UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549  FORM 10-QSB   [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934  For the quarterly period ended March 31, 2007  Commission File Number 0-25377  HOUSE OF TAYLOR JEWELRY, INC. (Exact name as specified in its charter)  Nevada33-0805583(State or other jurisdiction of
incorporation or organization)(IRS Employer Identification No.)9200 Sunset Blvd., Suite 425
West Hollywood, California
(Address of principal executive office)90069
(Zip Code)  Registrants telephone number:  (310) 860-2660    Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the last 12 months (or for 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 (  )  As of May 18, 2007, the registrant had 40,338,793 shares of common stock issued and outstanding.            House of Taylor Jewelry, Inc.  TABLE OF CONTENTS  PART I FINANCIAL INFORMATION  Item 1 Financial Statements  Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006  Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)   Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2007 (unaudited)   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)   Notes to condensed consolidated unaudited financial statements  Item 2 Managements Discussion and Analysis or Plan of Operation.  Item 3 Controls and Procedures  PART II OTHER INFORMATION  Item 1. Legal Proceedings  Item 2.              Unregistered Sales of Equity Securities and Use of Proceeds  Item 3.               Defaults upon Senior Securities  Item 4.               Submission of Matters to a Vote of Security Holders  Item 5.               Other Information  Item 6.               Exhibits   SIGNATURES      PART I  FINANCIAL INFORMATION  Item 1. Financial Statements House of Taylor Jewelry, Inc. Condensed Consolidated Balance Sheets ASSETS March 31, 2007December 31, 2006(unaudited)Current assets:Cash and cash equivalents$1,532,088$1,689,282Accounts receivable - trade, net of allowance of $1,376,055 and $868,537,  respectively (includes $244,475 and $203,839 due from related parties, respectively)22,246,25223,753,813Inventory, net of allowance of $31,37713,290,29310,445,045Deferred debt issuance costs470,380574,416Prepaid expenses, includes prepaid royalties to related parties of $228,953 and $175,229, respectively1,060,720500,423Total current assets38,599,73336,962,979Property and equipment, less accumulated depreciation236,582195,395Intellectual property - related party, less accumulated amortization190,208201,667License agreements - related party, less accumulated amortization4,301,8874,528,302Deferred debt issuance costs, net of current portion182,550287,209Deposits20,58220,582Total Assets$43,531,542$42,196,134LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable26,728,29924,705,118Accrued expenses (includes $50,000 and $50,000 due to related parties, respectively)986,951569,566Deferred rent expense31,76534,569Current portion of convertible notes payable, including $111,912 and $77,780 due to related parties, respectively3,032,0732,418,434Note payable  related party, subordinated1,000,000-Current portion of notes payable - related parties, subordinated558,974570,834Total current liabilities32,338,06228,298,521Convertible notes payable, less current portion, including $139,890 and $155,560 due to related parties, respectively3,790,0914,836,869Notes payable - related parties, less current portion, subordinated146,808244,638Warrant liability3,694,7633,804,075Total Liabilities39,969,72437,184,103Stockholders equity:Preferred stock - $.0001 par value, 1,000,000 shares authorized,  0  issued and outstanding--Common Stock - $.0001 par value, 2,000,000,000 shares authorized, 39,774,153 and 39,399,153 issued and outstanding, respectively3,9783,941Additional paid-in capital17,844,33516,300,310Accumulated deficit(14,286,495)(11,292,220)Total stockholders equity3,561,8185,012,031Total liabilities and stockholders equity$43,531,542$42,196,134  The accompanying notes are an integral part of the condensed consolidated financial statements.  1        House of Taylor Jewelry, Inc. Condensed Consolidated Statements of Operations (Unaudited)  Three months ended
March 31,20072006Net sales (includes $510,383 and $56,153, respectively, of sales to related parties)$4,524,078$1,366,403Cost of goods sold4,020,3661,356,066Gross profit503,71210,337Expenses:Selling, shipping and general and administrative1,878,1941,997,232Loss from operations(1,374,482)(1,986,895)Other income (expense):Interest income8,3445,143Gain on change in warrant liability109,312-Interest expense(1,737,449)(124,065)(1,619,793)(118,922)Net loss$(2,994,275)$(2,105,817)Net loss per share: basic and diluted$(0.08)$(0.06)Weighted average shares outstanding:
Basic and diluted39,532,48638,285,281   The accompanying notes are an integral part of the condensed consolidated financial statements.                  2    House of Taylor Jewelry, Inc. Condensed Consolidated Statement of Stockholders Equity For the Three Months Ended March 31, 2007 (Unaudited)  No. of
sharesCommon StockAdditional
Paid-in
CapitalRetained earnings (Accumulated deficit)TotalBalance at December 31, 200639,399,153$3,941$16,300,310$(11,292,220)$5,012,031Conversion of notes375,000371,499,963-1,500,000Stock based compensation--44,062-44,062Net loss for the three months ended March 31, 2007---(2,994,275)(2,994,275)Balance at March 31, 200739,774,153$3,978$17,844,335$(14,286,495)$3,561,818  The accompanying notes are an integral part of the condensed consolidated financial statements                                 3    House of Taylor Jewelry, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)  Three months ended
March 31,20072006Operating activities:Net loss$(2,994,275)$(2,105,817)Adjustments to reconcile net loss
to net cash used in
operating activities:Depreciation and amortization253,343249,388Increase (reduction) of allowance for bad debts and returns283,133(344,340)Non-cash amortization of costs of the convertible notes1,275,556-Change in fair value of warrant liability(109,312)-Stock based compensation44,06296,938Warrants issued for services-252,064Changes in assets and liabilities:Accounts receivable1,224,4281,173,400Inventory(2,845,248)439,834Prepaid expenses(560,297)(139,668)Accounts payable2,023,181(405,264)Accrued liabilities417,385259,573Deferred rent expense(2,804)980Net cash used in by operating  activities(990,848)(522,912)Investing activities:Additions to property and equipment(56,656)(22,070)Net cash used in investing activities(56,656)(22,070)Financing activities:Proceeds from note payable  related party1,000,000-Increase (decrease) in loan from stockholder(109,690)25,159Cash released from restriction as collateral-2,000,000Decrease in line of credit-(2,005,911)Net cash provided by financing activities890,31019,248Net decrease in cash(157,194)(525,734)Cash and cash equivalents at beginning of period1,689,2821,070,163Cash and cash equivalents at end of period$1,532,088$544,429Supplemental disclosure of cash flow information:Cash payments for interest$483,334$5,911Issuance of 375,000 common shares for the conversion of        $1.5 million of Convertible Notes$1,500,000-  The accompanying notes are an integral part of the condensed consolidated financial statements.  4


House of Taylor Jewelry, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2007  1. Organization and description of business House of Taylor Jewelry, Inc. (a Nevada corporation, formerly Nurescell Inc.  an inactive development stage company  the Company or HOTJ)  was organized in May 2005 and its stockholders consisted of Interplanet Productions, Ltd. (Interplanet), Sandbox Jewelry, LLC (Sandbox), and the former stockholders of Techline. HOTJ entered into an exclusive licensing agreement with Interplanet, the marketing entity through which Dame Elizabeth Taylor brings her jewelry line of branded products to the marketplace. The licensing agreement provides the Company with the exclusive use of the House of Taylor Jewelry name and, subject to Interplanets approval, a broad, exclusive license to manufacture, market and enter into sublicense agreements for the manufacture and marketing of all categories of jewelry, including diamonds, colored stones, pearls, semiprecious stones, watches, costume jewelry and bridal adornment. HOTJ also entered into an exclusive licensing agreement with Sandbox, a subsidiary of Kathy Ireland Worldwide. By adding this license, the Company combined branding and creative resources in fine jewelry design to serve jewelry retailers with an array of unique creations marketed under the House of Taylor® Jewelry and Kathy Ireland® brands. The Companys license with Sandbox is limited principally to North America and does not cover watches or costume jewelry. Ms. Ireland leads design direction for her own collections and serves as an Ambassador for House of Taylor Jewelry under the direction of Dame Elizabeth Taylor. Under the aforementioned licensing agreements, the Company has developed multiple new product lines including bridal, diamond basics, fashion and pearls to market under its Elizabeth Taylor and Kathy Ireland brands. These products will be sold through retail channels ranging from specialty couture jewelry retailers, independent jewelry stores, large chain jewelry and department store retailers. Our current jewelry sales are primarily to specialty couture and independent jewelry retailers and our loose diamond sales are to both retailers and wholesalers.  Liquidity and Going Concern  The consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company incurred a net loss of approximately $3.0 million and $8.4 million for the first three months ended March 31, 2007 and the year ended December 31, 2006, respectively and has an accumulated deficit of approximately $14.3 million as of March 31, 2007. The Company used approximately $1.0 million and $9.2 million of cash in operations for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively. During the next 12 months, approximately $4.5 million of our convertible notes are due.  Such principal payments may be paid in cash or, at the option of the Company, if certain conditions are satisfied, in shares of the Companys common stock.  Our first principal payment was paid in common stock on April 2, 2007 as more fully described in Note 3.  The Company is evaluating its cash needs and existing and forecasted cash utilization rate and plans to raise additional debt or equity capital in the short term to provide funding for ongoing future operations.  No  assurances  can be given that the  Company will be successful  in  obtaining  additional  capital,  or that  such  capital  will be available on terms acceptable to the Company.  This raises substantial doubt about the Companys ability to continue as a going concern. The Company's continued existence is dependent upon its ability to raise capital and to market and sell its products successfully.  The accompanying financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if the Company is unable to continue as a going concern.  2.  Significant accounting policies


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Interim financial statements  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements pursuant to Regulation S-B. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  These statements should be read in conjunction with the historical statements for the years ended December 31, 2006 and 2005 included in the Companys Annual Report on Form 10-KSB dated April 16, 2007.  Estimates and assumptions  The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make  estimates and assumptions that affect the accounting for and recognition of assets, liabilities, stockholders equity, revenue and expenses. Estimates and assumptions are made because certain information is dependent on future events. The most significant estimates used in preparing the financial statements are those relating to the collectibility of receivables and the market value used in valuation of inventory. Actual results could differ from those estimates.  Comprehensive income (loss)  For the three months ended March 31, 2007, comprehensive income consists only of net loss and, therefore, a Statement of Other Comprehensive Income (Loss) has not been included in these financial statements.  Per share information  Basic earnings (loss) per share are determined by dividing the net earnings or loss by the weighted average shares of common stock outstanding during the period. Diluted earnings or loss per share are determined by dividing the net earnings or loss by the weighted average shares of common stock outstanding plus the dilutive effects of stock options and warrants. Stock options and warrants outstanding of 4,847,628 and 4,141,378 at March 31, 2007 and 2006, respectively, have been excluded from the calculation of loss per share because the effect would be anti-dilutive.  Cash and cash equivalents The Company considers all highly liquid debt instruments with original maturity dates of three months or less when purchased to be cash equivalents. There were approximately $719,000 and $710,000 held in a time deposit account that matured weekly on March 31, 2007 and December 31, 2006, respectively. The Company maintains its cash in bank deposits, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.  Allowance for Doubtful Accounts and Sales Returns  The Company grants credit in the normal course of business to its customers and periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk.  Since 2006, the Company has offered extended terms to certain of its customers in order to achieve greater penetration and visibility in key markets.


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The Companys management reviews receivables on an ongoing basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of previously written off receivables are recorded when received. No interest is charged on past due accounts. An allowance for returns is provided based on an ongoing review of returns and managements expectation of returns based on their evaluation of current business conditions. The Company generally accepts returns when the customer concurrently purchases additional products or where the Company considers the likelihood of collection to be remote.  Allowances are adjusted on a quarterly basis based on the above review and analysis. The allowances for doubtful accounts and returns are as follows:   March 31, 2007December 31, 2006Allowance for doubtful accounts$173,755$110,693Allowance for sales returns1,202,300757,844$1,376,055$868,537  In the third quarter of 2006, HOTJ launched an initiative to increase sales of branded loose diamonds to the wholesale trade at a minimal markup in order to expand the channels for the distribution and sale of our products, and to increase market penetration and brand awareness.  Total loose diamond sales for the year ended December 31, 2006, to both wholesalers and retailers, totaled approximately $22.4 million.  As an incentive to those customers who purchased in the third quarter, we offered extended payment terms on the mark-up that we charged on loose diamond sales and will allow a credit for the amount of the markup at the time it is due if the value has not yet been recognized by the marketplace.  We have established a reserve for these amounts of approximately $191,000, which is included in the allowance for sales returns for both March 31, 2007 and December 31, 2006. The sales of the diamonds are final and returns are not accepted.  Accounting for Stock-Based Compensation  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. SFAS 123R supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning on or after January 1, 2006.  The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006.  No stock options were granted during the three months ended March 31, 2007 or March 31, 2006. The following table summarizes activity for options during the three months ended March 31, 2007:  Number of SharesWeighted Avg. Exercise PriceBalance,  January 1, 2007325,000$5.37Granted during the period--Exercised during the period--Balance, March 31, 2007325,000$5.37Exercisable at March 31, 2007175,000$4.99


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The weighted average remaining contractual life for the options outstanding at December 31, 2006 is 8.1 years. The fair value of each option granted is estimated on the date of grant using the Black Scholes option pricing model. The weighted average fair value of options exercisable at March 31, 2007 is $2.42.  As of March 31, 2007, all stock options, vested and non-vested, had no intrinsic value, as their exercise price exceeded the current market price of the Companys common stock.  Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of earnings for the three months ended March 31, 2007 and 2006. Stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2007 and 2006, was approximately $44,000 and $97,000, respectively. As of March 31, 2007, approximately $159,000 of unrecognized compensation costs related to non-vested stock options are expected to be recognized over the following 18 months.  Income Taxes  On January 1, 2007, the Company adopted FASB Interpretation No. 48 (Fin 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement 109, which was issued in July 2006 and clarifies the accounting for uncertain tax positions. Fin 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Uncertain tax positions are recognized in the financial statements for positions which are considered more likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. The measurement of the tax benefit recognized in the financial statements is based upon the largest amount of tax benefit that, in managements judgment, is greater than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.  The implementation of FIN 48 did not have a material impact on the amount, reporting and disclosures of our fully reserved deferred tax assets resulting primarily from tax loss carryforwards. Due to our net operating loss carryforward position, the impact of uncertain tax positions, if any, would not be material.  The Company is subject to audit by the IRS and California Franchise Tax Board since its organization in May 2005.  Recent accounting pronouncements In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many 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. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS No. 159 to have any impact on the Companys financial condition or results of operations. In November 2006, the FASB ratified EITF Issue No. 06-07, Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133 ( EITF 06-07). EITF 06-07 affects convertible debt issuers with previously bifurcated conversion options that no longer require separate derivative accounting under SFAS 133. EITF 06-07 states that when a previously bifurcated conversion option no longer requires separate accounting, the issuer shall disclose (1) a description of the change causing the conversion option to no longer require bifurcation and (2) the amount of the derivative liability reclassified to shareholders equity. EITF 06-07 is effective for interim and annual periods beginning after December 15, 2006.  The Company does not expect EITF 06-07 to have any impact on the Companys financial condition or results of operations. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the


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Company on January 1, 2008 and is not expected to have a significant impact on the Companys financial statements.  3.  Senior Secured Convertible Notes  In May 2006, the Company entered into a series of agreements pursuant to a private placement transaction providing for, among other things, the issuance of senior convertible notes (Notes) and warrants to purchase shares of the Companys $.0001 par value per share common stock.  On May 12, 2006 the Company issued notes in the aggregate principal amount of $11,660,000 and Series A Warrants to purchase up to 2,186,250 shares of the Companys Common Stock.  The net proceeds of the issuance totaled approximately $10.3 million after direct placement costs of approximately $1.3 million. The notes are convertible into 2,915,000 shares of HOTJs common stock at any time at the option of the holders at an initial conversion price of $4.00 per share, subject to adjustment. The notes can be converted at the Companys option if certain criteria are satisfied.  The Company also entered into a Security Agreement that grants the holders of the Notes a first priority security interest in all of the Companys assets. The Notes bear interest at 9.75% payable quarterly, in arrears, and have an initial conversion price of $4.00. The conversion price is subject to adjustment if: (i) the Company fails to meet a Sales Threshold as shown on the following table; and (ii) the Average Market Price on the applicable date is less than $5.00.  The Sales Thresholds and dates are:  Sales ThresholdDate$14,000,000 for the three fiscal quarters endingSeptember 30, 2006$30,000,000 for the year endingDecember 31, 2006$45,000,000 for the year endingDecember 31, 2007  The Company exceeded the Sales Threshold for the three fiscal quarters ended September 30, 2006.  Sales for the year ended December 31, 2006 totaled $31.8 million (including $22.4 million of loose diamond sales) and, accordingly, the Sales Threshold for that period was met.  The Series A Warrants have an initial exercise price of $5.00 per share, a term of 60 months and became exercisable on November 12, 2006. The Company also issued Series B Warrants to purchase up to 947,375 shares of the Company's Common Stock and Series C Warrants to purchase up to 1,894,750 shares of the Company's Common Stock.  The Series B Warrants and Series C Warrants are not initially exercisable and only become exercisable upon the occurrence of certain conditions, including the Company causing a conversion of the Notes. Certain affiliates of the Company consisting of (i) members of the Abramov family as a group, (ii) Interplanet Productions, Ltd and (iii) Sandbox Jewelry LLC, owned by Kathy Ireland Worldwide, (collectively referred to as the Stockholders) each agreed to invest $125,000, for an aggregate amount of $375,000, on the same terms as other investors, except that, notwithstanding any provisions in the transactions documents, each of the Stockholders agreed not to convert or exercise any securities at a price which is lower than the closing bid price of the Companys Common Stock on the date of the closing until after the shareholders of the Company have voted in favor of the issuance of all of the securities as described in the transaction documents in accordance with applicable law and the rules and regulations of the Nasdaq Capital Market.  The principal amount of the notes is to be repaid in nine quarterly installments, based on the principal outstanding at the time of the payment, beginning on April 1, 2007.  Such principal payments may be paid in cash or, at the option of the Company, if certain conditions are satisfied, in shares of the


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Companys common stock. Any shares of common stock used to pay an installment of principal will be valued at the lower of the current Conversion Price or the Company Conversion Price which is equal to 85% of the Average Market Price as defined in the Notes.  Under certain conditions, if the Average Market Price equals or exceeds $5.50 per share then the principal payment that is due is deferred until the maturity date of the notes. On April 2, 2007, the Company paid the first principal payment of $1,087,222 and accrued interest of $238,509 on its convertible notes by issuing a total of 542,416 shares of common stock.  The Company Conversion Price (as defined in the notes) was $2.44.  In accordance with the terms of the notes, five of our affiliated noteholders elected to defer the payment of $41,666 of principal and $9,141 of interest due to them on April 2, 2007 until March 31, 2009. Interest is due quarterly, starting on July 1, 2006. The interest rate is 9.75% per annum. All or a portion of the accrued and unpaid interest may be paid in cash or, at the option of the Company, if certain conditions are satisfied, in shares of the Companys common stock. Any shares of common stock used to make an interest payment will be valued at the lower of the conversion price or 85% of the Average Market Price on the applicable interest payment date.  At March 31, 2007, interest payable of $247,650 is included in accrued expenses. After reviewing the applicable accounting literature, the Company concluded the notes did not meet the definition of conventional debt per EITF 05-02 and EITF 00-19, due to a provision which provides for the possible reset of the conversion price which results in the debt not being convertible into a fixed number of shares.  Under SFAS 133, if the debt is determined to be unconventional, then the Company is required to look to EITF 00-19 to determine how the embedded conversion feature would be classified (as liability or equity) if it were freestanding and therefore determine if it qualified for the scope limitation in paragraph 11 a. of SFAS 133 or if it required derivative accounting. Upon review of EITF 00-19, paragraphs 12  32, the Company concluded that all applicable requirements for equity treatment were met, including the Company having sufficient authorized shares to issue the maximum number required under the note provisions and the potential liquidated damages under the registration rights agreement being limited to 10%, which is less than a reasonable estimate of the discount between the FMV of registered and unregistered shares. The intrinsic value of the conversion option in the notes totaling $2.8 million was calculated in accordance with EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments and recorded as additional paid in capital and a corresponding reduction of the carrying value of the note. The Company is accounting for the Series A warrants, issued in connection with the note, as derivative liabilities in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock and EITF No. 05-2, The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19. The warrant liability was valued at $3,804,075 on the warrant issuance date.   In accordance with EITF 00-19, the value of the warrant has been recorded as a liability subject to marked-to-market revaluation at each period end.  At March 31, 2007 and December 31, 2006, the warrant liability was valued at $3,694,763 and $3,804,075, respectively.  The Company recorded a gain on the change in warrant liability of $109,312. The Company uses the Black-Scholes model to value the liability.  The assumptions used at May 12, 2006, December 31, 2006 and March 31, 2007 included expected volatility of 58.9%, 95.9% and 91.6% and a risk free interest rate of 5.00%, 4.53% and 4.48%, respectively. The discount attributable to the issuance date intrinsic value of the conversion option and the fair value of the warrants, totaling approximately $6.6 million, is being amortized using the effective interest method over the term of the note.  During the three months ended March 31, 2007, $1,067,000 of this discount was amortized to expense.  For financial statement presentation purposes, the discount is allocated between current and non-current on a pro rata basis. The components of convertible notes, net are as follows:


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CurrentNon-CurrentPrincipal amount of notes$ 4,515,556$ 5,644,444Less discount(1,483,483)(1,854,353)Net carrying value$ 3,032,073$ 3,790,091 In connection with the financing arrangement, the Company incurred financing costs of $1.3 million. The total financing costs were capitalized and are being amortized over the life of the note using the effective interest method. During the three months ended March 31, 2007, approximately $209,000 of the capitalized financing costs were amortized to expense. The registration rights agreement required the Company to file a registration statement for the resale of a number of shares of Common Stock equal to 150% of the sum of the number of shares issuable upon conversion of the Notes and upon the number of shares issuable upon exercise of the Warrants by June 26, 2006 and required that the registration statement be declared effective by July 11, 2006 if there was no review of the registration statement by the SEC.  The registration rights agreement states that the registration statement must remain effective and available for use until earlier of the date the noteholders can sell all of the securities covered by the registration statement without restriction pursuant to Rule 144(k) and the date all of such securities have been sold pursuant to the registration statement. The Company filed its registration statement on June 26, 2006 and it was declared effective by the SEC on July 10, 2006. If thereafter the registration statement ceases to be effective, the Company may be required to pay damages of 1.5% percent of the aggregate purchase price of the Notes and Warrants monthly until such failure is cured.  These damages will have a cash payment cap of 10% of the aggregate purchase price.  On February 21, 2007, two holders of the Companys convertible notes converted their entire note holdings for a total of $1,500,000 in the aggregate.  The Company issued 375,000 common shares upon the conversion and paid approximately $180,000 of Make-Whole Amounts as defined in the notes.  On April 2, 2007, the Company paid the first principal payment of $1,087,222 and accrued interest of $238,509 on its convertible notes by issuing a total of 542,416 shares of common stock.  The Company Conversion Price (as defined in the notes) was $2.44.  In accordance with the terms of the notes, five of our affiliated noteholders elected to defer the payment of $41,666 of principal and $9,141 of interest due to them on April 2, 2007 until March 31, 2009.  On April 2, 2007, two holders of the Companys convertible notes converted the remaining balances of their notes totaling of $88,889 in the aggregate.  The Company issued 22,224 common shares upon the conversion.  The noteholders waived their rights to the Make-Whole Amount as defined in the notes.  4. Commitments  In March 2007, the Company entered into an agreement with Fine Diamonds LLC/Festdiam Cutting Works (Fine), a Sightholder of the Diamond Trading Company (DTC), the sales and marketing arm of the De Beers Group of Companies. The agreement calls for Fine to offer the Company preferred pricing and terms on its purchases of diamonds, both certified and uncertified, in the grades, ranges and sizes that the Company has historically purchased. The Company will issue 100,000 shares of common stock to a principal of Fine in 2007 as consideration for services rendered in connection with establishing and promoting the relationship to date, and as a further incentive to aid the Company in broadening its wholesale and retail distribution of branded and unbrandeddiamonds. Beginning with 2008, and for each subsequent calendar year that the Company and Fine elect to continue this relationship, HOTJ expects to  issue 50,000 shares of common stock at June 30 and again at December 31,  provided that the Company purchases at least $10,000,000 from Fine during each six month


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period ending on such dates. If the purchases during the first six months are less than $10,000,000 but the total purchases for the calendar year equal at least $20,000,000, then HOTJ will nevertheless issue the further share amount to equal an aggregate of 100,000 shares of HOTJ stock for that calendar year.  While the parties intend for the agreement to have an initial term of five years the arrangement may be modified or canceled by either party upon thirty days notice.  In March 2007, the Company engaged Financo, Inc. as its strategic and transactional advisor.  The Company expects Financo will assist it with developing strategic plans that may include adding channels of distribution for the Companys current and new product lines, expanding its brands overseas and evaluating new licensing and sub-licensing opportunities.  5.  Related party transactions  In connection with the merger in May 2005, the shareholders of Techline Jewelry, Inc. received distributions which included a note for $1,365,090 (and collateralized by a security interest in the assets of the subsidiary, subject to the first security interest held by a bank) payable over three years with interest at 8% a year. Further, the shareholders agreed to repurchase any of the accounts receivable at May 20, 2005 that remained outstanding over a specified period. As of March 31, 2007 and December 31, 2006, the amounts outstanding on the note are $705,781. Interest payable to the related party as of March 31, 2007 of $14,116 is included in accrued expenses. Interest payable to the related party as of December 31, 2006 of $16,309 is included in accounts payable.  On January 11, 2007, the Company issued a promissory note for $1,000,000 to a related party.  The note is due on demand and bears interest at 8%, payable quarterly.  Interest payable to the related party as of March 31, 2007 of $17,315 is included in accrued expenses. In March 2004, the Company entered a lease for its office space lease which provides for minimum annual rent starting at $123,000 a year, increasing 3% per year through March 2009. A stockholder has guaranteed payments under the lease. During the three months ended March 31, 2007 and 2006, the Company incurred $110,151 and $45,800 of royalty expense to related parties.  At March 31, 2007 and December 31, 2006, there were prepaid royalties due to related parties of $228,953 and $175,229 included in prepaid expense and $50,000 and $50,000 of marketing fees due to related parties included in accrued expenses. At March 31, 2007 and December 31, 2006, accounts payable included $54,625 relating to minimum payments for royalties due to related parties. During the three months ended March 31, 2007 and 2006 the Company incurred marketing expense of $25,000 and $25,000, respectively, to related parties. During the three months ended March 31, 2007 and 2006, the Company recorded sales of $510,383 and $56,153 to related parties, respectively.   At March 31, 2007 and December 31, 2006, accounts receivable included $244,475 and $203,839 due from related parties, respectively.  Certain affiliates of the Company each invested $125,000, for an aggregate amount of $375,000, in our offering of convertible notes in May 2006.  Interest payable to these affiliates of $9,141 is included in accrued expenses at March 31, 2007.  Interest payable to these affiliates of $3,047 and $6,094 is included in accounts payable and accrued expenses, respectively, at December 31, 2006.  6. Subsequent Event  Initial Installment Payment of Convertible Notes


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On April 2, 2007, the Company paid the first principal payment of $1,087,222 and accrued interest of $238,509 on its convertible notes by issuing a total of 542,416 shares of common stock.  The Company Conversion Price (as defined in the notes) was $2.44.  In accordance with the terms of the notes, five of our affiliated noteholders elected to defer the payment of $41,666 of principal and $9,141 of interest due to them on April 2, 2007 until March 31, 2009.  Note Conversion  On April 2, 2007, two holders of the Companys convertible notes converted the remaining balances of their notes totaling of $88,889 in the aggregate.  The Company issued 22,224 common shares upon the conversion and expensed the related unamortized discounts.  The noteholders waived their rights to the Make-Whole Amount as defined in the notes.  The Company has determined that the conversion resulted in a substantial modification due to the waiver of the Make-Whole provision and, in accordance with Emerging Issues Task Force EITF Issue 96-19 Debtors Accounting for a Modification or Exchange of Debt,the conversion will be accounted for as an extinguishment of debt.  There were no fees paid in connection with the conversion.  Item 2. Managements Discussion and Analysis or Plan of Operation  This discussion, other than historical financial information, may consist of forward-looking statements that involve risks and uncertainties, including when and if the Company has significant operations. Consequently, actual results may vary from managements expectations. Management considers its success in developing new products, and channels to market them, under the Elizabeth Taylor and Kathy Ireland brands to be critical challenges. We are implementing a business model that involves having our products manufactured according to our designs and specifications and marketing fine jewelry products under our Elizabeth®, ET®, House of Taylor Jewelry®, and Kathy Ireland Jewelry® Exclusively for House of Taylor Jewelry, while leveraging the manufacturing resources, distribution and marketing infrastructures of some of the leading fine and fashion jewelry manufacturers in the world. Our Kathy Ireland specialty brands include J du J and The Quilts of Gees Bend. We currently sell our Kathy Ireland Collection jewelry lines primarily through independent jewelry stores, and plan to further expand distribution with non-competing products to department store retail channels.  The Kathy Ireland collections feature price points ranging from about $200 to $3,500. We target upper tier retail channels with our Elizabeth® and House of Taylor Jewelry® lines which feature price points ranging from about $3,000 to over $1 million. Each of these branded lines include products from various categories including diamond basics, loose diamonds, colored stones, bridal, and pearls. We have designed and completed more than 600 new products that comprise the Elizabeth®, House of Taylor Jewelry® and Kathy Ireland Jewelry® Collections. While meeting with jewelry retailers at the major trade shows, in their stores and at our offices, we asked them what product(s) they had the greatest need for and what sold best in their stores. The majority expressed the need for a consistent and competitive supply of loose and mounted diamonds and diamond jewelry, in particular, branded products in those categories.  In the third quarter of 2006, we launched an initiative to meet this expressed need and increase our sales of branded loose diamonds and a wider range of diamond jewelry to both the retail and wholesale trade.  We sought to establish HOTJ as an internationally recognized global source for diamonds with the added value of a brand.  In the fourth quarter we expanded this initiative and now examine, grade and certify our diamonds of one carat and above with reputable gem trade laboratories and brand markings to differentiate HOTJ diamonds from other branded and non branded product and to provide the end consumer with our company set standards and assurances of quality, value, craftsmanship and conflict free sourcing. We established relationships with a number of global diamond cutters, manufacturers and suppliers to insure we will have a consistent, well priced supply of polished diamonds and diamond jewelry to meet the anticipated demands from our customers and to establish HOTJ as a key branded supplier to the trade.  We sold loose diamonds to the wholesale trade at a minimal markup and with extended


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terms in order to expand the channels for the distribution and sale of our products, and to increase market penetration and brand awareness.  We see the increased distribution of our branded diamonds through various supply channels as a marketing and awareness initiative to ultimately drive consumers to our HOTJ authorized jewelry retailers.  Results of operations for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 Net sales for the three months ended March 31, 2007 totaled $4,524,000, an increase of $3,158,000 or 231% from net sales of $1,366,000 for the three months ended March 31, 2006.  Of the increase, $2,727,000 were from sales of loose diamonds sold to increase market penetration and brand awareness.  Sales of our branded jewelry products increased $1,439,000 for the three months ended March 31, 2007 compared to the same period in 2006. Net sales for the three months ended March 31, 2007 also include $510,000 of related party sales as compared to $56,000 in the comparable period in 2006.  During the three months of March 31, 2007, management reduced the number of product offerings to focus on branded products and sold $700,000 of closeout merchandise at heavily discounted pricing.  During the three months of March 31, 2006, sales included $770,000 in closeout merchandise, primarily in our discontinued Mirabelle products. Our cost of goods sold consists of the cost of merchandise (principally finished products), freight and duty. The Company does not have significant warehouse costs.  Our inventory management, fulfillment and freight out and insurance costs are included in selling, shipping, general and administrative expense.  Gross profit for the three months ended March 31, 2007 totaled $504,000, an increase of $493,000 from a gross profit of $10,000 for the three months ended March 31, 2006.  Gross profit as a percentage of sales increased to 11.1% for the three months ended March 31, 2007 from .8% for the comparable period in 2006 due primarily to the increase in branded products. The gross profit margin was impacted by the sales of $2,727,000 in sales of loose diamonds to wholesale trade at margins of under five percent. Sales of $700,000 of closeout merchandise of heavily discounted products also impacted the gross profit margin. Selling, shipping and general and administrative expenses were $1,878,000 for the three months ended March 31, 2007, compared to $1,997,000 for the three months ended March 31, 2006, a decrease of $119,000. As a percent of sales, selling, shipping and general and administrative expenses decreased from 146.2% for the three months ended March 31, 2006 to 41.5% for the three months ended March 31, 2007 due primarily to the increase in sales in 2007.  Advertising, marketing and selling expenses increased $222,000, including an increase in commissions and sales management expense of $102,000 due to the increase in sales.  Royalty expense to related parties increased $64,000, also driven by the increased sales. Expenses related to being a public company decreased by $30,000 as $49,000 of filing fees were incurred in the three months ended March 31, 2006 that were associated with the registration statement filed in 2006. $44,000 of non-cash compensation expense associated with options issued to our directors in 2005 was expensed in the three months ended March 31, 2007 as compared to $97,000 for the comparable period in 2006.  Professional fees decreased by $301,000 for the three months ended March 31, 2007 over the comparable period in 2006.  Payroll and related expense increased $79,000 for three months ended March 31, 2007 as compared to the comparable period in 2006. A reduction in other selling shipping and general and administrative expenses accounted for the balance of the decrease.  Interest expense was $1,737,000 for the three months ended March 31, 2007 compared to $124,000 for the same period last year. Of the interest expense for the three months ended March 31, 2007, $1,276,000 is non-cash expenses due to the amortization of costs of the convertible notes, and the balance is interest on the convertible notes and related party notes.  The change in fair market value (FMV) of the warrant liability is a non-cash charge determined by the difference in FMV from period to period. The Company calculates the FMV of the warrants


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outstanding using the Black-Scholes model. The decrease in the fair value of the warrant liability for the three months ended March 31, 2007 was $109,000 and is a result of the decrease in the trading value of our stock in the First Quarter of 2007.  The Company recorded no provision for income taxes for the three months ended March 31, 2007 and 2006 due to the net loss incurred in each period. On January 1, 2007, the Company adopted FASB Interpretation No. 48 (Fin 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement 109, which was issued in July 2006 and clarifies the accounting for uncertain tax positions. Fin 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Uncertain tax positions are recognized in the financial statements for positions which are considered more likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. The measurement of the tax benefit recognized in the financial statements is based upon the largest amount of tax benefit that, in managements judgment, is greater than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.  The implementation of FIN 48 did not have a material impact on the amount, reporting and disclosures of our fully reserved deferred tax assets resulting primarily from tax loss carryforwards.  Liquidity and Capital Resources Operations and liquidity needs are funded through cash flows from operations, debt and equity offerings, as the well as utilizing, when needed, borrowings under the Companys various credit lines. The Company is evaluating its cash needs and existing and forecasted cash utilization rate and plans to raise additional debt or equity capital in the short term to provide funding for ongoing future operations.  No  assurances  can be given that the  Company  will be successful  in  obtaining  additional  capital,  or that  such  capital  will be available on terms acceptable to the Company. The Company's continued existence is dependent upon its ability to raise capital and to market and sell its products successfully. During the three months ended March 31, 2007, the Company used $991,000 for operations. The principal components of the cash used in operations included the net loss of $2,994,000 but this included $1,747,000 of non-cash expenses.  Inventory increased by $2,845,000 but was somewhat offset by an increase in accounts payable of $2,023,000, primarily due to the purchase of diamond inventory. Accounts receivable decreased by $1,224,000 due to lower sales in the first quarter versus the fourth quarter of 2006.  For the three months ended March 31, 2006, the Company used $523,000 for operations. The principal components of the cash used in operations included the net loss of $2,106,000, a reduction in the allowance for returns and bad debts of $344,000, and a decrease in accounts payable of $405,000.  These decreases were offset by a reduction of accounts receivable of $1,173,000, a decrease in inventory of $400,000, non-cash operating expenses of $598,000 and an increase in accrued liabilities of $260,000 consisting primarily of professional fees and the liquidated damages due to investors in our August 2005 private placement. For the three months ended March 31, 2007, investing activities used $57,000 for the purchase of computer software and hardware and the acquisition of an additional safe.  Investing activities used $22,000 in the three months ended March 31, 2006 for the acquisition of additional safes.  For the three months ended March 31, 2007, financing activities provided $890,000.  We made payments on loans to shareholders of $110,000. On January 11, 2007, the Company issued a promissory note for $1,000,000 to a related party.


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For the three months ended March 31, 2006, financing activities provided $19,000 consisting of an increase in notes payable to shareholder due to accrued interest of $25,000 and a decrease in our line of credit that exceeded the release of restricted cash by $6,000.  Critical Accounting Policies and Use of Estimates  For a discussion of our critical accounting policies, we refer you to the corresponding section in Part II, Item 6 of our 2006 Annual Report on Form 10-KSB filed on April 16, 2007, and to the footnote disclosures included in Part I, Item 1 of this report.  The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.  Recent accounting pronouncements In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many 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. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS No. 159 to have any impact on the Companys financial condition or results of operations. In November 2006, the FASB ratified EITF Issue No. 06-07, Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133 ( EITF 06-07). EITF 06-07 affects convertible debt issuers with previously bifurcated conversion options that no longer require separate derivative accounting under SFAS 133. EITF 06-07 states that when a previously bifurcated conversion option no longer requires separate accounting, the issuer shall disclose (1) a description of the change causing the conversion option to no longer require bifurcation and (2) the amount of the derivative liability reclassified to shareholders equity. EITF 06-07 is effective for interim and annual periods beginning after December 15, 2006.  The Company does not expect EITF 06-07 to have any impact on the Companys financial condition or results of operations. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Companys financial statements.  Item 3. Controls and Procedures  As of March 31, 2007, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as defined in the Securities Act of 1934 Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Companys management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Companys disclosure controls and procedures were effective as of March 31, 2007. No changes in internal controls over financial reporting identified in connection with its evaluation occurred during the quarterly period covered by this report that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.  Although the evaluation did not detect any material weaknesses or significant deficiencies in the Companys system of internal accounting controls over financial reporting, management identified


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certain potentialdeficiencies in its level of staffing, and inherent limitations in its electronic data processing software. The Company plans to add additional accounting personnel and replace its electronic data processing software during the second quarter of 2007 to address these resource issues.


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PART II - OTHER INFORMATION . This Quarterly Report on Form 10-QSB and our other filings with the Securities and Exchange Commission and public announcements contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results or performance to differ materially from any results of performance expressed or implied by those statements. Examples of forward-looking statements include predictive statements, statements that depend on or refer to future events or conditions, which include words such as expects, anticipates, intends, plans, believes, estimates, should, would, may or similar expressions, or statements that involve hypothetical events.  Item 1. Legal Proceedings  None  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  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  Item 6.  Exhibits  Exhibit 31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended  Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended  Exhibit 32.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Exhibit 32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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SIGNATURES   In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.    HOUSE OF TAYLOR JEWELRY, INC.   Dated:  May 18, 2007/s/ Jack AbramovJack Abramov
Chief Executive OfficerDated: May 18, 2007/s/ Robert RankinRobert Rankin
Chief Financial Officer
(Principal Accounting Officer)


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