UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q








[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
Quarterly Period ended:  March 31, 2008





OR





[
] 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.
              (Exact
      Name of Small Business Issuer as Specified in its Charter)
              
              DELAWARE                            74-2896910
              -----------------------                       ---------------------
              (State
      or Other Jurisdiction
      of            (I.R.S.
      Employer
              Incorporation
      or
      Organization)          Identification
      Number)





7660 CENTURION PARKWAY,
JACKSONVILLE, FLORIDA 32256


(904)
565-0066


(Address,
including zip code and telephone number, including area code, of principal
executive offices)





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 [  ]





Indicate
by check whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):





Large
accelerated filer [  ]     Accelerated filer
[  ]     Non-accelerated filer
[  ]     Smaller reporting company
[X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12G-2 of the Exchange Act


Yes
[  ] No [X]





There
were 88,883,587 shares of a21's common stock outstanding on May 15,
2008.











TABLE OF CONTENTSPagePART
      I – FINANCIAL INFORMATIONITEM
      1.   FINANCIAL STATEMENTS (unaudited)
            
            3Condensed
      Consolidated Balance Sheets at March 31, 2008 and December 31,
      2007
            
            3Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2008 and 2007
            
            5Condensed
      Consolidated Statement of Changes in Capital Deficit for the three months
      ended March 31, 2008
            
            6Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2008 and 2007
            
            7Notes
      to Condensed Consolidated Financial Statements
            
            9ITEM
      2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      ANDRESULTS
      OF OPERATIONS (MD&A)
            
            25ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            
            29ITEM
      4.  CONTROLS AND PROCEDURES
            
            29PART
      II – OTHER INFORMATION
            
            30ITEM
      1.  LEGAL PROCEEDINGS
            
            30ITEM
      1A.  RISK FACTORS
            
            30ITEM
      2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
      OF EQUITY SECURITIES
            
            30ITEM
      3.  DEFAULTS UPON SENIOR SECURITIES
            
            30ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS
            
            30ITEM
      5.  OTHER INFORMATION
            
            30ITEM
      6.  EXHIBITS
            
            31








Page
2





a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED BALANCE SHEETS($
      in thousands, except per share amounts)(unaudited)March
      31,
            
            
            December
      31,2008
            
            
            2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            1,087
            
            
            $
            2,090Accounts
      receivable, net allowance for doubtful accounts of $222 and $237, at March
      31, 2008 and December 31, 2007, respectively
            
            
            2,819
            
            
            
            3,008Inventory
            
            
            939
            
            
            
            874Prepaid
      expenses and other current assets
            
            
            452
            
            
            
            437Total
      current assets
            
            
            5,297
            
            
            
            6,409Property,
      plant and equipment, net
            
            
            6,706
            
            
            
            6,832Goodwill
            
            
            8,826
            
            
            
            8,778Intangible
      assets, net
            
            
            4,826
            
            
            
            4,921Restricted
      cash
            
            
            750
            
            
            
            750Other
            
            
            2,206
            
            
            
            2,431Total
      assets
            
            $
            28,611
            
            
            $
            30,121LIABILITIES
      AND CAPITAL DEFICITCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
            
            $
            2,678
            
            
            $
            2,761Royalties
      payable
            
            
            1,194
            
            
            
            1,232Wages
      payable
            
            
            232
            
            
            
            278Deferred
      revenue
            
            
            428
            
            
            
            389Restructure
      liability
            
            
            94
            
            
            
            138Other
            
            
            101
            
            
            
            99Total
      current liabilities
            
            
            4,727
            
            
            
            4,897LONG-TERM
      LIABILITIESSenior
      secured convertible notes payable, net – related party
            
            
            15,500
            
            
            
            15,500Secured
      notes payable, net – related party (ArtSelect Sellers)
            
            
            2,555
            
            
            
            2,555Loan
      payable from sale-leaseback of building, less current
    portion
            
            
            7,330
            
            
            
            7,347Other
            
            
            71
            
            
            
            67Total
      liabilities
            
            
            30,183
            
            
            
            30,366


Page
3








a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED BALANCE SHEETS (continued)($
      in thousands, except per share amounts)(unaudited)March
      31,
            
            
            December
      31,2008
            
            
            2007COMMITMENTS
      AND CONTINGENCIESMINORITY
      INTEREST
            
            
            553
            
            
            
            1,071CAPITAL
      DEFICITCommon
      stock; $.001 par value; 200,000,000 shares authorized; 91,843,222 and
      90,740,851 shares issued and 88,163,447 and 87,061,076 shares outstanding
      at March 31, 2008 and December 31, 2007, respectively
            
            
            92
            
            
            
            91Treasury
      stock (at cost, 3,679,775 shares)
            
            
            ---
            
            
            
            ---Additional
      paid-in capital
            
            
            26,696
            
            
            
            26,121Accumulated
      deficit
            
            
            (29,368
            )
            
            
            (27,961
            )Accumulated
      other comprehensive income
            
            
            455
            
            
            
            433Total
      capital deficit
            
            
            (2,125
            )
            
            
            (1,316
            )Total
      liabilities and capital deficit
            
            $
            28,611
            
            
            $
            30,121The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.





Page
4





a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS($
      in thousands except per share amounts)(unaudited)




Three
      Months EndedMarch
      31,2008
            
            
            2007REVENUELicensing
      revenue
            
            $
            2,615
            
            
            $
            3,168Product
      revenue
            
            
            2,492
            
            
            
            2,956TOTAL
      REVENUE
            
            
            5,107
            
            
            
            6,124COSTS
      AND EXPENSESCost
      of licensing revenue (excludes related amortization of $272 and $279 for
      three months ended March 31, 2008 and 2007, respectively)
            
            
            952
            
            
            
            950Cost
      of product revenue (excludes related amortization of $45 and $44 for three
      months ended March 31, 2008 and 2007, respectively)
            
            
            1,334
            
            
            
            1,397Selling,
      general and administrative
            
            
            3,160
            
            
            
            3,663Restructure
      costs, including severance
            
            
            39
            
            
            
            ---Depreciation
      and amortization
            
            
            587
            
            
            
            619TOTAL
      OPERATING EXPENSES
            
            
            6,072
            
            
            
            6,629OPERATING
      LOSS
            
            
            (965
            )
            
            
            (505
            )Interest
      expense
            
            
            (441
            )
            
            
            (442
            )Warrant
      expense
            
            
            ---
            
            
            
            (1
            )Other
      income, net
            
            
            19
            
            
            
            13NET
      LOSS BEFORE INCOME TAX EXPENSE
            
            
            (1,387
            )
            
            
            (935
            )Income
      tax expense
            
            
            (20
            )
            
            
            (27
            )NET
      LOSS ATTRIBUTED TO COMMON STOCKHOLDERS
            
            $
            (1,407
            )
            
            $
            (962
            )NET
      LOSS ATTRIBUTED TO COMMON STOCKHOLDERS PER SHARE, BASIC AND
      DILUTED
            
            $
            (0.02
            )
            
            $
            (0.01
            )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND
    DILUTED
            
            
            87,247,398
            
            
            
            84,084,622The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.


Page
5








a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES INCAPITAL
      DEFICIT(in
      thousands)
              (unaudited)





COMMON
      STOCK
            
            
            TREASURY
      STOCKNUMBER
      OF SHARES
            
            
            AMOUNT
            
            
            NUMBER
      OF SHARES
            
            
            AMOUNT
            
            
            ADDITIONAL
      PAID-IN CAPITAL
            
            
            ACCUMULATED
      DEFICIT
            
            
            ACCUMULATED
      OTHER COMPREHENSIVE INCOME
            
            
            TOTALBalance
      at December 31, 2007
            
            
            90,741
            
            
            $
            91
            
            
            
            (3,680
            )
            
            $
            ---
            
            
            $
            26,121
            
            
            $
            (27,961
            )
            
            $
            433
            
            
            $
            (1,316
            )Share-based
      compensation
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            58
            
            
            
            ---
            
            
            
            ---
            
            
            
            58Issuance
      of common stock upon the conversion of SuperStock Seller Preferred
      stock
            
            
            926
            
            
            
            1
            
            
            
            ---
            
            
            
            ---
            
            
            
            517
            
            
            
            ---
            
            
            
            ---
            
            
            
            518Vesting
      of restricted stock compensation
            
            
            176
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Net
      loss
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (1,407
            )
            
            
            ---
            
            
            
            (1,407
            )Foreign
      currency translation adjustment
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            22
            
            
            
            22Comprehensive
      loss
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (1,385
            )Balance
      at March 31, 2008
            
            
            91,843
            
            
            $
            92
            
            
            
            (3,680
            )
            
            $
            ---
            
            
            $
            26,696
            
            
            $
            (29,368
            )
            
            $
            455
            
            
            $
            (2,125
            )





The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.


Page
6








a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS($
      in thousands)(unaudited)FOR
      THE  THREE MONTHS ENDED MARCH 31,
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,407
            )
            
            $
            (962
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            587
            
            
            
            619Amortization
      of finance costs
            
            
            27
            
            
            
            27Loss
      on disposal of equipment
            
            
            -
            
            
            
            38Change
      in fair value of warrant obligation
            
            
            -
            
            
            
            (18
            )Share-based
      compensation
            
            
            58
            
            
            
            170Changes
      in assets and liabilities:Accounts
      receivable
            
            
            189
            
            
            
            147Prepaid
      expenses and other current assets
            
            
            (42
            )
            
            
            21Inventory
            
            
            (65
            )
            
            
            79Accounts
      payable and accrued expenses
            
            
            (237
            )
            
            
            (807
            )Deferred
      revenue
            
            
            39
            
            
            
            131Other
            
            
            (1
            )
            
            
            73NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (852
            )
            
            
            (482
            )


Page
7





a21,
      Inc. and SubsidiariesCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)($
      in thousands)(unaudited)FOR
      THE THREE MONTHS ENDED MARCH 31,
            
            2008
            
            
            2007CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in property, plant and equipment
            
            
            (26
            )
            
            
            (4
            )Investment
      in software
            
            
            (113
            )
            
            
            (68
            )Investment
      in photo collection
            
            
            (5
            )
            
            
            (208
            )Other
            
            
            -
            
            
            
            (3
            )NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (144
            )
            
            
            (283
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from the exercise of stock options
            
            
            -
            
            
            
            29Net
      proceeds from the exercise of stock warrants
            
            
            -
            
            
            
            19Payment
      of SuperStock seller promissory note payable
            
            
            -
            
            
            
            (33
            )Other
            
            
            (17
            )
            
            
            31NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
            
            
            (17
            )
            
            
            46EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
            
            
            10
            
            
            
            4NET
      DECREASE IN CASH
            
            
            (1,003
            )
            
            
            (715
            )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            2,090
            
            
            
            5,455CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            1,087
            
            
            $
            4,740








SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Foreign
      income taxes paid
            
            $
            20
            
            
            $
            25Interest
      paid
            
            
            38
            
            
            
            191SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:Conversion
      of SuperStock Seller Preferred stock into common stock (see Note
      F)
            
            
            518
            
            
            
            1,182Cashless
      exercise of warrants for common stock
            
            
            -
            
            
            
            19Accrued
      purchase price payable
            
            
            26
            
            
            
            78The
      accompanying notes are an integral part of these Condensed Consolidated
      Financial Statements.











Page
8


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








NOTE
A - FINANCIAL STATEMENT PRESENTATION AND THE DESCRIPTION OF
BUSINESS





The
unaudited condensed consolidated financial statements of a21, Inc. (“a21”, “the
Company”, “we”) 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 a21’s financial position at March 31, 2008, 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 our audited financial
statements included in our annual report on Form 10-K for the year ended
December 31, 2007, as filed with the SEC.





a21, Inc.
(the “Company”) was incorporated in the State of Texas in October 1998, under
the name Saratoga Holdings I, Inc. In April 2002, we changed our name from
Saratoga Holdings I, Inc. to a21, Inc.  In February 2004, we completed
the acquisition of all of the voting common stock, representing 83% of the
outstanding equity, of SuperStock, Inc. In October 2005, our UK subsidiary
SuperStock Ltd. completed the acquisition of all of the outstanding stock of
Ingram Publishing Limited, and in May 2006, we completed the acquisition of
ArtSelect, Inc. through the merger of a wholly owned subsidiary into ArtSelect.
On July 31, 2006, we changed our state of incorporation from Texas to
Delaware.





Through
SuperStock, we aggregate visual content from photographers, photography
agencies, archives, libraries and private collections and license the visual
content to our customer base consisting 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). SuperStock products
are sold directly and through a global network of distributors.





ArtSelect
supplies home and office framed and unframed wall décor to retailers,
catalogers, membership organizations and consumers through both online and
traditional retail and wholesale distribution channels in the United
States.








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





[1] Basis
of presentation/Going concern:




The
accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern.  We have sustained
significant recurring losses and an accumulated deficit of $29.4 million at
March 31, 2008 that raise substantial doubt about our ability to continue as a
going concern, and we will need to raise cash from equity or debt financings to
fund our operations.  However, there can be no assurance that
sufficient additional capital needed to sustain operations will be obtained by
us.  If we are unable to secure the required funding, we may not be
able to implement our business plan and may not be able to conduct business as a
going concern. Our independent registered public accounting firm’s audit report
on our consolidated financial statements as of and for the year ended December
31, 2007 included a paragraph to emphasize the substantial doubt about the
Company’s ability to continue as a going concern.  At March 31, 2008,
we had cash of $1.1 million and working capital of $571,000.





Our
future plans, assuming we have sufficient funds to do so, include further
developing our distribution channels for SuperStock while improving the
leveraging of SuperStock’s owned and licensed image content, introducing new
products and customer channels in the stock photography space, gaining
new


Page
9


key
customer relationships for ArtSelect while introducing new products and
customer channels, and seeking integration cost reduction opportunities where
feasible across the Company.  In addition, we continue to review
potential acquisition targets that, if successful, could result in an enhanced
market position and incremental cash flow from operations.  However, there
can be no assurance that these efforts will be successful or that our operations
will become profitable.





[2]
Principles of consolidation:





The
consolidated financial statements include all of our accounts including our
primary operating subsidiaries, SuperStock and ArtSelect.  The
minority interest in the consolidated balance sheets at March 31, 2008 and
December 31, 2007, represents the interest of the holders of preferred shares of
SuperStock (“SuperStock Seller Preferred”), which are exchangeable into a21
common shares.  All significant inter-company balances and
transactions have been eliminated.





[3]
Revenue recognition:





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.





Licensing
fee revenue is recorded at invoiced amounts except in the case of licensing
rights through distributors, where revenue is recorded at our share of invoiced
amounts. Distributors typically earn and retain a percentage of the license fee
according to their contract, and we record the remaining license fee as revenue.
Persuasive evidence of an arrangement exists and the price is fixed or
determinable at the time the customer agrees to the terms and conditions of the
license agreement. We maintain a credit department and credit policies that set
credit limits and ascertain customer credit worthiness, thus reducing our risk
of credit loss. Based on our policies and procedures, as well as our historical
experience, we are able to determine that the likelihood of collection is
reasonably assured prior to recognizing revenue. These first three general
revenue recognition criteria have been met at or prior to the time of delivery
of the imagery, regardless of the format or delivery medium. Delivery occurs
upon making digital images available for download by the customer, or upon
shipment of CD, analog film and transparencies.  We also sell
subscriptions of certain images for terms ranging from one to twelve months.
Subscription revenue is recognized over the respective term of the subscription
agreement and, accordingly, $428,000 and $389,000 is recorded as deferred
revenue as of March 31, 2008 and December 31, 2007.







Revenue
from product sales is recognized when the product is shipped and title is
transferred to the customer. Revenue from sales via ArtSelect’s website and/or
related sub-domains is recognized on a gross basis. Revenue from sales through
customers’ distribution channels is recognized net of related costs. We base our
estimates for sales returns on historical experience.





[4] Cost
of revenue:





Cost of
licensing fee revenue reflects royalties on revenue generated from images
licensed under contracts with photographers. Royalties are expensed in the
period that they are incurred. Cost of revenue excludes amortization of revenue
generating assets. Cost of product sales reflects payments made to suppliers of
art content, framing materials, and shipment and handling costs.





[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 significantly from those
estimates. The recoverability of the carrying values of long-lived assets,
including goodwill and identifiable intangible assets represent sensitive
estimates subject to change.


Page
10







[6] Fair
value of financial instruments:





Our
financial instruments consist primarily of cash and cash equivalents, 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 us. The fair value of our notes payable to stockholders and an
affiliated company are not reasonably determinable based on the related party
nature of the transactions.





[7] Cash
and cash equivalents, and restricted cash:





We
consider all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. At March 31, 2008 and December
31, 2007, we had no investments with maturities greater than three months. We
are required to maintain a security deposit in accordance with our lease
agreement for the SuperStock facility. This consists of restricted cash funded
by us to secure a letter of credit in the amount of $750,000 at March 31, 2008
and December 31, 2007.





[8]
Accounts Receivable and Allowance for Doubtful Accounts:





Accounts
receivable are trade receivables, net of allowances for doubtful accounts. We
estimate our allowance for doubtful accounts based on historical loss ratios,
existing economic conditions, and specific account analysis of high-risk
accounts. Concentration of credit risk is limited due to the dispersion of
customers. No single customer represents more than 10% of the total accounts
receivable.





[9]
Inventory:





Inventory
is valued at the lower of cost or market and is determined on the first-in,
first-out (FIFO) basis. Inventories include raw materials and finished goods.
Raw materials include prints, mats, frames, molding, and packaging material.
Finished goods consist of pre-framed art and compact disk products produced for
resale. The requirements for any provisions of estimated losses for obsolete,
excess, or slow-moving inventories are reviewed periodically.





[10]
Deferred Rent Receivable





During
2004, we entered into an agreement to sublease a significant portion of our
headquarters and SuperStock facility for a term of six years with an option to
renew for an additional two-year term. Statement of Financial Accounting
Standards (“SFAS”) 13, “Accounting for Leases”, requires rental income from an
operating lease be recognized on a straight-line basis over the non-cancelable
lease term. Accordingly, we recognize total contractual minimum lease payments,
including scheduled rent increases, as rental income evenly over the lease term.
Accrued revenues from contractually scheduled rent increases in excess of
amounts currently due are reported as a long-term receivable. We monitor this
asset for collection risk and will establish reserves for any amounts deemed not
collectible. However, amounts collected in future periods may vary from our
expectations.





[11]
Defined Contribution Employee Benefit Plan





We
maintain defined contribution retirement plans pursuant to Section 401(k) of the
Internal Revenue Code (the Plan), in which U.S. employees at least 21 years of
age may participate after completing six months of service. Eligible employees
may contribute up to a certain percentage of their annual compensation to the
Plan, subject to the annual IRS limitations. The Company may match employee
contributions on a discretionary basis. No company match was made during 2008 or
2007.





Page
11


[12]
Foreign Currency:





We
translate assets and liabilities of foreign subsidiaries, whose functional
currency is the local currency, at exchange rates in effect as of the balance
sheet date. We translate revenue and expenses at the monthly average rates of
exchange prevailing during the year. We include the adjustment resulting from
translating the financial statements of such foreign subsidiaries in accumulated
other comprehensive income, which is reflected as a separate component of
capital deficit. Gains and losses, which are denominated in currency other than
a subsidiary’s local currency and re-measured in the subsidiary’s local
currency, are recognized in the condensed consolidated statements of
operations.





[13] Land
and building and property and equipment and depreciation:





The land
and building in Jacksonville, Florida with our SuperStock and corporate offices
were sold and leased back in a SuperStock transaction accounted for as a
financing transaction. The building is being depreciated over the twenty-year
term of the related lease. Property and equipment consisting of furniture,
fixtures and equipment, photography and computer equipment are recorded at cost.
Depreciation of property and equipment is computed by the straight-line method
over the assets' estimated lives. The estimated applicable life for furniture,
fixtures, and equipment is 7 years; the applicable, estimated life of
photography and computer equipment is 5 to 7 years.





Expenditures
for major additions and improvements are capitalized. Maintenance and repairs
are charged to operations as incurred. 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.





[14]
Photo collection and contracts with photographers:





Expenditures
for additions and improvements to the photo 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 from the accounts and any gain or loss is reflected in
operations.





Contracts
with photographers have an average life of ten years including those that are
automatically renewable. Amortization of the photographer’s contracts is based
on projected revenues expected to be generated over the estimated average
ten-year life of the underlying images covered by the respective
contracts.





[15]
Goodwill and intangible assets:





We test
goodwill for impairment at least annually, or more often if deemed necessary
based on certain circumstances.  The Company’s impairment test
performed on October 1, 2007, concluded that no impairment of goodwill existed.
As circumstances change, it is reasonably possible that future goodwill
impairment tests could result in a loss from impairment to goodwill, which would
be included in the determination of net income or loss.





Intangible
assets with definite lives are amortized over their estimated useful life and
reviewed for impairment in accordance with SFAS 144 (as defined below).
Intangible assets with definite lives are amortized using either the
straight-line method or based on expected usage of the asset, depending on the
nature of the asset over their expected useful life.





The
Company capitalizes software development costs for modifications to various web
site components and management information systems that result in additional
functionality in accordance with AICPA Statement of Position (SOP), 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.”  Software development costs are amortized on a
straight-line basis over four years.


Page
12





[16]
Long-lived assets:





We
evaluate our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”), pursuant to which an
impairment loss is recognized if the carrying amount of a long-lived asset is
not recoverable and exceeds its undiscounted cash flows.  A long-lived
asset is tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable.  Our
consideration of SFAS 144 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. No impairment charges have been incurred during
the three months ended March 31, 2008.





[17]
Other assets, net:





3/31/2008
            
            
            12/31/2007Photo
      collection, net
            
            $
            1,109
            
            
            $
            1,231Photographer
      contracts, net
            
            
            463
            
            
            
            511Long-term
      receivable
            
            
            402
            
            
            
            435Other
            
            
            232
            
            
            
            254$
            2,206
            
            
            $
            2,431








[18]
Income taxes:




We
recognize deferred tax assets and liabilities for both the expected impact of
differences between the financial statements and tax bases of assets and
liabilities, and for the expected future tax benefit to be derived from
offsetting the net operating loss and tax credit carry-forwards against taxable
income, if any. We established a valuation allowance to reflect the likelihood
of realization of deferred tax assets. Deferred tax assets are reduced 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. The difference in basis of the
investment in foreign subsidiary relates to goodwill which is a temporary
difference.  The Company recognizes accrued interest and penalties
associated with uncertain tax positions as part of income tax expense, if
applicable.






[19]
Net loss attributed to common stockholders per share:




We
calculate net loss attributed to common stockholders 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 consolidated statements of operations. Basic income (loss) per share is
computed by dividing the net loss attributed to common stockholders by the
weighted average number of shares of common stock outstanding during each
period. Diluted 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, 2008 and 2007, the basic and diluted net loss
attributed to common stockholders per share is the same since the effect from
the potential exercise of 9,734,900 and 15,361,229 outstanding stock options and
warrants as of March 31, 2008 and 2007, or the vesting of 720,139 and 1,968,181
shares of restricted stock, respectively, would have been
anti-dilutive.





For the
three months ended March 31, 2008 and 2007, 986,922 and 1,913,253 shares of
common stock issuable upon the conversion of the SuperStock Seller Preferred,
respectively, have also been excluded from the weighted average shares
outstanding due to their anti-dilutive effect.





Page
13


[20]
Reclassifications:





Certain
reclassifications have been made to the prior period financial statements to
conform to the respective current year presentation.





[21]
Comprehensive Loss and Accumulated Other Comprehensive Income:





Accumulated
other comprehensive income consists of net unrealized foreign currency
translation adjustments and is presented in the consolidated balance sheets as a
component of capital deficit.





[22]
Share based payments:





We have a
2005 Stock Option Plan and a 2002 Stock Option Plan, which are described in Note
L below.  We apply the fair value recognition provisions of SFAS
123(R) whereby compensation cost for all share-based payments are based on
the grant date estimated fair value.





The fair
value of each option is measured at the grant date using a Black-Scholes
option-pricing model, which requires the use of a number of assumptions
including volatility, risk-free interest rate, and expected dividends. There
were no stock options granted during the three months ended March 31,
2008.





The
following summarizes our stock option activity for the three months ended March
31, 2008 (unaudited):





Stock
      OptionsShares
            
            
            Weighted
      Average Exercise PriceBalance,
      December 31, 2007
            
            
            5,967,013
            
            
            $
            0.35Granted
            
            
            ---
            
            
            
            ---Exercised
            
            
            ---
            
            
            
            ---Forfeited
            
            
            (2,632,913
            )
            
            $
            0.30Balance,
      March 31, 2008
            
            
            3,334,100
            
            
            $
            0.32Exercisable,
      December 31, 2007
            
            
            5,228,677
            
            
            $
            0.35Exercisable,
      March  31, 2008
            
            
            2,656,416
            
            
            $
            0.32





Page
14


The
following table summarizes information about stock options outstanding at March
31, 2008:





Exercise
      Prices
            
            
            Number
      Outstanding
            
            Weighted
      Average Remaining Contractual Life
            
            Number
      Exercisable$
            0.09
            
            
            
            230,000
            
            3
      months
            
            
            150,000$
            0.28
            
            
            
            1,000,000
            
            43
      months
            
            
            722,916$
            0.30
            
            
            
            1,139,100
            
            11
      months
            
            
            956,000$
            0.34
            
            
            
            165,000
            
            33
      months
            
            
            165,000$
            0.46
            
            
            
            425,000
            
            40
      months
            
            
            425,000$
            0.65
            
            
            
            200,000
            
            41
      months
            
            
            150,000$
            0.83
            
            
            
            175,000
            
            38
      months
            
            
            87,5003,334,100
            
            25
      months
            
            
            2,656,416





The
aggregate intrinsic value of options outstanding and exercisable as of March 31,
2008, was $0. This amount represents the total pre-tax intrinsic value (the
difference between our closing stock price on the last trading day of the first
quarter of 2008 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option
holders exercised their options on March 31, 2008.





The
following is a summary of the status of and changes to the Company’s non-vested
restricted shares as of and for the three months ended March 31,
2008:





Non-vested
              Shares
            
            
            Weighted
      Average Grant-Date Fair ValueBalance,
      December 31, 2007
            
            
            929,513
            
            
            $
            0.26Granted
            
            
            ---
            
            
            
            ---Vested
            
            
            (176,041
            )
            
            $
            0.28Cancelled
            
            
            (33,333
            )
            
            $
            0.26Balance,
      March 31, 2008
            
            
            720,139
            
            
            $
            0.26








Share-based
compensation expense of $58,000 was recognized during the three months ended
March 31, 2008, for the fair value of restricted shares and options that vested
during the period.  As of March 31, 2008, there was $289,000 of total
unrecognized compensation cost related to non-vested share based compensation
arrangements, including options and restricted stock grants. That cost is
expected to be recognized over a weighted-average period of about 2
years.





[23]
Advertising





Advertising
expenses were $193,000and $99,000 for the three months ended March 31, 2008 and
2007, respectively.  Advertising costs are expensed as
incurred.


Page
15





[24]
Recently Issued Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. In February
2008, the FASB deferred the effective date of SFAS 157 by one year for
certain non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually).  On January 1, 2008, we adopted
the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157
“Fair Value Measurements” (“SFAS 157”), except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
has been delayed by one year.  The adoption of SFAS 157 did not have a
material effect on our financial position or results of operations.





On
January 1, 2008, we adopted the provisions of SFAS No. 159 “The Fair Value
Option for Financial Assets and Financial Liabilities — including an
amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159
provides companies with an option to report selected financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. The fair value option: (i) may be applied
instrument by instrument, with a few exceptions, such as investments accounted
for by the equity method; (ii) is irrevocable (unless a new election date
occurs); and (iii) is applied only to entire instruments and not to
portions of instruments.  We did not elect to report any additional
assets or liabilities at fair value and accordingly, the adoption of SFAS 159
did not have a material effect on our financial position or results of
operations.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles
and requirements for how an acquirer: (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree; (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is to be applied
prospectively to business combinations consummated on or after the beginning of
the first annual reporting period on or after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact SFAS 141(R)
will have upon adoption on our accounting for acquisitions. However, under the
previous guidance,  any changes in valuation allowances as a result of
income from acquisitions, for certain deferred tax assets would serve to reduce
goodwill, whereas under the new standard, any changes in the valuation allowance
related to income from acquisitions currently or in prior periods will serve to
reduce income taxes in the period in which the reserve is
reversed.  In addition, under SFAS 141(R), transaction related
expenses, which were previously capitalized as “deal costs”, will be expensed as
incurred.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards that require (i) non-controlling interests to be
reported as a component of equity, (ii) changes in a parent’s ownership
interest while the parent retains its controlling interest to be accounted for
as equity transactions, and (iii) any retained non-controlling equity
investment upon the deconsolidation of a subsidiary to be initially measured at
fair value. SFAS 160 is effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008, with
early adoption prohibited. We are currently evaluating the effect, if any, which
the adoption of SFAS 160 may have on our financial position, results of
operations.








Page
16


NOTE C
- INVENTORY





The major
components of inventory are summarized as follows:





($
      in thousands)
            
            March
      31, 2008
            
            
            December
      31, 2007Framed
      art raw materials
            
            $
            643
            
            
            $
            647Framed
      art finished goods
            
            
            229
            
            
            
            161Other
            
            
            67
            
            
            
            66$
            939
            
            
            $
            874








NOTE D
- PROPERTY, PLANT AND EQUIPMENT





Property,
plant, and equipment are summarized as follows:





($
      in thousands)
            
            March
      31, 2008
            
            
            December
      31, 2007Land
      and building
            
            
            7,768
            
            
            
            7,768Office
      equipment and furnishings
            
            
            773
            
            
            
            765Technology
      equipment
            
            
            599
            
            
            
            589Less:
      Accumulated depreciation
            
            
            (2,434
            )
            
            
            (2,290
            )$
            6,706
            
            
            $
            6,832








Land and
building were sold and leased back in a transaction accounted for as a financing
transaction. The building is being depreciated over the twenty-year term of the
related lease.





Depreciation
expense was $153,000 and $154,000 for the three months ended March 31, 2008 and
2007, respectively.








NOTE E
- GOODWILL AND OTHER INTANGIBLE ASSETS





($
      in thousands)Goodwill
      at December 31, 2007
            
            $
            8,778SuperStock
      earn-out
            
            
            26Cumulative
      foreign currencytranslation
      of goodwill
            
            
            22Goodwill
      at March 31, 2008
            
            $
            8,826








Page
17


Identifiable
intangible assets, net of amortization at March 31, 2008 are as
follows:





($
      in thousands)
            
            Cost
            
            
            Accumulated
              Amortization
            
            
            Foreign
      Currency Translation
            
            
            Net
            
            
            Average
      Useful Life (in months)SuperStock
      non-compete covenants
            
            $
            116
            
            
            $
            (116
            )
            
            $
            ---
            
            
            $
            ---
            
            
            
            34SuperStock
      software
            
            
            876
            
            
            
            (202
            )
            
            
            ---
            
            
            
            674
            
            
            
            36
      – 60Ingram
      license agreements
            
            
            1,142
            
            
            
            (787
            )
            
            
            193
            
            
            
            548
            
            
            
            60Ingram
      non-compete agreements
            
            
            430
            
            
            
            (398
            )
            
            
            21
            
            
            
            53
            
            
            
            36Ingram
      customer relationships
            
            
            420
            
            
            
            (341
            )
            
            
            52
            
            
            
            131
            
            
            
            36Ingram
      distribution agreements
            
            
            270
            
            
            
            (219
            )
            
            
            34
            
            
            
            85
            
            
            
            36Ingram
      trademark
            
            
            220
            
            
            
            (220
            )
            
            
            ---
            
            
            
            ---
            
            
            
            24ArtSelect
      trade name
            
            
            80
            
            
            
            ---
            
            
            
            ---
            
            
            
            80
            
            
            
            N/AArtSelect
      software
            
            
            1,377
            
            
            
            (552
            )
            
            
            ---
            
            
            
            825
            
            
            
            48ArtSelect
      customer relationships
            
            
            2,800
            
            
            
            (370
            )
            
            
            ---
            
            
            
            2,430
            
            
            
            210Intangible
      assets
            
            $
            7,731
            
            
            $
            (3,205
            )
            
            $
            300
            
            
            $
            4,826





Amortization
expense during the three months ended March 31, 2008 and 2007 totaled $241,000
and $264,000, respectively.  Approximate remaining annual amortization
expense is as follows for each of the following years:  2008:
$634,000, 2009: $632,000, 2010: $422,000, 2011: $203,000 and 2012:
$198,000.





($
      in thousands)Intangible
      assets, net at December 31, 2007
            
            $
            4,921Reduction
      to cumulative foreign currency translation
            
            
            (5
            )SuperStock
      software additions, net
            
            
            102ArtSelect
      software additions, net
            
            
            49Amortization
      expense
            
            
            (241
            )Intangible
      assets, net at March 31, 2008
            
            $
            4,826








NOTE F
- MINORITY INTEREST





Minority
interest represents 328,974 shares of SuperStock Seller Preferred (which does
not include the converted shares of SuperStock Seller Preferred described below)
held by the former owners of SuperStock at March 31, 2008, which is exchangeable
for 986,922 shares of a21’s common stock. The SuperStock Seller Preferred has no
voting rights, pays no dividend, and, except for exchange rights into common
stock, it has no other special rights except a liquidation preference. In the
event of a liquidation, it is senior to the common stock of SuperStock and has
distribution rights to the greater of $839,000 or 3% of the total liquidation
distributions after creditors. The minority interest is valued as if it had been
exchanged into a21’s common stock at the closing price on the day of the
acquisition.





On March
22, 2008, we issued 926,331 shares of a21 common stock upon the conversion of
308,777 shares of SuperStock Seller Preferred with a respective adjustment to
equity of $518,000, representing the allocable, original fair value of the
SuperStock Seller Preferred as if it had been exchanged into a21’s common stock
at the closing price on the day of the acquisition.








Page
18


NOTE G
- OPERATING SEGMENTS





We
operate in the following segments: Corporate, SuperStock, and ArtSelect. No
customer represented 10% or more of our total revenue in the periods
presented.


7% and
10% of our total revenues were based in the U.K. for the three months ended
March 31, 2008 and 2007, respectively.  88% and 90% of our total
assets were based domestically in the U.S. as of March 31, 2008 and December 31,
2007, respectively.





The
following table presents information about our segment activity as of March 31,
2008, and 2007 for the three months then ended:





($
      in thousands)Three
      months ended
              March
      31, 2008
            
            Corporate
            
            
            SuperStock
            
            
            ArtSelect
            
            
            TotalRevenue
            
            $
            ---
            
            
            $
            2,615
            
            
            $
            2,492
            
            
            $
            5,107Segment
      operating loss
            
            
            (780
            )
            
            
            (19
            )
            
            
            (166
            )
            
            
            (965
            )Segment
      total assets
            
            
            224
            
            
            
            17,220
            
            
            
            11,167
            
            
            
            28,611Segment
      long-lived assets
            
            
            ---
            
            
            
            12,563
            
            
            
            9,406
            
            
            
            21,969








($
      in thousands)Three
      months ended
              March
      31, 2007
            
            Corporate
            
            
            SuperStock
            
            
            ArtSelect
            
            
            TotalRevenue
            
            $
            ---
            
            
            $
            3,168
            
            
            $
            2,956
            
            
            $
            6,124Segment
      operating loss
            
            
            (540
            )
            
            
            (34
            )
            
            
            69
            
            
            
            (505
            )Segment
      total assets
            
            
            759
            
            
            
            21,049
            
            
            
            11,473
            
            
            
            33,281Segment
      long-lived assets
            
            
            ---
            
            
            
            13,393
            
            
            
            9,732
            
            
            
            23,125








The
SuperStock segment information reflects the operation of foreign
subsidiaries.










Page
19


NOTE H
– DEBT FINANCINGS
 
 The
following table summarizes the future maturities of long-term debt obligations
at March 31, 2008 (in thousands):
 
 Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011Senior
      Secured Convertible Notes
              
              $
              15,500
              
              
              
              ---
              
              
              $
              ---
              
              
              
              ---
              
              
              $
              15,500Secured
      Notes (ArtSelect)
              
              
              2,555
              
              
              
              ---
              
              
              
              2,555
              
              
              
              ---
              
              
              
              ---Total:
              
              $
              18,055
              
              
              
              ---
              
              
              $
              2,555
              
              
              
              ---
              
              
              $
              15,500


$15.5
Million Senior Secured Convertible Notes




During
April 2006, we entered into a securities purchase agreement (“Purchase
Agreement”) with certain purchasers and Queequeg Partners, LP, as agent
(“Agent”), whereby we issued $15.5 million of 5% Senior Secured Convertible
Notes (“Senior Convertible Notes”) in consideration for which we received
net proceeds of $11.7 million in cash after the repayment of certain
outstanding debt of $3.3 million, the exchange of Notes totaling $215,000
to retire warrants to purchase 637,500 shares of a21’s common stock,
the repayment of total interest due of $216,000, and the payment of a finder’s
fee of $100,000. Queequeg Partners L.P. and Queequeg, Ltd. (each of which
are affiliated with Ahab Capital Management, Inc., which was a 10% beneficial
owner of a21’s common stock prior to April 27, 2006) (collectively “Ahab”),
and StarVest Partners, LP (“StarVest”), which was a 10% beneficial owner of
a21’s common stock prior to April 27, 2006, purchased a portion of the
Notes sold in this transaction. As part of this transaction, we released
$690,000 of certificate of deposits (“CDs”), which had been pledged by Ahab
to secure the letter of credit issued by SuperStock in connection with its
capital lease for our facility in Jacksonville, Florida, and replaced the
deposit with new CDs from the net proceeds of the financing.




The
Senior Convertible Notes are secured by substantially all of our assets and are
convertible into 23,846,149 of a21’s common stock at a minimum conversion price
of $0.65 per share, subject to adjustment as provided in the Senior Convertible
Notes. In addition, the conversion price of the Senior Convertible Notes may be
adjusted based on a weighted average anti-dilution formula in the event of
issuances of a21’s common stock at a price per share below $0.65. The minimum
conversion price is set at $0.50 per share on a diluted basis. The interest on
the Senior Convertible Notes is payable quarterly in arrears, and the principal
will be due and payable on March 31, 2011. If the 45-day volume weighted average
price of a21’s common stock equals or exceeds $1 per share, the Senior
Convertible Notes will automatically be converted into a21’s common stock under
certain conditions.




The
Senior Convertible Notes include customary events of default, including the
failure to pay any principal or interest when due, the breach of any covenant or
term or condition of the Senior Convertible Notes, the breach of any
representation or warranty in the Purchase Agreement, Senior Convertible Notes
or other documents executed in connection with the transactions contemplated
thereby, defaults in the performance of any other indebtedness of greater than
$500,000, the insolvency or bankruptcy of the Company, and the SEC issuing a
stop trade order or suspension of trading relating to a21’s common
stock.  Upon the occurrence of an event of default, each Note will
become due and payable, either upon notice from the agent for the holders of
Senior Convertible Notes at the direction of the holders of a majority of the
outstanding principal amount of the Senior Convertible Notes or automatically,
depending on the particular event of default.




Pursuant
to the terms of the Purchase Agreement, for so long as StarVest beneficially
owns at least 8,000,000 shares of a21’s common stock, StarVest has the right to
name a designee to our Board of Directors. In addition, for so long as at least
40% of the aggregate principal amount of the Senior Convertible Notes is
outstanding, we may not, without the prior written consent of the Agent, engage
in certain activities or transactions, including, but not limited to, declaring
dividends, liquidating, dissolving, effecting a reorganization or change of
control, or incurring certain indebtedness. The Purchase Agreement also provides
that the purchasers have a pro-rata “first right of refusal” to provide up to
25% of the amount of any additional financing the amount of which will be in
excess of $2.0 million.





On
January 31, 2008, we entered into a waiver agreement with the holders of a
majority of the outstanding principal amount of the Secured Convertible Notes,
to waive quarterly cash interest payments until March 31, 2008. Instead of
paying the interest for such periods in cash, the agreement provides that we
will settle quarterly interest payments due in January and April 2008 with new
notes in the aggregate principal amount equal to the interest due, having
substantially the same terms as the original notes. We would resume paying
quarterly interest in cash beginning with the quarterly interest due in July
2008.  As of May 15, 2008, the new notes for the unpaid interest due
have not been issued, and we continue to have ongoing discussions with the
noteholders.


Page
20







Secured
Notes – Related Party (ArtSelect Sellers)





In
partial consideration for the sale of ArtSelect to a21, the stockholders of
ArtSelect received $2.4 million in secured notes. The seller notes bear interest
at 6% per year and mature on the earlier to occur of a change of control or May
15, 2009. The first year of interest on the notes was accrued and added to the
principal of the notes. Since the first year, interest has been payable
quarterly, in arrears. The notes are secured by substantially all the assets of
ArtSelect (provided that, with respect to up to $3.0 million of the assets of
ArtSelect, the notes are junior to the previously issued $15.5 million
Senior Convertible Notes described above). The $2.6 million notes, including
accrued interest, recorded on our condensed consolidated balance sheet at March
31, 2008, is included in the caption “Secured notes payable, net- related party
(ArtSelect Sellers)”.








NOTE I–
LOAN PAYABLE ON BUILDING





During
June 2004, we completed the sale and leaseback of the land and an approximately
73,000 square foot building in which our headquarters is located in
Jacksonville, Florida. The facility was sold for $7.7 million and resulted in
net proceeds of $7.5 million, of which $4.0 million was used to repay a bank
note that was secured by a first mortgage on the facility and $1.6 million was
used to repay other indebtedness to the selling stockholders of SuperStock. The
building was leased back for a term of twenty years. The lease provides us with
two five-year renewal options on specified payment terms.





Based on
the terms of the leasing 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 10.1%. The building is included
in property and equipment and is being depreciated on a straight-line basis over
the twenty-year term of the lease.





The
following table summarizes our annual maturities under the loan payable on
building at March 31, 2008:





($
      in thousands)2008
            
            
            442009
            
            
            802010
            
            
            1102011
            
            
            1442012
            
            
            182Thereafter
            
            
            6,831Total
      Maturities
            
            
            7,391Less:
      Current Portion
            
            
            (61
            )Long
      Term Portion
            
            $
            7,330





The
current portion of the loan payable is included in other current
liabilities.


Page
21


The
following table summarizes our related annual lease payments on
building:





($
      in thousands)2008
            
            
            6052009
            
            
            8222010
            
            
            8432011
            
            
            8642012
            
            
            885Thereafter
            
            
            11,913Total
      payments
            
            
            15,932Less
      interest
            
            
            (8,541
            )Net
            
            $
            7,391








NOTE J
- INCOME TAXES





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes– an
Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income
Taxes.  FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.





The
Company adopted the provisions of FIN 48 effective January 1,
2007.  The Company recognizes accrued interest and penalties
associated with uncertain tax positions as part of income tax expense, if
applicable.  As of the date of adoption and through March 31, 2008,
the Company did not have any unrecognized tax benefits recorded as a provision
for the uncertainty of certain tax positions. As such, no estimated interest and
penalties on the provision for the uncertainty of certain tax positions is
included in the consolidated financial statements.  The Company does
not currently anticipate any significant changes to the unrecognized tax
benefits during the remainder of 2008.





The
Company, or one of its subsidiaries, files income tax returns in the U.S.
federal jurisdiction, and various states and foreign
jurisdictions.  Without exception, the Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2001.  Income tax returns are generally
subject to examination for a period of three to five years after filing of the
respective return.  The state impact of any federal changes remains
subject to examination by various states for a period of up to one year after
formal notification to the states. The Company currently does not have any
income tax returns under review.








NOTE K
– CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY





[1]
Common and Preferred stock:





We are
authorized to issue 200,000,000 shares of a21 common stock.





We are
authorized to issue 100,000 shares of $.001 par value preferred stock having
rights, preferences, and privileges which may be determined by our Board of
Directors.





[2] Stock
options and warrants:





Stock
options and warrants have been granted to officers, directors and employees
pursuant to employment agreements and other grants at the discretion of the
Board of Directors. Warrants have been granted through other financing and
investment agreements with certain of our investors.


Page
22





Our 2005
Stock Incentive Plan (the “2005 Plan”) provides for the grant of options, stock
appreciation rights (“SARs”), performance share awards, restricted stock, and
unrestricted stock of up to an aggregate of 6,000,000 shares of a21 common stock
to officers, employees, and independent contractors of ours or our affiliates.
If any award expires, is cancelled, or terminates unexercised or is forfeited,
the number of shares subject thereto is again available for grant under the 2005
Plan. A committee selected by our Board of Directors has the authority to
approve option grants and the terms, which include the option price and the
vesting terms. Stock options issued under the 2005 Plan typically have a
five-year term and vest pro-rata over that term except when otherwise adapted to
specific terms per executive management agreements and their respective terms.
The exercise price typically shall be no less than the fair market value of a
share of a21’s common stock on the date of grant of the options. See Note B
[22]. As of March 31, 2008, there were 2,028,464 shares available for grant
under the 2005 Plan.





Our 2002
Directors, Officers And Consultants Stock Option, Stock Warrant And Stock Award
Plan, as amended (the "2002 Plan"), provides for the grant
of  warrants, options, restricted or unrestricted common stock, and
other awards of up to an aggregate of 3,000,000 shares of a21 common
stock  to our employees, consultants and directors and our affiliates.
If any award expires, is cancelled, or terminates unexercised or is forfeited,
the number of shares subject thereto is again available for grant under the 2002
Plan. A committee selected by our 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 typically expire after a
ten-year period except when otherwise adapted to specific terms per executive
management agreements and their respective terms, and are subject to
acceleration upon the occurrence of certain events. The exercise price typically
shall be no less than the fair market value of a share of a21’s common stock on
the date of grant of the options. See Note B [22]. As of March 31, 2008, there
were 2,841,500 shares available for grant under the 2002 Plan.





Certain
options and warrants to be granted under the 2005 Plan and 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 granted
under the plans will be nonqualified options that are not intended to qualify as
ISOs.








NOTE L -
COMMITMENTS AND OTHER MATTERS





[1] Lease
commitments





As
described in Notes D and I above, we have capitalized our facility
under the terms of a sale and leaseback transaction. In September 2004, we
entered into an agreement to sublease a significant portion of its facility for
a term of six years with an option to renew for an additional two-year term. The
sublease requires monthly rent payments to us beginning in November 2004 with
annual increases through the term of the sublease. The total lease payments in
accordance with the terms of the agreement are $3.5 million. Sublease payments
of $174,000, and 169,000 were received for the three months ended March 31, 2008
and 2007, respectively.  Sublease payments are scheduled as follows
for each of the following years:  2008: $526,000, 2009: $722,000 and
2010: $616,000. Rental income is recognized on a straight-line basis over the
term of the sublease, and the excess of rental income recognized over rental
payments received is recorded as deferred rent receivable, which was $402,000
and $435,000 as of March 31, 2008, and December 31, 2007,
respectively.





In
connection with our operating lease agreement for SuperStock Limited in the UK,
we 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, our UK
subsidiary would be liable for approximately $90,000 per year under the
covenants in the lease in the event the lessee who has sublet the facility is
unable to perform under such terms.





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23


[2] Lease
Deposit Arrangement





A
security deposit is required under the capital lease agreement for our facility
in Florida. The lease deposit of $750,000 is included in restricted cash
non-current assets as of March 31, 2008 and December 31, 2007.





[3]
Legal





We are
involved in various claims and lawsuits in the ordinary course of business.
Management believes that there are no such matters outstanding that would have a
material adverse effect on our results of operations and financial
position.





[4]
Software Development Agreement





During
2007, the Company entered into a software development agreement with an
unrelated third party to pay approximately $525,000 in fees for the development
of a new online stock photography e-commerce website.  As of March 31,
2008, all payments due under the agreement have been made, and $559,000 of such
fees have been capitalized as software development in process, which is included
in intangible assets, net, in the accompanying consolidated balance
sheet.  The related asset was placed in service during April
2008.











Page
24


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 our condensed consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended December 31, 2007.





PRELIMINARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





The
statements contained in this Form 10-Q 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 our expectations, beliefs, intentions
or strategies for the future, which are indicated by words or phrases such as
“anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “management
believes” and similar words or phrases. The forward-looking statements are based
on our current expectations and are subject to certain risks, uncertainties, and
assumptions. Our 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 us on the date hereof, and
we assume no obligation to update any such forward-looking
statements.








OVERVIEW




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. SuperStock’s 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). SuperStock’s
products are sold directly and through a global network of distributors in over
100 countries. SuperStock’s subsidiary Ingram is a UK-based provider of
subscription, CD-ROM and individual royalty free images as well as vector
graphics and fonts, vehicle online templates, and print price guides for the
worldwide graphics design, printing, sign making, advertising and publishing
communities. Our subsidiary ArtSelect supplies home and office framed and
unframed wall décor to retailers, catalogers, membership organizations and
consumers through both online and traditional retail and wholesale distribution
channels. We are headquartered in Jacksonville, Florida, with other operating
and sales establishments in Iowa and London.








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 (“GAAP”). The
preparation of financial statements in conformity with GAAP 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 unaudited condensed consolidated financial statements included in this
quarterly report on Form 10-Q.








Page
25


RESULTS
OF OPERATIONS





THREE
MONTHS ENDED MARCH 31, 2008, COMPARED TO THREE MONTHS ENDED MARCH 31,
2007




LICENSING
REVENUES. Licensing revenues were $2.6 million for the three months ended March
31, 2008, compared to $3.2 million for the same prior year
period.  Licensing revenues lower by 17% due to challenging market
conditions that have prevailed during 2008 affecting our SuperStock foreign and
U.S. based channel sales more significantly than direct sales.




PRODUCT
REVENUES. Product revenues were $2.5 million for the three months ended March
31, 2008, compared to $3.0 million for the same prior year period, or 17%
lower.  Product revenues have been affected by the slow down in the
home-buying market and retail consumer spending, which impacts consumer
purchasing of home décor products.




COST OF
LICENSING REVENUE. Cost of licensing revenue was $952,000 for the three months
ended March 31, 2008, compared to $950,000 the same prior year
period.  As a percentage of licensing revenues, cost of licensing
sales was 36% and 30% for the three months ended March 31, 2008 and 2007,
respectively. Cost of licensing sales as a percentage of licensing revenues may
vary in any period depending on SuperStock’s relative mix of stock photography
distributed that is either licensed from third parties or owned by
us.




COST OF
PRODUCT REVENUE. Cost of product revenue was $1.3 million for the three months
ended March 31, 2008, compared to $1.4 million the same prior year
period.  As a percentage of product revenues, cost of product sales
was 54% and 47% for the three months ended March 31, 2008 and 2007,
respectively. Cost of product sales percentage reflects the variable cost for
ArtSelect’s raw materials including prints, mats, frames, molding, and packaging
material as well as shipping and handling costs. ArtSelect also incurred higher
post-integration costs associated with the consolidation of certain previously
outsourced fulfillment operations.




SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $3.2 million for the
three months ended March 31, 2008, compared to $3.7 million for the same prior
year period, primarily reflecting lower operating expenses resulting from
restructuring initiatives.




RESTRUCTURE
COSTS. Restructure costs were $39,000 for the three months ended March 31,
2008, and were primarily attributable to severance expense resulting from staff
reductions at ArtSelect.




DEPRECIATION
AND AMORTIZATION. Depreciation and amortization was $587,000 for the three
months ended March 31, 2008, compared to $619,000 for the same prior year
period.




INTEREST
EXPENSE. Interest expense was $441,000 for the three months ended March 31,
2008, compared to $442,000 for the same prior year period.  Interest
relates primarily to the outstanding debt during the three months ended March
31, 2008, compared to the same prior year period along with accounting for the
capital lease of our Jacksonville, Florida office space.




NET LOSS
ATTRIBUTED TO COMMON STOCKHOLDERS. Net loss attributed to common stockholders
was $1.4 million or $0.02 per share, for the three months ended March 31, 2008,
compared to net loss of $962,000, or $0.01 per share, for the same prior year
period.  There were approximately 3.2 million more weighted average shares
outstanding during the three months ended March 31, 2008, compared to the same
prior year period.


Page
26




LIQUIDITY
AND CAPITAL RESOURCES




As of
March 31, 2008, we had $1.1 million of cash and cash equivalents and working
capital of $571,000, compared to $2.1 million in cash and cash equivalents and
working capital of $1.5 million at December 31, 2007. The decrease in cash is
primarily due to overall cash used in operating and investing activities during
the three months ended March 31, 2008.




Net cash
used in operating activities for the three months ended March 31, 2008 was
$852,000, compared to net cash used in operating activities of $482,000 for the
same prior year period. The net cash used in operating activities during the
three months ended March 31, 2008, was substantially due to the net loss of $1.4
million adjusted by $587,000 for depreciation and amortization. Net cash used in
operating activities in the three months ended March 31, 2007, was due primarily
to the net loss of $962,000 adjusted for $619,000 for depreciation and
amortization, and a decrease in accounts payable and accrued expenses of
$807,000.




Net cash
used in investing activities for the three months ended March 31, 2008, was
$144,000, compared to net cash used in investing activities for the same prior
year period, of $283,000.  Net cash used in investing activities for
the three months ended March 31, 2008, was primarily due to a $113,000
investment in software development. Net cash used in investing activities in the
three months ended March 31, 2007, was primarily due to $208,000 investment in
SuperStock’s photo collection.




Net cash
used in financing activities for the three months ended March 31, 2008, was
$17,000, compared to net cash provided by financing activities of $46,000 for
the same prior year period.





Our
future plans, assuming we have sufficient funding to do so, include further
developing our distribution channels for SuperStock while improving the
leveraging of SuperStock’s owned and licensed image content, introducing new
products and customer channels in the stock photography space, gaining new key
customer relationships for ArtSelect while introducing new products and customer
channels, and seeking integration cost reduction opportunities where feasible
across the Company. However, there can be no assurance that these efforts will
be successful. We will have to seek additional funding within the next few
months to effect our business plan.  There can be no assurance that
sufficient additional capital needed to sustain operations will be obtained by
us, or that our operations will become profitable.





We have
sustained significant recurring losses and an accumulated deficit of $29.4
million at March 31, 2008, that raise substantial doubt about our ability to
continue as a going concern, and will need to raise cash from equity and debt
financings to fund our operations within the next few months.  If we
are unable to secure the required funding, we may not be able to implement our
business plan and may not be able to conduct business as a going concern. Our
independent registered public accounting firm’s audit report on our consolidated
financial statements as of and for the year ended December 31, 2007, included a
paragraph to emphasize the substantial doubt about the Company’s ability to
continue as a going concern.





On
January 31, 2008, we entered into a waiver agreement with the holders of a
majority of the outstanding principal amount of the Secured Convertible Notes,
to waive cash quarterly interest payments until March 31,
2008.  Instead of paying the interest for such periods in cash, the
agreement provides that we will settle quarterly interest payments due in
January and April 2008 with new notes in the aggregate principal amount equal to
the interest due, having substantially the same terms as the original
notes.  We will resume paying quarterly interest in cash beginning
with the quarterly interest due in July 2008.  As of May 15, 2008, the
new notes for the unpaid interest due have not been issued, and we continue to
have ongoing discussions with the noteholders.





Page
27




OFF
BALANCE SHEET ARRANGEMENTS





We are
not entered into any off balance sheet arrangements as of March 31,
2008.








Page
28


ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a
smaller reporting company, we are not required to include this information in
our quarterly report on Form 10-Q.








ITEM
4. CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





The Chief
Executive Officer and Chief Financial Officer have evaluated 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, as amended (the Exchange
Act)) as of March 31, 2008. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that as of March 31, 2008, these
disclosure controls and procedures were effective to ensure that information
required to be disclosed in our filings under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. In addition, our Chief
Executive Officer and Chief Financial Officer concluded as of the end of the
period covered by this quarterly report on Form 10-Q that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.





CHANGES
IN INTERNAL CONTROLS





During
the period covered by this report, there were no changes in our internal control
over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under
the Exchange Act) identified in connection with management’s evaluation of the
effectiveness of our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





Page
29


PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





We are
involved in various claims and lawsuits in the ordinary course of business.
Management believes that there are no such matters outstanding that would have a
material adverse effect on our results of operations and financial
position.








ITEM
1A.  RISK FACTORS





As a
smaller reporting company, we are not required to include this information in
our quarterly report on Form 10-Q.








ITEM
2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES





None








ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





None.








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





None








ITEM
5.  OTHER INFORMATION





None





Page
30





ITEM
6.  EXHIBITS





The
following exhibits are filed as part of this report:





EXHIBIT NUMBER
            DESCRIPTION31.1
            Certification
      Of Chief Executive Officer Pursuant To Rule 13A-14[A] Of The Securities
      Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The
      Sarbanes-Oxley Act Of 200231.2
            Certification
      Of Chief Financial Officer Pursuant To Rule 13A-14[A] Of The Securities
      Exchange Act Of 1934, As Adopted Pursuant To Section 302 Of The
      Sarbanes-Oxley Act Of 200232.1
            Certification
      Of Principal Executive Officer And Principal Financial Officer Pursuant To
      18 U.S.C.1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
      Act Of 2002





Page
31





SIGNATURES








Pursuant
to 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
      15, 2008
            By:
      /s/ JOHN Z. FERGUSONJohn
      Z. Ferguson
              Chief
      Executive Officer
              (Principal
      Executive Officer)Date:  May
      15, 2008
            By:
      /s/ THOMAS COSTANZAThomas
      Costanza
              Chief
      Financial Officer
              (Principal
      Financial Officer)

















Page 32