will remain at zero due to the sale of substantially all the Company’s assets.

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Research and Development

Research and development expenses were zero and $263,000 for the quarters ended September 30, 2007 and 2006, respectively.  The decrease in research and development expenses is due to the sale of substantially all the Company’s assets and will remain at zero.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $46,000 and $561,000 for the quarters ended September 30, 2007 and 2006, respectively.  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, Interest Expense and Other

Interest income and other, net was $1,000 and $573,000 for the quarters ended September 30, 2007 and 2006, respectively.  The decrease is principally due to the gain on the sale of assets of $581,000 from the sale of substantially all the Company’s assets in the third quarter of 2006.

For the Nine Months Ended September 30, 2007 and 2006

Revenues

Revenues were zero and $1,587,000 for the nine months ended September 30, 2007 and 2006, respectively.  Revenues for the nine months ended September 30, 2007 and 2006 consisted of zero and $1,318,000 for product and software sales and zero and $269,000 for software support, respectively.  Revenues will remain at zero due to the sale of substantially all the Company’s assets.

Cost of Sales

Cost of sales was zero and $772,000 for the nine months ended September 30, 2007 and 2006, respectively.  Cost of sales will remain at zero due to the sale of substantially all the Company’s assets.

Research and Development

Research and development expenses were zero and $1,078,000 for the nine months ended September 30, 2007 and 2006, respectively.  The decrease in research and development expenses is due to the sale of substantially all the Company’s assets and will remain at zero.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $159,000 and $2,158,000 for the nine months ended September 30, 2007 and 2006, respectively.  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, Interest Expense and Other

Interest income and other, net was $14,000 and $553,000 for the nine months ended September 30, 2007 and 2006, respectively.  The decrease is principally due to the gain on the sale of assets of $581,000 from the sale of substantially all the Company’s assets in the third quarter of 2006.

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Liquidity and Capital Resources

Net cash used in operating activities was $78,000 and $2,080,000 in the nine months ended September 30, 2007 and 2006, respectively.  The decrease of $2,002,000 in cash used by operating activities was primarily due to expenses having decreased significantly as we terminated all of our employees due to the sale of assets to Clarient and outsourced our administrative functions.

Net cash provided by investing activities was zero and $2,845,000 in the nine months ended September 30, 2007 and 2006, respectively. Investing activities for the nine months ended September 30, 2006 resulted from the sale of substantially all the Company’s assets.

Net cash provided by/(used in) financing activities was ($655,000) and zero in the nine months ended September 30, 2007 and 2006, respectively.  The decrease of $655,000 in cash used in financing activities was primarily due to the Loan Agreement with Clarient in 2006 and dividend of $1,005,000 paid to the shareholders in 2007.

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 by Clarient, Clarient entered into a Second Loan Agreement with us pursuant to which Clarient loaned $250,000 to us 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 our 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 us.

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.

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

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

The Company suffered recurring losses from operations and has an accumulated deficit of $52,468,000 at September 30, 2007.  Currently, we are a non-operating public company. The Company is seeking out suitable candidates for a business combination with a private company.

Inflation and Seasonality

Inflation has not been material to the Company during the past five years. Seasonality has not been material to the Company.

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Recent Accounting Pronouncements

In March 2006 the 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 the “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 have 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 have 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.

In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.  The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities.  This statement is not applicable to the Company.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or financing activities with special purpose entities.

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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 September 30, 2007, we had an accumulated deficit of approximately $52,468,000, of which approximately $52,193,000 was incurred prior to the sale of our tissue imaging and telemedicine business lines to Clarient.  We anticipate that our existing cash and cash equivalents will be sufficient to fund our business needs. 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 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.

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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.

Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock, lower our value and make it more difficult for us to pursue or consummate a private company transaction.

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

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

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

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

·   announcements concerning our strategy,

·   litigation; and

·   general market conditions.

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

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

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

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

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

Our articles of incorporation authorize the issuance of 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 therefor. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders.

ITEM 3 – 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.

As of September 30, 2007, the end of the period covered by this report, 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 as of September 30, 2007, our disclosure controls and procedures were effective.

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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, 2007 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 II - OTHER INFORMATION

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

On June 25, 2007, four stockholders who own of record 135,350,500 shares of our common stock, representing approximately 94.5% of the then outstanding shares of our common stock, executed and delivered to us a written consent authorizing and approving an amendment to our Third Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 1,500,000,000 (the “Action”).  There were 143,257,214shares of our common stock entitled to vote on the Action, 7,906,714 of which did not vote on the action.  The amendment to our Third Amended and Restated Certificate of Incorporation became effective on August 17, 2007.

ITEM 6 – EXHIBITS.

See exhibit index.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TRESTLE HOLDINGS, INC.
Date: November 14, 2007	/s/  ERIC STOPPENHAGEN
	Name: Eric Stoppenhagen
	Title: Interim President

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EXHIBIT INDEX

Exhibit	Description
31	Certification of Interim President and Principal Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of the Company’s Interim President and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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