**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





**** **FORM
10-QSB**








**x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE**


**SECURITIES
EXCHANGE ACT OF 1934**





For the
Quarterly Period ended: March 31, 2005





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 No.: 000-51285
 
 
 **a21,
INC.**
 (Name of
Small Business Issuer in its Charter)
 
 TEXAS
    74-2896910(State
      or Other Jurisdiction of
    (I.R.S.
      EmployerIncorporation
      or Organization)
    Identification
      Number)





**7660
CENTURION PARKWAY, JACKSONVILLE, FLORIDA 32256**


(Principal
Executive Office)





Issuer's
telephone number, including area code: (904) 565-0066





**SECURITIES
REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE**





**SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common stock, par value $0.001
per share**





Check
whether the Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 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 x No o





There
were 41,056,237 shares of a21, Inc.’s common stock, par value $0.001 per share,
outstanding on May 13, 2005.





Transitional
Small Business Disclosure Format (check one): Yes o No x







**TABLE
      OF CONTENTS**PagePART
      I - FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTS (unaudited)Condensed
      Consolidated Balance Sheets at March 31, 2005 and December 31,
      2004
    
    1Condensed
      Consolidated Statements of Income for the three months ended March 31,
      2005 and 2004
    
    3Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2005 and 2004
    
    4Condensed
      Consolidated Statements of Changes in Stockholder’s Equity for the three
      months ended March 31, 2005
    
    6Notes
      to Condensed Consolidated Financial Statements
    
    7ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
    
    17ITEM
      3. CONTROLS AND PROCEDURES
    
    18PART
      II - OTHER INFORMATIONITEM
      1. LEGAL PROCEEDINGS
    
    19ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
    
    19ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
    
    19ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    19ITEM
      5. OTHER INFORMATION
    
    19ITEM
      6. EXHIBITS
    
    20















**a21, Inc. and Subsidiaries**
 **CONSOLIDATED
BALANCE SHEETS**
 **(Unaudited)**
 **($
in thousands)**


**March
      31,**
    
    **December
      31,****2005**
    
    **2004**ASSETSCURRENT
      ASSETSCash
      and cash equivalents
    
    $
    850
    
    $
    717Accounts
      receivable, net
    
    
    1,776
    
    
    1,462Prepaid
      expenses and other current assets
    
    
    202
    
    
    200Income
      tax receivable
    
    
    108
    
    
    108Total
      current assets
    
    
    2,936
    
    
    2,487Land
      and building, net
    
    
    7,462
    
    
    7,329Photo
      collection, net
    
    
    2,076
    
    
    2,198Property
      and equipment, net
    
    
    477
    
    
    547Goodwill
    
    
    2,283
    
    
    2,283Contracts
      with photographers
    
    
    1,082
    
    
    1,133Long-term
      notes receivable
    
    
    16
    
    
    18Intangible
      assets, net
    
    
    85
    
    
    92Other
      long-term assets
    
    
    102
    
    
    101Restricted
      cash
    
    
    608
    
    
    600Total
      assets
    
    $
    17,127
    
    $
    16,788LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESCurrent
      portion of loan payable
    
    $
    5
    
    $
    ---Accounts
      payable
    
    
    564
    
    
    872Accrued
      wages and payroll taxes
    
    
    173
    
    
    147Accrued
      interest, current
    
    
    27
    
    
    187Accrued
      purchase price payable
    
    
    201
    
    
    201Current
      portion of promissory note payable
    
    
    33
    
    
    32Royalties
      payable
    
    
    1,100
    
    
    979Total
      current liabilities
    
    
    2,103
    
    
    2,418LONG-TERM
      LIABILITIESPromissory
      note payable, long-term portion
    
    
    33
    
    
    67Other
      long-term liabilities
    
    
    62
    
    
    61Loan
      payable
    
    
    7,453
    
    
    7,458Senior
      secured notes payable, net
    
    
    2,213
    
    
    1,071Unsecured
      notes payable to others, net
    
    
    1,050
    
    
    1,040Accrued
      interest, long-term
    
    
    137
    
    
    ---Deferred
      income taxes
    
    
    1,241
    
    
    1,234Total
      liabilities
    
    
    14,292
    
    
    13,349





-1-




**a21, Inc. and Subsidiaries**
 **CONSOLIDATED
BALANCE SHEETS (Cont’)**
 **(Unaudited)**
 **($
in thousands)**


**March
      31,**
    
    **December
      31,****2005**
    
    **2004**COMMITMENTS
      AND CONTINGENCIESMINORITY
      INTEREST
    
    
    2,800
    
    
    2,800STOCKHOLDERS'
      EQUITYPreferred
      stock; $.001 par value; 100,000 shares authorized; no shares
      issuedand
      outstanding
    
    
    ---
    
    
    ---Common
      stock; $.001 par value; 100,000,000 shares authorized; 41,816,012shares
      issued and 38,136,237 shares outstanding at March 31, 2005
    andDecember
      31, 2004, respectively
    
    
    42
    
    
    42Treasury
      stock (at cost, 3,679,775 shares)
    
    
    ---
    
    
    ---Additional
      paid-in capital
    
    
    9,701
    
    
    9,655Accumulated
      deficit
    
    
    (9,719
    )
    
    (9,018
    )Accumulated
      comprehensive income
    
    
    11
    
    
    (40
    )Total
      stockholders' equity
    
    
    35
    
    
    639Total
      liabilities and stockholders' equity
    
    $
    17,127
    
    $
    16,788The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.




-2-


**a21, Inc. and Subsidiaries**
 **CONSOLIDATED
STATEMENT OF OPERATIONS**
 **(Unaudited)**
 **($
in thousands)**


**Three
      Months Ended****March
      31,******
    
    ******2005**
    
    **2004******
    
    ****REVENUE
    
    $
    2,312
    
    $
    798COST
      OF REVENUE
    
    
    712
    
    
    212****
    
    
    ****GROSS
      PROFIT
    
    
    1,600
    
    
    586****
    
    
    ****EXPENSESSelling,
      general and administrative
    
    
    1,566
    
    
    986Depreciation
      and amortization
    
    
    353
    
    
    99****
    
    
    ****TOTAL
      OPERATING EXPENSES
    
    
    1,919
    
    
    1,085****
    
    
    ****OPERATING
      LOSS
    
    
    (319
    )
    
    (499
    )****
    
    
    ****Interest
      expense, net
    
    
    (480
    )
    
    (101
    )Other
      income, net
    
    
    105
    
    
    ---****
    
    
    ****NET
      LOSS BEFORE TAXES
    
    
    (694
    )
    
    (600
    )Income
      tax expense
    
    
    (7
    )
    
    ---****
    
    
    ****NET
      LOSS
    
    
    (701
    )
    
    (600
    )****
    
    
    ****COMPREHENSIVE
      LOSSForeign
      currency translation adjustment
    
    
    51
    
    
    ---****
    
    
    ****TOTAL
      COMPREHENSIVE LOSS
    
    $
    (650
    )
    $
    (600
    )****
    
    
    ****NET
      LOSS PER SHARE, BASIC AND DILUTED
    
    $
    (0.02
    )
    $
    (0.02
    )****
    
    
    ****WEIGHTED
      AVERAGE NUMBER OF COMMON SHARESOUTSTANDING,
      BASIC AND DILUTED
    
    
    38,136,237
    
    
    25,726,916The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.






-3-


**a21, Inc. and Subsidiaries**
 **CONSOLIDATED
STATEMENT OF CASH FLOW**
 **(Unaudited)**
 **($
in thousands)**




****Three
      Months Ended**March 31,****2005**
    
    **2004**CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
    
    $
    (701
    )
    $
    (600
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      & amortization
    
    
    353
    
    
    99Amortization
      of finance costs
    
    
    2
    
    
    53Compensation
      from the prior issuance of variable options
    
    
    ---
    
    
    305Compensation
      from the issuance of options
    
    
    ---
    
    
    48Amortization
      of debt discount related to unsecured notes payable to
    others
    
    
    (10
    )
    
    ---Write-off
      of debt discount related to convertible subordinated notes
      payable
    
    
    (179
    )
    
    ---Deferred
      income taxes, net
    
    
    7
    
    
    (9
    )Changes
      in:Accounts
      receivable
    
    
    (314
    )
    
    (202
    )Prepaid
      expenses & other current assets
    
    
    (2
    )
    
    (115
    )Long-term
      assets
    
    
    2
    
    
    (1
    )Accounts
      payable and accrued expenses
    
    
    161
    
    
    62Accrued
      interest and other current liabilities
    
    
    23
    
    
    23Restricted
      cash
    
    
    8
    
    
    ---NET
      CASH USED IN OPERATING ACTIVITIES
    
    
    (650
    )
    
    (337
    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in acquisition of SuperStock, net of cash balance of SuperStock at
      dateof
      acquisition in the amount of $1,151
    
    
    ---
    
    
    (1,400
    )Purchase
      of fixed assets
    
    
    (236
    )
    
    (96
    )NET
      CASH USED IN INVESTING ACTIVITIES
    
    
    (236
    )
    
    (1,496
    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Lease
      payments accounted for as repayment of loan payable
    
    
    1
    
    
    ---Net
      proceeds from senior secured notes payable
    
    
    2,250
    
    
    ---Net
      proceeds from sale of common stock and warrants
    
    
    ---
    
    
    2,790Proceeds
      from issuance of unsecured notes payable and warrants
    
    
    ---
    
    
    1,050Proceeds
      from issuance of convertible subordinated notes payable and
      warrants
    
    
    ---
    
    
    1,250Repayment
      of convertible subordinated notes payable
    
    
    (1,250
    )
    
    ---Repayment
      of revolving credit line
    
    
    ---
    
    
    (1,700
    )Repayment
      of unsecured notes payable to affiliates
    
    
    ---
    
    
    (75
    )Repayment
      of promissory note payable
    
    
    (33
    )
    
    ---Principal
      payment of note payable to bank
    
    
    ---
    
    
    (521
    )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    968
    
    
    2,794
   -4-
  **a21, Inc. and Subsidiaries**
 **CONSOLIDATED
STATEMENT OF CASH FLOW (Cont’)**
 **(Unaudited)**
 **($
in thousands)**
 ****Three
      Months Ended**March 31,****2005**
    
    **2004**NET
      EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENTS
    
    $
    51
    
    $
    1NET
      INCREASE IN CASH
    
    
    133
    
    
    962CASH
      AT BEGINNING OF PERIOD
    
    
    717
    
    
    1CASH
      AT END OF PERIOD
    
    $
    850
    
    $
    963SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Income
      taxes paid
    
    $
    ---
    
    $
    ---Interest
      paid
    
    
    99
    
    
    11SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:Issuance
      of equity for:Repayment
      of notes payable to affiliates
    
    
    ---
    
    
    424Issuance
      of common stock for accrued interest on notes payable to
      affiliates
    
    
    ---
    
    
    51Issuance
      of common stock for accrued compensation
    
    
    ---
    
    
    136Issuance
      of common stock for placement costs in connection with the sale of common
      stock
    
    
    ---
    
    
    13Issuance
      of common stock to sellers as part of acquisition cost of
      SuperStock
    
    
    ---
    
    
    137Debt
      discount recorded for the issuance of warrants in connection with
      unsecured note payable and convertible subordinated notes
      payable
    
    
    ---
    
    
    551Debt
      discount recorded for the issuance of warrants in connection with senior
      secured notes payable
    
    
    39
    
    
    ---Issuance
      of warrants as part of acquisition cost of SuperStock
    
    
    ---
    
    
    83Note
      payable to sellers on acquisition of SuperStock
    
    
    ---
    
    
    1,576Accrued
      purchase price payable
    
    
    ---
    
    
    300Accrued
      acquisition costs
    
    
    ---
    
    
    17Minority
      interest
    
    
    ---
    
    
    2,800Acquisition
      of SuperStock (See Note C)
    
    
    ---
    
    
    7,477The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.






-5-




**a21, Inc. and Subsidiaries**
 **CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY**
 **(Unaudited)**
 **(in
thousands)**


COMMON
      STOCK
    
    TREASURY
      STOCK
    
    
    
    
    
    ACCUMULATEDADDITIONAL
    
    
    
    OTHERNUMBER
      OF
    
    
    
    NUMBER
      OF
    
    
    
    PAID-IN
    
    RETAINED
    
    COMPREHENSIVESHARES
    
    AMOUNT
    
    SHARES
    
    AMOUNT
    
    CAPITAL
    
    EARNINGS
    
    INCOME
    
    TOTALBalance
      at December 31, 2004
    
    
    41,816
    
    $
    42
    
    
    (3,680
    )
    $
    ---
    
    $
    9,655
    
    $
    (9,018
    )
    $
    (40
    )
    $
    639Issuance
      of warrants to the holders of senior secured notes payable
    
    
    ---
    
    
    ---
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    39Issuance
      of warrants to the holders of unsecured notes payable
    
    
    ---
    
    
    ---
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    7Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (701
    )
    
    
    
    
    (701
    )Other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    51Balance
      at March 31, 2005
    
    
    41,816
    
    $
    42
    
    
    (3,680
    )
    $
    ---
    
    $
    9,701
    
    $
    (9,719
    )
    $
    11
    
    $
    35The
      accompanying notes are an integral part of these condensed consolidated
      Financial Statements.








-6-




a21, Inc. and Subsidiaries (Unaudited)
 Notes to
Condensed Consolidated Financial Statements
 March 31,
2005


**NOTE
A - FINANCIAL STATEMENT PRESENTATION**





The
unaudited condensed consolidated financial statements of a21, Inc. and
subsidiaries (the “Company”) herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) and, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position at March
31, 2005 and the results of operations for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
SEC rules and regulations. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years. These
condensed consolidated financial statements should be read in conjunction with
the Company’s audited financial statements included in the Company’s annual
report on Form 10-KSB for the year ended December 31, 2004 filed with the
Securities and Exchange Commission.





Through
February 29, 2004, the Company was considered a development stage enterprise in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7,
“Accounting and Reporting by Development Stage Enterprises.” As a result of its
acquisition of SuperStock, Inc. and subsidiaries (“SuperStock”) on February 29,
2004, the Company commenced planned principal operations and as such, it is no
longer considered to be a development stage enterprise in accordance with SFAS
No. 7.





In
February 2004, the Company completed the acquisition of SuperStock, Inc. (see
Note C) and in June 2004, sold SuperStock’s land and building for approximately
$7.7 million and leased it back (see Note K). The unaudited condensed
consolidated financial statements of the Company include the accounts of
SuperStock from the acquisition date of February 29, 2004. The minority interest
in the condensed consolidated balance sheet at March 31, 2005, represents the
interest of the holders of preferred shares of SuperStock, which are
exchangeable into common shares of the a21, Inc. The minority interest was
valued at the estimated market value of the a21, Inc. shares at the acquisition
date as if exchanged.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The company has sustained
recurring losses and at March 31, 2005 had an accumulated deficit of $9,719,000
and working capital of $833,000. The Company has sustained operations by raising
capital through the private placement of common stock, convertible debt and
other debt and through the sale of assets. In February, 2005, the Company
completed a debt financing that yielded $1,000,000, net of retirement of prior
debt. The Company is planning to raise additional capital from time to time to
reduce its debt, provide working capital for operations, and to provide capital
for acquisitions. The Company plans to raise capital through the issuance of
debt, equity or other potential transactions, depending upon which is available
and provides the most favorable terms for the Company. There is no guarantee
that management will be successful in closing any debt or equity financings. If
the Company is unable to raise additional capital, then the Company may not be
able to fully execute its business plan.








**NOTE
B - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





[1]
Nature of Business





The
Company licenses and acquires stock photography for worldwide distribution to
advertisers and publishers through sublicense and license
agreements.





[2]
Principles of consolidation:





The
consolidated financial statements include the accounts of the Company and its
subsidiaries, including the accounts of SuperStock from the acquisition date of
February 29, 2004. The minority interest in the consolidated balance sheet at
March 31, 2005 represents the interest of the holders of preferred shares of
SuperStock, which are exchangeable into common shares of a21, Inc. The minority
interest was valued at the estimated market value of the a21, Inc. common shares
at the acquisition date as if exchanged. All significant intercompany balances
and transactions have been eliminated.





[3]
Revenue recognition:





The
license fees earned by the Company from reproductions are affected by the manner
in which they are used by clients. Revenue is recognized when the following
criteria are met: evidence of an arrangement exists, the price is fixed or
determinable, collectibility is reasonably assured and delivery has occurred or
services have been rendered. Revenue is recorded at invoiced amounts except in
the case of licensing rights through distributors, where revenue is recorded at
the Company’s share of invoiced amounts. Distributors typically earn and retain
a percentage of the license fee according to their contract, and the Company
recognizes the remaining percentage as revenue.





[4] Cost
of revenue:





Cost of
revenue reflects royalties on revenue generated from images licensed by the
Company under contracts with photographers. Royalties are expensed in the period
that they are incurred.




-7-


a21, Inc. and Subsidiaries (Unaudited)
 Notes to
Condensed Consolidated Financial Statements
 March 31,
2005


[5] Use
of estimates:





The
preparation of financial statements in conformity with accounting principles
generally accepted 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
recoverability of the carrying values of long-lived assets represents sensitive
estimates subject to change.





[6] Fair
value of financial instruments:





Financial
instruments consist primarily of cash, accounts receivable, accounts payable,
accrued expenses, and short-term debt, which approximate fair value because of
their short maturities. The carrying amount of long-term debt approximates fair
value due to the market rate of interest incurred by the Company. The fair value
of the Company's notes payable to an affiliated company are not reasonably
determinable based on the related party nature of the transactions.





**** [7] Cash
and cash equivalents:





The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. At March 31, 2005, the
Company had no investments with maturities greater than three months. Cash
excludes funds to secure a letter of credit in the amount of $608,000 as of
March 31, 2005, which the Company is required to maintain in accordance with its
lease agreement for the SuperStock facility (see Note M).





[8]
Foreign Currency Translation:





The
Company’s U.K., Canada and Italy operations use the U.S. dollar as the
functional currency. As such, its monetary assets and liabilities are translated
into U.S. dollars at current exchange rates.





[9] Land
and Building





Land and
building, which were sold and leased back in a transaction accounted for as a
financing (see Note K ); the
building is being depreciated over the twenty-year term of the related
lease.





[10]
Property and equipment:





Property
and equipment are recorded at cost. Expenditures for major additions and
betterments are capitalized. Maintenance and repairs are charged to operations
as incurred. Depreciation of property and equipment is computed using the
straight-line method over the assets' estimated lives ranging from three to seven years.
Upon sale or retirement of property and equipment, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in operations.





[11]
Photo collection:





In
connection with the acquisition of SuperStock, $2,607,000 was allocated to the
photo collection. Expenditures for additions and betterments to the collection
are capitalized. The photo collection is categorized by type of imagery (fine
art, vintage and contemporary). Depreciation of the photo collection is computed
by the straight-line method over the assets’ estimated lives of forty years for
fine art and vintage images and four years for contemporary images. Upon sale or
retirement of any portion of the collection, the related cost and accumulated
depreciation are removed form the accounts and any gain or loss is reflected in
operations. At March 31, 2005, the net book value of the photo collection
included fine art and vintage images of $696,000 and contemporary images of
$1,380,000.





[12]
Goodwill:





The
Company has adopted Statement of Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Other Intangible Assets”. This statement requires the Company to
test the goodwill balance for impairment annually and between annual tests in
certain circumstances. When assessing impairment, the Company must estimate the
implied fair value of the goodwill. The Company estimated the implied fair value
based on a discounted cash flow model that involves significant assumptions and
estimates based on management’s best judgments of current and future
circumstances, including currently enacted tax laws, the future weighted average
cost of capital, and our future financial performance. As circumstances change,
it is reasonably possible that future goodwill impairment tests could result in
a loss on impairment of assets, which could be included in the determination of
net income/ (loss). SFAS 142 also requires that intangible assets with definite
lives be amortized over their estimated useful life and reviewed for impairment
in accordance with SFAS 144. Intangible assets with definite lives are amortized
using the straight line method over their expected useful life of four
years.





[13]
Long-lived assets:





The
Company evaluates its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," pursuant to which an impairment loss is
recognized if the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value. The Company estimated the implied fair value based on a
discounted cash flow model that involves significant assumptions and estimates
based on management’s best judgments of current and future circumstances,
including currently enacted tax laws, the future weighted average cost of
capital, and our future financial performance.





-8-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005 [14]
Income taxes:





The
Company accounts for income taxes in accordance with SFAS No.109, "Accounting
for Income Taxes." SFAS No. 109 requires the recognition of deferred tax assets
and liabilities for both the expected impact of differences between the
financial statements and tax base of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. Deferred
tax assets are reduced, if necessary, by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.





[15] Net
income (loss) per share:





The
Company calculates net income (loss) per share in accordance with the provisions
of SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires a dual presentation
of "basic" and "diluted" income (loss) per share on the face of the statements
of operations. Basic income (loss) per share is computed by dividing the net
income (loss) by the weighted average number of shares of common stock
outstanding during each period. Diluted income (loss) per share includes the
effect, if any, from the potential exercise or conversion of securities, such as
stock options and warrants, which would result in the issuance of incremental
shares of common stock. For the three months ended March 31, 2005 and 2004, the
basic and diluted net loss per share is the same since the effect from the
potential exercise of 36,053,740 and 33,092,590 outstanding stock options and
warrants as of March 31, 2005 and 2004, respectively, would have been
anti-dilutive. In addition, 5,000,151 shares of common stock issuable upon the
exchange of the seller’s non-voting participating preferred stock (see Note C)
have been excluded for the three months ended March 31, 2005.





[16]
Stock-based compensation:





The
Company accounts for stock-based employee compensation under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." The following table illustrates the effect on net
loss and loss per share for the three months ended March 31, 2005 and 2004 if
the fair value based method had been applied to all awards.




**$
      in thousands, except per share amounts**
    
    **Three
      months ended March 31,****2005**
    
    **2004**Reported
      net loss
    
    $
    (701
    )
    $
    (600
    )Stock
      based employee compensation included in net loss
    
    
    ---
    
    
    305Stock-based
      employee compensation determined under the fair value based method, net of
      tax effect
    
    
    (79
    )
    
    (19
    )Pro
      forma net loss
    
    $
    (780
    )
    $
    (314
    )Loss
      per share - basic and dilutedAs
      reported
    
    $
    (0.02
    )
    $
    (0.02
    )Pro
      forma
    
    $
    (0.02
    )
    $
    (0.01
    )




The fair
value of each option is measured at the grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options granted during the three months ended March 31, 2005 and 2004:
annual dividends of $0.00; expected volatility of 80%; risk free interest rate
of 3.00%, and an expected life of five years.





Compensation
expense of zero and $305,000 was recorded in the consolidated statements of
operations for the three months ended March 31, 2005 and 2004, respectively,
pursuant to variable accounting for certain options.





[17]
Advertising





Advertising
expenses were $102,000 and $52,000 for the three months ended March 31, 2005 and
March 31, 2004, respectively. Advertising costs are charged to expense as
incurred.




**NOTE
C - ACQUISITION OF SUPERSTOCK, INC.**





In
February 2004, the Company completed the acquisition of all of the voting common
stock, representing 83% of the outstanding equity, of SuperStock, Inc., a
licensor of stock images to the advertising, media and publishing industries.
SuperStock's primary assets included a collection of images that it either owns
or licenses from third parties, an approximately 73,000 square foot facility in
Jacksonville, Florida (which the Company, through our SuperStock subsidiary,
sold and leased back from the buyer), receivables from its customers and cash.





In
consideration for the sale and purchase of the common stock of SuperStock, the
sellers received 1,666,717 shares of non-voting participating preferred stock
(the “Seller Preferred”) of SuperStock which is exchangeable into 5,000,151
shares of the Company’s common stock, $2.6 million in cash and a 14 month
secured note in the amount of $1.6 million that initially pays an interest rate
of LIBOR plus 1.9% per annum. In addition, we granted warrants to the sellers to
purchase 160,000 shares of our common stock at $0.56 per share and issued to the
sellers and their advisors 573,589 shares of our common stock for $150,000
consideration. Final adjustments were made to the purchase price upon
finalization of SuperStock's closing balance sheet pursuant to which we agreed
to pay $100,000 to the sellers in three installments. The first installment was
paid upon the signing of the final agreement, the second installment is due on
March 1, 2006 and the third installment is due on March 1, 2007. The deferred
payments due March 1, 2006 and March 1, 2007 in the form of a promissory note
shall bear interest at the rate of five percent per annum commencing on March 1,
2005 until paid in full. As part of the original purchase agreement, the sellers
may also receive up to $1.5 million should SuperStock achieve certain revenue
milestones during the four year period after closing, of which the estimated
payment for the first year (March 1, 2004 through February 28, 2005) is expected
to be about $201,000, which was accrued as a cost of the
acquisition.





-9-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005


In
addition, the Company repaid a $1.7 million credit facility of SuperStock and
paid down $500,000 of a note secured by a first mortgage on the SuperStock
Facility. This reduced the principal balance on the note secured by a first
mortgage to $4.0 million at an interest rate of LIBOR plus 1.9% payable monthly
plus principal ("First Mortgage").





The
aggregate purchase price was approximately $7,477,000. The following summarizes
the fair values of the assets acquired and liabilities assumed at the date of
acquisition.




**($
      in thousands)**Current
      assets
    
    $
    2,473Land
      and building
    
    
    7,572Photo
      collection
    
    
    2,607Property
      and equipment
    
    
    469Goodwill
    
    
    2,584Contracts
      with photographers
    
    
    1,304Other
      intangible assets
    
    
    116Other
      long-term assets
    
    
    342Note
      payable to bank - current
    
    
    (4,554
    )Other
      current liabilities
    
    
    (3,171
    )Deferred
      income taxes
    
    
    (2,265
    )$
    7,477




Results
of operations of SuperStock are included in the accompanying financial
statements from February 29, 2004, the date of


acquisition.
The following proforma information gives effect to the acquisition as if it had
occurred on the first day of the period ended March 31, 2004.








**Three
      Months**
      **Ended****($
      in thousands, except per share amounts)**
    
    **March
      31, 2004******
    
    ****Total
      revenue
    
    $
    2,319Net
      loss
    
    
    (688
    )Net
      loss per share, basic and diluted
    
    $
    (0.02
    )Proforma
      weighted average number of common shares outstanding, basic and diluted
    
    
    38,073,737







-10-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005
 **NOTE
D -- PROPERTY AND EQUIPMENT**





Property
and equipment is stated at cost, less accumulated depreciation and amortization,
and at March 31, 2005 and December 31, 2004, is summarized as follows:




**($
      in thousands)**
    
    **March
      31, 2005**
    
    **December
      31, 2004**Furniture,
      fixtures & officeequipment
    
    $
    401
    
    $
    412Photo/Computer
      equipment
    
    
    409
    
    
    407Software
    
    
    138
    
    
    138Less:
      Accumulated Depreciation
    
    
    (471
    )
    
    (410
    )Total
      property & equipment, net
    
    $
    477
    
    $
    547




Depreciation
and amortization in the amount of $353,000 and $99,000 are included in expenses
for the three months ended March 31, 2005 and 2004, respectively, in the
consolidated statements of operations and include depreciation and amortization
for land and building, the photo collection and the contracts with
photographers.




**NOTE
E -- LONG-TERM NOTES RECEIVABLE**





In 2003,
SuperStock sold its operations in Chile to a third party and accepted a note
receivable from the buyer for $80,000. The timing and amount of the payments
against this note were determined to be insufficient to support the note’s book
value. Using present value analysis, the value of the note at December 31, 2004
was calculated to be $18,000; the Company wrote the note receivable down by
$49,000 at the end of 2004 to reflect this value. The balance of this note is
$16,000 at March 31, 2005.




**NOTE
F -- GOODWILL AND OTHER INTANGIBLE ASSETS**





Goodwill
of $2,283,000 represents the excess of the purchase price over the fair value of
tangible and identifiable intangible assets associated with the acquisition of
SuperStock, Inc. described in detail in Note C. Goodwill has been reduced by
$484,000 to reflect the utilization of SuperStock’s net operating loss
carryforward on the sale of the land and building.





Identifiable
intangible assets are shown net of amortization and are principally comprised of
covenants not to compete, which are amortized over four years.




**NOTE
G - CONTRACTS WITH PHOTOGRAPHERS**





Contracts
with photographers ($1,082,000, net of amortization) are attributable to the
acquisition of SuperStock, Inc. These contracts have an average life of five
years and are automatically renewable. Amortization of the photographer’s
contracts is based on projected revenues expected to be generated over the
estimated ten year life of the underlying images.




**NOTE
H -- MINORITY INTEREST**





As part
of the financing to acquire all of the voting common stock, representing 83% of
the outstanding equity of SuperStock, in consideration for the sale and purchase
of such shares, the sellers received 1,666,717 shares of non-voting
participating preferred stock of SuperStock, which are exchangeable for
5,000,151 shares of a21 common stock. The preferred stock has no voting rights,
pays no dividend, and, except for exchange rights into a21 common stock, it has
no other special rights except for liquidation rights. In liquidation, it is
senior to the common stock of SuperStock and has distribution rights to the
greater of $4.25 million or 17% of the total liquidation distributions made
after distributions to creditors.





The
minority interest is valued as if it were exchanged into a21 common stock at the
closing price on the day of the acquisition.





-11-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005
 **NOTE
I -- OPERATING SEGMENTS**





The
Company began operating domestically and internationally beginning February 29,
2004. The following table presents information about the Company’s domestic and
international activity, including minority interest.








**($
      in thousands)****Domestic**
    
    **International**
    
    **Total******
    
    ****
    
    ****
    
    ****Three
      months ended March 31, 2005:Revenue
    
    $
    1,967
    
    $
    345
    
    $
    2,312Segment
      operating loss
    
    
    (687
    )
    
    (7
    )
    
    (694
    )Segment
      assets at March 31, 2005
    
    
    16,732
    
    
    395
    
    
    17,127Three
      months ended March 31, 2004:Revenue
    
    $
    683
    
    $
    115
    
    $
    798Segment
      operating loss
    
    
    (587
    )
    
    (13
    )
    
    (600
    )Segment
      assets at March 31, 2004
    
    
    16,963
    
    
    422
    
    
    17,385








Domestic
segment information includes $484,000 and $157,000 of revenue and $361,000 and
$346,000 of account receivables, respectively, for the three months ended March
31, 2005 and 2004, attributable to foreign agents utilized by a domestic
subsidiary. International segment information reflects the operation of foreign
subsidiaries. Those amounts are not based on the geographic origin of customers
which is not readily determinable.




**NOTE
J - DEBT FINANCINGS**





[1]
Convertible Subor d inated
Notes Payable:





The
Company received $1,250,000 in connection with the issuance of a two-year
convertible subordinated note (due February 29, 2006) which accrued interest at
12% for the first six months, 13.5% for the next twelve months, and 15% for the
last six months and was convertible into the Company’s common stock based along
with 937,500 callable warrants exercisable at prices between $0.45 and $1.35 per
share.





The
Company allocated the proceeds received to the principal amount of the note and
the warrants based upon the relative fair value method. The fair value of the
warrants was determined using the Black Scholes pricing model. The difference
between the proceeds allocated to, and the relative fair value of the notes,
which amounted to $306,000, was recorded as debt discount and additional paid-in
capital. The discount was being amortized over the two-year term of the note,
and the balance of $1,071,000 at December 31, 2004 is presented net of the
unamortized debt discount. In February 2005, the Company repaid the notes and
accr u ed
interest (see item [3] below).





[2]
Unsecured Notes Payable:





The
Company received $1,050,000 in connection with the issuance of unsecured debt in
the form of promissory notes, which accrue interest at 12% for up to twelve
months along with 630,000 callable warrants at $0.45 per share. In addition, the
Company issued 63,000 warrants exercisable at $0.45 per share to an
investment-banking firm in connection with the placement of the unsecured debt.
These notes matured on August 29, 2004, but provided for an automatic extension,
if not paid, of six months and monthly extensions thereafter. The fair value of
the warrants, which amounted to $245,000, was determined using the Black Scholes
pricing model and was recorded as debt discount and additional paid-in
capital.





Since the
notes were still outstanding as of August 29, 2004, the number of shares of
warrants was increased by 50% (315,000 callable warrants) at $0.45 per share.
The fair value of the warrants issued for the six-month extension, which
amounted to $31,000, was determined using the Black Scholes pricing model and
was recorded as debt discount and additional paid-in capital. The discount was
amortized over the six-month term of the promissory notes.







-12-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005
 For every
month thereafter the next six-month extension (February 28, 2005) and until the
note is paid, the number of warrants is to be increased by one-ninth (105,000
callable warrants). Since the note was still outstanding as of February 29,
2005, the revised number of warrants was increased by one-ninth (105,000
callable warrants) at $0.45 per share. The fair value of the warrants issued,
which amounted to $4,000, was determined using the Black Scholes pricing model
and was recorded as expense and additional paid-in capital. Since the note was
still outstanding as of March 31, 2005, the revised number of warrants was
increased by one-ninth (105,000 callable warrants) at $0.45 per share. The fair
value of the warrants issued, which amounted to $3,000, was determined using the
Black Scholes pricing model and was recorded as expense and additional paid-in
capital. The balance of the unsecured notes payable is $1,050,000 at March 31,
2005. The fair value of warrants issued for additional monthly extensions will
be recognized as expense and additional paid in capital as
incurred.





[3]
Senior Secured Notes Payable





O n
February 22, 2005, a21, Inc. consummated a $2,250,000 financing (the
"Financing") in the form of two-year interest only senior (non-convertible)
secured notes and retired $1,250,000 of its two-year convertible subordinated
notes issued in conjunction with a21's acquisition of its SuperStock subsidiary
in February 2004.The investors in the Financing were existing investors of a21
and were also holders of the Subordinated Notes (as defined below). In the
Financing, SuperStock issued new 12% senior secured notes due in February 2007
in the principal amount of $2,250,000 (the "Senior Notes") and retired all of
its outstanding 13% convertible subordinated notes due February 28, 2006 (the
"Subordinated Notes").





Five year
warrants to purchase 937,500 shares of a21 common stock originally issued to the
holders of the Subordinated Notes were amended and restated whereby, inclusive
of the right to purchase an additional 125,000 shares, the holders of the Senior
Notes participating in the Financing received two year warrants to purchase an
aggregate of 500,000 shares of a21 common stock at $0.225 per shares and an
aggregate of 562,500 shares of a21 common stock at $0.45 per share (together,
the "Warrants"). The Senior Notes are interest only and may be prepaid without
penalty at any time. They also have a provision which adds 4% per year to their
principal balance, due at maturity. Each of the Senior Notes and the Warrants is
dated as of February 22, 2005. In connection with the issuance of the Senior
Notes, SuperStock entered into a security agreement, dated as of February 22,
2005 (the "Security Agreement"), pursuant to which it granted a first priority
security interest in the Collateral , which represents substantially all of the
Company’s current and future assets.





During
the first quarter of 2005, a21, Inc. recognized as an expense, the unamortized
portion of the debt discount of $179,000 and recorded a new debt discount of
$39,000 for the excess of the fair value of the 1,062,500 warrants on the date
of issuance over the fair value of the 937,500 calculated at the time of
amendment (reflecting the remaining term and the stock price on that date). The
debt discount is being recognized as a financing expense over the term of the
Senior Notes. The effective interest rate is 17%.





In
connection with the Financing, SuperStock repaid in their entirety $1,250,000 of
the Subordinated Notes as of February 22, 2005. The Subordinated Notes were
convertible at a minimum conversion price of $0.90 per share and a maximum
conversion price of $2.00 per share, or into between 625,000 and 1,388,889
shares of a21 common stock. In connection with repaying the Subordinated Notes,
SuperStock also terminated the Exchange Agreements which it had entered into
with the holders of the Subordinated Notes and which set forth the terms
pursuant to which the Subordinated Notes could have been converted into shares
of a21 common stock.




**NOTE
K -- LOAN PAYABLE - SALE OF SUPERSTOCK LAND AND BUILDING**





On June
30, 2004, the Company completed the sale and leaseback of the land and
approximately 73,000 square foot building in which the Company’s headquarters
are located in Jacksonville, Florida. The facility was sold for $7.7 million and
resulted in net proceeds of $7,477,000, of which $4,033,000 was used to repay a
bank note that was secured by a first mortgage on the facility and $1,576,000
was used to repay other indebtedness to the selling shareholders of SuperStock.
The building was leased back for a term of twenty years. The lease provides the
Company with two five-year renewal options at specified payments.





The
Company has entered into an agreement to sublease a significant portion of its
facility, which provides payments to the Company aggregating $3.5 million over a
six-year period.





Based on
the terms of the subleasing arrangement, the transaction does not qualify for
sale recognition and has been accounted for as a financing transaction pursuant
to SFAS No. 98, "Accounting for Leases". Accordingly, the accompanying financial
statements reflect the net proceeds from the sale of the land and building as a
loan payable with an effective interest rate of 10.14% based on the payment
terms of the lease. The land and building are included in property and equipment
and are being depreciated on a straight-line basis over the twenty-year term of
the lease.





-13-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005


The
following table summarizes the Company’s annual maturities under the loan
payable as of March 31, 2005:




****Year
      Ending March 31,**($ in
      thousands)**2006
    $
    52007
    
    222008
    
    402009
    
    612010
    
    87Thereafter
    
    7,2437,458Less:
      Current Portion
    
    (5
    )Long
      Term Portion
    $
    7,453




**NOTE
L -- STOCKHOLDERS’ EQUITY**





[1]
Preferred stock:





The
Company exchanged all of its pre-acquisition preferred stock (1,500,000
pre-adjusted shares) as part of its exchange agreement with Saratoga on April
30, 2002. The Company is authorized to issue 100,000 shares of its $.001 par
value preferred stock.





At March
31, 2005 and 2004, there are no shares of a21, Inc. preferred stock issued or
outstanding.





[2]
Common stock:





The
Company is authorized to issue 100,000,000 shares of its $.001 par value common
stock.





In
February 2004, the Company received aggregate gross proceeds of $5.9 million in
equity and debt financings. The Company received proceeds of $3.0 million (net
proceeds of $2.8 million), and $600,000 of liabilities owed by the Company were
exchanged, in connection with the issuance of 18,000,000 shares of common stock
along with 5,508,000 warrants exercisable at $0.20 per share and 19,828,800
callable warrants exercisable at prices between $0.225 and $1.35 per share. In
addition, the Company issued 450,000 shares of common stock to an
investment-banking firm in connection with the placement of the equity. The
liabilities that were exchanged included $475,000 of notes payable to affiliates
and $125,000 of accrued compensation due to the Company’s Chairman and
President.





During
the year ended December 31, 2004, the Company issued 490 ,000
shares of its common stock for services and
payment of equity placement costs . The
Company has issued no shares of its common stock during the three months ended
March 31, 2005.





[3] Stock
options and warrants:





Options
and warrants have been granted to officers, directors and employees based upon
employment agreements and other agreements with investors and members of the
Company's Advisory Board at the discretion of the Board of
Directors.





In March
2005, the Company’s Board of Directors approved the 2005 Stock Incentive Plan
(the “2005 Plan”) and, subject to shareholder approval, the issuance of up to
6,000,000 shares of which up to 2,000,000 are in the form of options to the
employees of SuperStock as agreed per the Amended and Restated Stock Purchase
and Recapitalization Agreement by and among a21, SuperStock and its stockholders
dated February 29, 2004. The 2005 Plan authorizes the Company’s board of
directors to award Incentive Stock Options, Nonstatutory Stock Options, stock
appreciation rights, performance shares, restricted stock or unrestricted stock
to the employees and independent contractors, including consultants, directors,
advisors and other service providers of the Company. Certain options and
warrants to be granted under the 2005 Plan are intended to qualify as Incentive
Stock Options (“ISOs”) pursuant to Section 422 of the Internal Revenue Code of
1986, as amended, while other options and warrants granted under the 2005 Plan
will be nonqualified options or warrants which are not intended to qualify as
ISOs. A committee selected by the Company's Board of Directors has the authority
to approve option grants and the terms, which include the option price and the
vesting terms. Options granted under the 2005 Plan expire after a ten-year
period and are subject to acceleration upon the occurrence of certain events. As
of March 31, 2005, 1,373,650 options were granted to employees under this plan
and 4,626,350 options were available for grant under the 2005 Plan.




-14-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005Pursuant
to the Company’s 2002 Directors, Officers And Consultants Stock Option, Stock
Warrant And Stock Award Plan, as amended (the "2002 Plan"), 3,000,000 shares of
the Company's common stock are reserved for issuance. The 2002 Plan authorizes
the Company’s board of directors to issue warrants, options, restricted or
unrestricted common stock and other awards to the employees, consultants and
directors of the Company and its affiliates. Certain options and warrants to be
granted under the 2002 Plan are intended to qualify as Incentive Stock Options
(“ISOs”) pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended, while other options and warrants granted under the 2002 Plan will be
nonqualified options or warrants which are not intended to qualify as ISOs. A
committee selected by the Company's Board of Directors has the authority to
approve option grants and the terms, which include the option price and the
vesting terms. Options granted under the 2002 Plan expire after a ten-year
period and are subject to acceleration upon the occurrence of certain events. As
of March 31, 2005 there were 496,264 options available for grant under the 2002
Plan.







**NOTE
M -- COMMITMENTS AND OTHER MATTERS**





[1]
Consulting and advisory services agreements:





In
September 2002, the Company entered into a three-year agreement with a
consultant to act as the Company's Chairman of the Board. The agreement calls
for initial payments of $15,000 per month, to be adjusted for certain events, as
defined. Compensation may be payable in common shares of the Company at the
individual's option in the event that the Company does not make above payments
in cash at the end of each month. The rate at which common shares were issued
was 150% of cash compensation due or restricted common shares at 200% of the
cash compensation due. During 2003 the Company issued 1,013,005 shares of common
stock as consideration for $105,000 of accrued compensation. In addition, in
January 2004, the Company awarded the consultant an option to purchase 1,505,514
common shares at $0.30. In May 2004, the consultant agreed to serve as Chief
Executive Officer. The consulting agreement is for a term of three years, but
may be terminated by the consultant upon 90 days' notice or by the Company upon
180 days notice; provided, however that in the event of termination without
cause (as defined in the consulting agreement), the consultant will be entitled
to continue to receive his annual base compensation for the term of any
non-competition agreement which he may enter into with the Company. This
consulting agreement has been terminated and a21 and the executive officer have
entered into an employment agreement.





Pursuant
to a consulting agreement dated July 1, 2002 between the Company and one of its
shareholder’s (who is currently an executive officer and director of the
Company), the shareholder agreed to serve as a consultant to the Company and to
provide marketing and consulting services. As compensation for his services, the
Company issued the shareholder a warrant to purchase 50,000 shares of common
stock at an exercise price of $0.25 per share and issued 30,000 shares of common
stock in 2002 and 30,000 shares in 2003. The agreement with the Company has
expired and the Company entered into an employment agreement with this executive
officer, who currently serves as Vice Chairman and President of a21, and Chief
Executive Officer of SuperStock. Prior to these positions, he served as Chief
Strategic Officer from June 2004 to December 2004 and from February 2001 to May
2004, he served as an advisor.





In
September 2002, the Company entered into a two-year agreement with an employee
to act as the Company's President. The agreement called for initial payments of
$15,000 per month, to be adjusted for certain events, as defined. Compensation
was payable in common shares of the Company at the option of the individual in
the event that the Company therein did not make above payments in cash at the
end of each month. The rate at which common shares were issued was 150% of cash
compensation due or restricted common shares at 200% of the cash compensation
due. During 2003 the Company issued 1,138,005 shares of common stock as
consideration for $120,000 of accrued compensation. The employee was also
provided with options to purchase up to 400,000 common shares of the Company
with 160,000 options exercisable at $0.50, 120,000 exercisable at $1.00 and
120,000 exercisable at $1.50. Such options will expire May 1, 2007. In addition,
in January 2004, the Company awarded the employee an option to purchase 577,941
common shares at $0.30. The agreement with the Company has expired and the
Company entered into an employment agreement with this executive officer, who
currently serves as Chief Creative Officer of a21, and President and Chief
Creative Officer of SuperStock.





[2] Lease
commitments:




The
capital lease agreement for the Company’s headquarters facility (see Note K)
includes a requirement to maintain a security deposit, funded as a letter of
credit in the amount of $608,000, which is reflected as restricted cash on the
balance sheet as of March 31, 2005. The lease agreement also requires the
Company to fund additional $30,000 deposits on the first day of each July,
October, January, and April beginning July 1, 2005 up to and including July 1,
2006, for a total of $750,000. The first additional funding of $30,000 was made
on April 21, 2005.





In a
lease agreement for SuperStock, LTD in the UK, the Company has sublet the entire
facility to a third party as of June 2002, until the expiration of the lease in
2014. In accordance with the lease agreement, SuperStock LTD would be liable for
£51,000 per year under the covenants in the lease in the event the company who
has sublet the facility is unable to perform under such terms.





[3]
Litigation and settlement of claims:





At
December 31, 2001, the Company was a defendant in a lawsuit where the creditor
was seeking recovery of future and past due lease payments on a lease, which was
terminated by the parties. The Company entered into a settlement agreement on
April 1, 2002, which required the payment of principal of $88,000 plus
stipulated interest in ten installments commencing April 2002. During 2002, the
Company issued 130,000 shares of common stock valued at $49,000 to an unrelated
party that transferred non-cash consideration to the creditor. In 2004 the
Company agreed to pay $26,000 to the creditor to settle this matter.




-15-


a21, Inc. and Subsidiaries (Unaudited)
Notes to
Condensed Consolidated Financial Statements
March 31,
2005 The
Company has been involved in various other claims and lawsuits, primarily with
former officers and employees, both for and against the Company. Management
believes that there are no such matters outstanding or threatened that would
have a material adverse effect on the Company's results of operations and
financial position.





[4]
Other:





In April
2003, the Company was contacted by an attorney representing a holder of certain
Nonexchanged Shares claiming that such shares are exchangeable into shares of
the Company's common stock. The Company believes that the shares are not
exchangeable since the exchange agreement has expired. However, the Company
cannot currently determine the ultimate outcome regarding the Nonexchanged
Shares. However, the company has not been contacted since the initial contact in
April 2003.







**NOTE
N -- SUBSEQUENT EVENTS**




[1]
Employment Agreements




On May
13, 2005, a21 executed an employment agreement with its Chairman and Chief
Executive Officer. On May 13, 2005, a21 and SuperStock executed an employment
agreement with a21’s Vice Chairman and President, who is also the Chief
Executive Officer of SuperStock, and a21’s Chief Creative Officer, who is also
the President and Chief Creative Officer of SuperStock. Each of these employment
agreements is for a term of three years and includes a confidentiality covenant,
a non-competition covenant and a prohibition on the solicitation of the
employees, suppliers, vendors and customers of a21 and SuperStock.





[2]
Equity Transaction





In
connection with executing the employment agreements with three of its executive
officers on May 13, 2005, effective as of May 1, 2005, the Company issued
2,410,000 shares of its restricted common stock to these executive officers and
granted five-year stock options to purchase 2,000,000 shares of common stock,
which options are exercisable at $0.30 per share. As of May 1, 2005, the Company
issued to its non-employee directors 510,000 shares of its restricted common
stock and granted to these directors five-year stock options to purchase 510,000
shares of common stock, which options are exercisable at $0.30 per
share.




-16-






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





*The
following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto
appearing elsewhere herein and in conjunction with the Management’s Discussion
and Analysis set forth in the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2004.*








**PRELIMINARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS**





The
statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company’s expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “will,” “the Company
believes,” “management believes” and similar words or phrases. The
forward-looking statements are based on the Company’s current expectations and
are subject to certain risks, uncertainties and assumptions. The Company’s
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.





**OVERVIEW**





a21, Inc.
was incorporated in the State of Texas in October 1998, under the name Saratoga
Holdings I, Inc. In February 2004, we completed the acquisition of all of the
voting common stock, representing 83% of the outstanding equity, of SuperStock,
Inc. Through our subsidiary, SuperStock, we aggregate visual content from
photographers, photography agencies, archives, libraries and private collections
and license the visual content to our customers. Our customer base consists of
four major groups: creative (advertising and design agencies), editorial
(publishing and media entities), corporate (in-house communications departments
and outside corporate communications firms) and consumers (the general public).
Our products are sold directly and through a global network of distributors in
approximately 100 countries. We are headquartered in Jacksonville, Florida
operate a Company-owned office in the United Kingdom and conduct operations in
Canada.




**CRITICAL
ACCOUNTING POLICIES AND ESTIMATES**




This
discussion and analysis of our financial condition and results of operations are
based on our financial statements that have been prepared under accounting
principles generally accepted in the United States of America. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could materially differ from those
estimates. We have summarized significant accounting policies in Note B to the
condensed consolidated financial statements included in this Form
10-QSB.




**RESULTS
OF OPERATIONS**





**THREE
MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31,
2004**





Prior to
the acquisition of SuperStock in February 2004, the Company was a development
stage enterprise. All financial information presented for the quarter ending
March 31, 2004 includes the accounts of SuperStock from the acquisition date of
February 29, 2004 through March 31, 2004.





REVENUES.
Revenues were $2,312,000 in the three months ended March 31, 2005 compared to
$798,000 in the three months ended March 31, 2004. The increase in revenues in
the three months ended March 31, 2005 is attributable to SuperStock’s revenue
generation for the full first quarter in 2005 as compared to the period from
February 29, 2004 through March 31, 2004 for the first quarter in
2004.





COST OF
REVENUES. Cost of revenues was $712,000 in the three months ended March 31, 2005
compared to $212,000 in the three months ended March 31, 2004. As a percentage
of revenues, cost of revenues was 31% and 27% in the three months ended March
31, 2005 and 2004, respectively, and gross profit was 69% and 73% in the three
months ended March 31, 2005 and 2004, respectively.





SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative
expenses were $1,566,000 in the three months ended March 31, 2005 compared to
$986,000 in the three months ended March 31, 2004. This increase was primarily
attributable to the acquisition of SuperStock and the underlying general and
administrative expenses of its operations.





DEPRECIATION
AND AMORTIZATION. Depreciation and amortization was $353,000 in the three months
ended March 31, 2005 as compared to $99,000 in the three months ended March 31,
2004. This increase was primarily attributable to the amortization of assets
recorded in connection with the acquisition of SuperStock.




-17-





NET
INTEREST EXPENSE. Interest expense was $480,000 in the three months ended March
31, 2005 as compared to $101,000 in the three months ended March 31, 2004. This
increase is attributable to the amortization of debt discount and additional
interest due on unsecured notes payable, convertible subordinated notes payable,
senior secured notes payable, and recorded interest on the loan payable
resulting from the Company’s sale and lease of the SuperStock
facility.





NET LOSS.
Net loss was $701,000 or $0.02 per share in the three months ended March 31,
2005 as compared to net loss of $600,000 or $0.02 per share for the three months
ended March 31, 2004. The increase in net loss is principally due to the
acquisition of SuperStock.





**LIQUIDITY
AND CAPITAL RESOURCES**





As of
March 31, 2005, the Company had $850,000 of cash and cash equivalents and
working capital of $833,000 as compared to $717,000 in cash and a working
capital deficit of $69,000 at December 31, 2004.





Net cash
used in operating activities for the three months ended March 31, 2005 was
$650,000 as compared to net cash used in operating activities of $337,000 for
the three months ended March 31, 2004. Net cash used in operating activities in
the three months ended March 31, 2005 was due primarily to the net loss of
$701,000 adjusted for $179,000 for the write-offs of the debt discount related
to the convertible subordinated notes payable and $353,000 of depreciation and
amortization, in addition to a decrease in accounts payable and accrued expenses
of $161,000, and an increase in accounts receivable of $314,000. Net cash used
in operating activities in the three months ended March 31, 2004 was principally
due to a net loss of $600,000 adjusted for $305,000 of variable option
compensation and $99,000 of depreciation and amortization, in addition to an
increase in accounts receivable of $202,000 and an increase in prepaid expenses
and other current assets of $115,000, partially offset by an increase in
accounts payable and accrued expenses of $62,000.





Net cash
used in investing activities for the three months ended March 31, 2005 was
$236,000 as compared to net cash used in investing activities for the three
months ended March 31, 2004 of $1,496,000. Net cash used in investing activities
in the three months ended March 31, 2005 was primarily due to in the purchase of
fixed assets. Net cash used in investing activities in the three months ended
March 31, 2004 was primarily from the net cash investment in the acquisition of
SuperStock, Inc. in the amount of $1,400,000 and the purchase of fixed assets
for $96,000.





Net cash
provided by financing activities for the three months ended March 31, 2005 was
$968,000, as compared to net cash provided by financing activities of $2,794,000
for the three months ended March 31, 2004. Net cash provided by financing
activities in the three months ended March 31, 2005 was mainly due to the new
$2,250,000 senior secured notes payable and the retirement of the $1,250,000
convertible subordinated notes payable (see Note J). Net cash provided by
financing activities in the three months ended March 31, 2004 was primarily from
net proceeds of $2,790,000 in connection with the issuance of common stock and
warrants, and proceeds of $2,300,000 from the issuance of notes payable and
warrants, partially offset by the repayment of $2,296,000 of debt.





While the
Company believes its current capital, along with its plans to obtain additional
capital resources, will be sufficient for the next twelve months based on
current operations, there can be no guarantee that the Company will have
sufficient capital or will be able to obtain sufficient capital to meet its
operational obligations or execute its business plan, which includes both
internal growth and growth by acquisitions.





**OFF-BALANCE
SHEET ARRANGEMENTS**





None





**RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS**





None







**ITEM
3. CONTROLS AND PROCEDURES**





**EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES**





Under the
supervision and with the participation of the Company's management, including
our principal executive officer and the principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report. Based on this evaluation, the Company's principal executive
officer and principal financial officer concluded as of the evaluation date that
the Company's disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission reports is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms relating to the Company, including
our consolidating subsidiaries, and was made known to them by others within
those entities, particularly during the period when this report was being
prepared.


Additionally,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation date. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.






-18-




**PART
II - OTHER INFORMATION ITEM**





**ITEM
1. LEGAL PROCEEDINGS**




We are
involved from time to time in litigation that arises in the ordinary course of
our business. We believe that any potential adverse determination in any pending
action will not have a material adverse effect on our business, financial
condition or results of operations.




**ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS**





On
February 22, 2005, we consummated a $2,250,000 financing (the “Financing”) in
the form of two-year interest only senior (non-convertible) secured notes and
retired $1,250,000 of our two-year convertible subordinated notes issued in
conjunction with our acquisition of SuperStock in February 2004. The investors
in the Financing were existing investors of ours and were also holders of the
Subordinated Notes (as defined below). We issued the securities to the investors
in the Financing in reliance on Section 4(2) of the Securities Act of
1933.





In the
Financing, SuperStock issued new 12% senior secured notes due in February 2007
in the principal amount of $2,250,000 (the “Senior Notes”) and retired all of
its outstanding 13% convertible subordinated notes due February 28, 2006 (the
“Subordinated Notes”).





Five year
warrants to purchase 937,500 shares of our common stock originally issued to the
holders of the Subordinated Notes were amended and restated whereby, inclusive
of the right to purchase an additional 125,000 shares, the holders of the Senior
Notes participating in the Financing received two-year warrants to purchase an
aggregate of 500,000 shares of our common stock at $0.225 per share and an
aggregate of 562,500 shares of our common stock at $0.45 per share (together,
the “Warrants”). The Senior Notes are interest only and may be prepaid without
penalty at any time. They also have a provision which adds 4% per year to their
principal balance, due at maturity. Each of the Senior Notes and the Warrants is
dated as of February 22, 2005. In connection with the issuance of the Senior
Notes, SuperStock entered into a security agreement, dated as of February 22,
2005, pursuant to which it granted a first priority security interest in the
collateral, which collateral represents substantially all of the Company’s
current and future assets.





On each
of February 28, 2005 and March 31, 2005, we issued 105,000 callable warrants
that are convertible into shares of our common stock at $0.45 per share. These
warrants were issued as a result of our 12% unsecured promissory notes being
outstanding as of such dates. The fair value of these warrants as of February
28, 2005 and March 31, 2005 was $4,000 and $3,000, respectively. These warrants
were issued to the investor in reliance on the exemption provided by section
4(2) of the Securities Act of 1933.




**ITEM
3. DEFAULTS UPON SENIOR SECURITIES**





None




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





None





**ITEM
5. OTHER INFORMATION**





In
connection with the Financing, SuperStock repaid in their entirety $1,250,000 of
the Subordinated Notes as of February 22, 2005. The Subordinated Notes were
convertible at a minimum conversion price of $0.90 per share and a maximum
conversion price of $2.00 per share, or into between 625,000 and 1,388,889
shares of a21 common stock. In connection with repaying the Subordinated Notes,
SuperStock also terminated the exchange agreements which it had entered into
with the holders of the Subordinated Notes and which set forth the terms
pursuant to which the Subordinated Notes could have been converted into shares
of our common stock.




-19-




**ITEM
6. EXHIBITS**





The
following exhibits are filed as part of this report:








**EXHIBIT****NUMBER**
    **DESCRIPTION**10.17
    Letter
      Agreement, dated as of February 22, 2005, among the Registrant and
      Cohanzick High Yield Partners, L.P., Gabriel Capital, L.P., Cohanzick
      Absolute Return Master Fund, Ltd., Cohanzick Credit Opportunities Master
      Fund, Ltd., and John L. Steffens. (1)10.18
    Security
      Agreement, dated as of February 22, 2005. (1)10.19
    Form
      of Senior Secured Note. (1)10.20
    Form
      of Common Stock Purchase Warrant. (1)31.1*
    Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
    Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1*
    Certification
      of Principal Executive Officer Financial Officer Pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002.*
      Filed herewith(1)
      Incorporated herein by reference to the Registrant’s Current Report on
      Form 8-K filed with the SEC on February 28,
2005.












-20-


**SIGNATURES**




In
accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.











**a21,
      Inc.**Date:
      May 13, 2005
    By:
      /s/ ALBERT H. PLEUSAlbert
      H. Pleus
      Chief
      Executive Officer
      (Principal
      Executive Officer)Date:
      May 13, 2005
    By:
      /s/ JOSE A. PEREZJose
      A. Perez
      Principal
      Financial Officer