**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 June 30, 2007





Commission
      File Number 0-25377





**HOUSE
      OF TAYLOR JEWELRY, INC.**


(Exact
      name as specified in its charter)





**Nevada**
            **33-0805583**(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
      August 10, 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
                INFORMATIONItem
                1
            Financial
                StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2007 (unaudited) and 
                December
                31, 2006Condensed
                Consolidated Statements of Operations for the three months and six
                months
                ended June 30, 2007 and 2006 (unaudited)Condensed
                Consolidated Statement of Stockholders’ Equity for the six months ended
                June 30, 2007 (unaudited)Condensed
                Consolidated Statements of Cash Flows for the six months ended June
                30,
                2007 and 2006 (unaudited)Notes
                to Condensed Consolidated unaudited financial statementsItem
                2
            Management’s
                Discussion and Analysis or Plan of Operation.Item
                3
            Controls
                and ProceduresPART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                ProceedingsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsItem
                3.
            Defaults
                upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security HoldersItem
                5.
            Other
                InformationItem
                6.
            ExhibitsSIGNATURES








**PART
      I - FINANCIAL INFORMATION**


**Item
      1. Financial Statements**


**House
      of Taylor Jewelry, Inc.**


**Condensed
      Consolidated Balance Sheets**


**ASSETS**


June
                30,
              2007
            
            December
                31,
              2006(unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            1,577,963
            
            $
            1,689,282Accounts
                receivable - trade, net of allowance of $1,073,553 and $868,537,
                respectively (includes $100,751 and $203,839 due from related parties,
                respectively)
            
            
            20,558,813
            
            
            23,753,813Inventory,
                net of allowance
            
            
            10,010,629
            
            
            10,445,045Deferred
                debt issuance costs
            
            
            396,471
            
            
            574,416Prepaid
                expenses (includes from related parties of $447,609 and $175,229,
                respectively)
            
            
            993,168
            
            
            500,423Total
                current assets
            
            
            33,537,044
            
            
            36,962,979Property
                and equipment, less accumulated depreciation
            
            
            281,830
            
            
            195,395Intellectual
                property - related party, less accumulated amortization
            
            
            178,749
            
            
            201,667License
                agreements - related party, less accumulated amortization
            
            
            4,075,473
            
            
            4,528,302Deferred
                debt issuance costs, net of current portion
            
            
            109,402
            
            
            287,209Deposits
            
            
            20,582
            
            
            20,582Total
                Assets
            
            $
            38,203,080
            
            $
            42,196,134**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            22,893,177
            
            $
            24,705,118Accrued
                expenses (includes $237,942 and $50,000 due to related parties,
                respectively)
            
            
            756,435
            
            
            569,566Deferred
                rent expense
            
            
            33,650
            
            
            34,569Due
                to shareholder
            
            
            300,000
            
            
            -Current
                portion of convertible notes payable, including $132,899 and $77,780
                due
                to related parties, respectively
            
            
            3,183,876
            
            
            2,418,434Note
                payable - related party, subordinated
            
            
            1,000,000
            
            
            -Current
                portion of notes payable - related parties, subordinated
            
            
            705,782
            
            
            570,834Total
                current liabilities
            
            
            28,872,920
            
            
            28,298,521Convertible
                notes payable, less current portion, including $134,138 and $155,560
                due
                to related parties, respectively
            
            
            3,213,547
            
            
            4,836,869Notes
                payable - related parties, less current portion,
                subordinated
            
            
            -
            
            
            244,638Warrant
                liability
            
            
            1,071,262
            
            
            3,804,075Total
                Liabilities
            
            
            33,157,729
            
            
            37,184,103Stockholders’
                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, 40,338,793
                and
                39,399,153 issued and outstanding, respectively
            
            
            4,035
            
            
            3,941Additional
                paid-in capital
            
            
            19,302,962
            
            
            16,300,310Accumulated
                deficit
            
            
            (14,261,646
            )
            
            (11,292,220
            )Total
                stockholders’ equity
            
            
            5,045,351
            
            
            5,012,031Total
                liabilities and stockholders’ equity
            
            $
            38,203,080
            
            $
            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)**




Six
                months ended
              June
                30,
            
            Three
                months ended
              June
                30,2007
            
            2006
            
            2007
            
            2006Net
                sales (includes $865,078 and $354,695, respectively, of sales to
                related
                parties in 2007 and $445,766 and $333,460, respectively, of sales
                to
                related parties in 2006)
            
            $
            9,320,269
            
            $
            3,848,238
            
            $
            4,796,191
            
            $
            2,481,835Cost
                of goods sold
            
            
            8,052,491
            
            
            3,664,346
            
            
            4,032,125
            
            
            2,308,280Gross
                profit
            
            
            1,267,778
            
            
            183,892
            
            
            764,066
            
            
            173,555Expenses:Selling,
                shipping and general and administrative
            
            
            4,095,637
            
            
            4,274,400
            
            
            2,217,443
            
            
            2,277,168Loss
                from operations
            
            
            (2,827,859
            )
            
            (4,090,508
            )
            
            (1,453,377
            )
            
            (2,103,613
            )Other
                income (expense):Interest
                income
            
            
            14,539
            
            
            43,074
            
            
            6,195
            
            
            37,931Change
                in fair value of warrant liability
            
            
            2,732,812
            
            
            2,557,915
            
            
            2,623,500
            
            
            2,557,915Interest
                expense
            
            
            (2,888,918
            )
            
            (905,954
            )
            
            (1,151,469
            )
            
            (781,889
            )(141,567
            )
            
            1,695,035
            
            
            1,478,226
            
            
            1,813,957Net
                income (loss)
            
            $
            (2,969,426
            )
            $
            (2,395,473
            )
            $
            24,849
            
            $
            (289,656
            )Net income
                (loss) per share:Basic
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            0.00
            
            $
            (0.01
            )Diluted
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            0.00
            
            $
            (0.01
            )Weighted
                average shares outstanding:Basic
            
            
            39,931,628
            
            
            38,394,543
            
            
            40,326,383
            
            
            38,728,399Diluted
            
            
            39,931,628
            
            
            38,394,543
            
            
            40,513,411
            
            
            38,728,399





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 Six Months Ended June 30, 2007**





**No.
                of**
              **shares**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Retained
                earnings (Accumulated deficit)**
            
            **Total**Balance
                at December 31, 2006
            
            
            39,399,153
            
            $
            3,941
            
            $
            16,300,310
            
            $
            (11,292,220
            )
            $
            5,012,031Conversion
                of notes (Unaudited)
            
            
            397,224
            
            
            39
            
            
            1,588,851
            
            
            -
            
            
            1,588,890Share-
                based compensation (Unaudited)
            
            
            -
            
            
            -
            
            
            88,125
            
            
            -
            
            
            88,125Shares
                issued for principal and interest (Unaudited)
            
            
            542,416
            
            
            55
            
            
            1,325,676
            
            
            
            
            
            1,325,731Net
                loss (Unaudited)
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,969,426
            )
            
            (2,969,426
            )Balance
                at June 30, 2007 (Unaudited)
            
            
            40,338,793
            
            $
            4,035
            
            $
            19,302,962
            
            $
            (14,261,646
            )
            $
            5,045,351





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)**




**Six
                months ended**
              **June
                30,****2007**
            
            **2006****Operating
                activities:**Net
                loss
            
            $
            (2,969,426
            )
            $
            (2,395,473
            )Adjustments
                to reconcile net loss to net cash used in
              operating
                activities:Depreciation
                and amortization
            
            
            510,530
            
            
            499,739Increase
                (reduction) of allowance for bad debts and returns
            
            
            305,959
            
            
            (208,481
            )Non-cash
                amortization of costs of the convertible notes
            
            
            2,173,983
            
            
            573,445Change
                in fair value of warrant liability
            
            
            (2,732,813
            )
            
            (2,557,915
            )Shares
                issued for services
            
            
            -
            
            
            42,700Share-based
                compensation
            
            
            88,125
            
            
            193,876Warrants
                issued for services
            
            
            -
            
            
            311,094Warrants
                issued for interest
            
            
            -
            
            
            126,495**Changes
                in assets and liabilities:**(Increase)
                decrease in accounts receivable
            
            
            2,889,041
            
            
            (483,770
            )(Increase)
                decrease in inventory
            
            
            434,416
            
            
            (548,568
            )Increase
                in prepaid expenses
            
            
            (492,745
            )
            
            (625,325
            )Increase
                in interest receivable
            
            
            -
            
            
            (18,966
            )Increase
                in deposits
            
            
            -
            
            
            (317
            )Increase
                (decrease) in accounts payable
            
            
            (1,811,941
            )
            
            1,487,514Increase
                (decrease) in accrued liabilities
            
            
            725,379
            
            
            (186,013
            )Increase
                (decrease) in deferred rent expense
            
            
            (919
            )
            
            1,960Net
                cash used in operating activities
            
            
            (880,411
            )
            
            (3,788,005
            )**Investing
                activities:**Additions
                to property and equipment
            
            
            (121,218
            )
            
            (28,088
            )Net
                cash used in investing activities
            
            
            (121,218
            )
            
            (28,088
            )**Financing
                activities:**Proceeds
                from note payable - related party
            
            
            1,000,000
            
            
            -Decrease
                in loan from stockholder
            
            
            (109,690
            )
            
            (334,939
            )Issuance
                of convertible notes
            
            
            -
            
            
            11,660,000Issuance
                costs of convertible notes
            
            
            -
            
            
            (1,300,098
            )Cash
                released from restriction as collateral
            
            
            -
            
            
            2,000,000Repayment
                of line of credit
            
            
            -
            
            
            (2,005,911
            )Issuance
                of common stock and warrants
            
            
            -
            
            
            750Net
                cash provided by financing activities
            
            
            890,310
            
            
            10,019,802Net
                increase (decrease) in cash
            
            
            (111,319
            )
            
            6,203,709Cash
                and cash equivalents at beginning of period
            
            
            1,689,282
            
            
            1,070,163Cash
                and cash equivalents at end of period
            
            $
            1,577,963
            
            $
            7,237,872




**Supplemental
                disclosure of cash flow information:**Cash
                payments for interest
            
            $
            483,334
            
            $
            180,156Issuance
                of 397,224 common shares for the conversion of $1.6 million of Convertible
                Notes
            
            $
            1,588,890
            
            
            -Issuance
                of 542,416 common shares for the conversion of $1.3 million of Convertible
                Notes
            
            $
            1,325,731
            
            
            -




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**


**June
      30, 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
      six months ended June 30, 2007 and the year ended December 31, 2006,
      respectively, and has an accumulated deficit of approximately $14.3 million
      as
      of June 30, 2007. The Company used approximately $0.9 million and $9.2 million
      of cash in operations for the six months ended June 30, 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 and our second principal payment was paid in
      cash
      on July 2, 2007 as more fully described in Note 3.





The
      Company will continue to evaluate its cash needs and existing and forecasted
      cash utilization rate and expects to raise additional debt or equity capital
      in
      the short term to provide funding if needed 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. 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.




**5**





**2.**  **Significant
      accounting policies**





**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 six months ended June 30, 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 filed on 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 and six months ended June 30, 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, warrants and shares underlying conversion
      of
      Notes. Stock options, warrants and shares underlying conversion of Notes
      outstanding of 7,258,980 and 4,141,378 at June 30, 2007 and 2006, respectively,
      have been excluded from the calculation of loss per share for the six months
      ended June 30, 2007 and the three and six months ended June 30, 2006 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.
      Approximately $710,000 was held in a time deposit account that matured weekly
      on
      December 31, 2006. There were no monies held in a time deposit account as of
      June 30, 2007. 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.


**6**




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:





June
                30, 2007
            
            December
                31, 2006Allowance
                for doubtful accounts
            
            $
            196,581
            
            $
            110,693Allowance
                for sales returns
            
            
            876,972
            
            
            757,844$
            1,073,553
            
            $
            868,537




In
      the
      third and fourth 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 and fourth 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 June 30, 2007 and December 31,
      2006.
      The sales of the diamonds are final and returns are not accepted.





**Accounting
      for Share-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 and six months ended June 30, 2007 and
      2006. The
      following table summarizes activity for options during the six months ended
      June
      30, 2007:




**7**


Number
                of Shares
            
            Weighted
                Avg. Exercise PriceBalance,
                January 1, 2007
            
            
            325,000
            
            $
            5.37Granted
                during the period
            
            
            -
            
            
            -Exercised
                during the period
            
            
            -
            
            
            -Balance,
                June 30, 2007
            
            
            325,000
            
            $
            5.37Exercisable
                at June 30, 2007
            
            
            175,000
            
            $
            4.99




The
      weighted average remaining contractual life for the options outstanding at
      June
      30, 2007 is 7.8 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 June 30, 2007 is $2.42. As of June 30,
      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.





Share-based
      compensation expense is included in selling, general and administrative expenses
      in the accompanying condensed consolidated statements of earnings for the three
      months ended June 30, 2007 and 2006. Share-based
      compensation expense recognized under SFAS 123R for the three months ended
      June
      30, 2007 and 2006, was approximately $44,000 and $97,000, respectively. Share-based
      compensation expense recognized under SFAS 123R for the six months ended June
      30, 2007 and 2006, was approximately $88,000 and $194,000, respectively. As
      of
      June 30, 2007, approximately $115,000 of unrecognized compensation costs related
      to non-vested stock options are expected to be recognized over the following
      15
      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 andclarifies
      the accounting for uncertain tax positions. Fin 48also
      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.


**8**




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.




**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
                Threshold**
            **Date**$14,000,000
                for the three fiscal quarters ending
            September
                30, 2006$30,000,000
                for the year ending
            December
                31, 2006$45,000,000
                for the year ending
            December
                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.


**9**





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 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.




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 June 30, 2007, interest payable of $228,123 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” since there is a possibility
      that they could be net cash settled in the event of a Fundamental Transaction
      which could be out of the control of the company. 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
      June
      30, 2007 and December 31, 2006, the warrant liability was valued at $1,071,262
      and $3,804,075, respectively. The Company recorded a gain on the change in
      the
      fair value of the warrant liability of $2,732,812 for the six months ended
      June
      30, 2007. The Company uses the Black-Scholes model to value the liability.
      The
      assumptions used at May 12, 2006, December 31, 2006 and June 30, 2007 included
      expected volatility of 58.9%, 95.9% and 88.5% and a risk free interest rate
      of
      5.00%, 4.53% and 5.03%, 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 and six months ended June 30, 2007, $751,000,
      and
      1,818,000, respectively, 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.


**10**




The
      components of convertible notes, net as of June 30, 2007 are as
      follows:





**Current**
            
            **Non-Current**Principal
                amount of notes
            
            $
            4,471,111
            
            $
            4,512,778Less
                discount
            
            
            (1,287,235
            )
            
            (1,299,231
            )Net
                carrying value
            
            $
            3,183,876
            
            $
            3,213,547




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 and six months ended June 30, 2007, approximately $147,000
      and
      $356,000 respectively, 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 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 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 was accounted for as an extinguishment of debt. There were no fees
      paid in connection with the conversion.





On
      July
      2, 2007, the Company paid the second principal payment totaling $1,016,667
      and
      accrued interest of $198,250 on its convertible notes. In accordance with the
      terms of the Notes, eight of our affiliated noteholders elected to defer the
      payment of $101,111 of principal and $20,432 of interest due to them on April
      2,
      2007 for 30 to 90 days.


**11**





**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 may 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 unbranded  diamonds.
      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
      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 June 30, 2007 and December 31, 2006, the amounts outstanding
      on
      the note are $705,782. Interest payable to the related party as of June 30,
      2007
      of $28,231 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 June 30, 2007 of $37,260
      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 June 30, 2007 and 2006, the Company incurred $36,687
      and
      $92,900 of royalty expense to related parties. During the six months ended
      June
      30, 2007 and 2006, the Company incurred $147,048 and $138,700 of royalty expense
      to related parties. At June 30, 2007 and December 31, 2006, there were prepaid
      royalties due to related parties of $447,609 and $175,229 included in prepaid
      expense and $100,000 and $50,000 of marketing fees due to related parties
      included in accrued expenses, respectively.




At
      June
      30, 2007 and December 31, 2006, accounts payable included $70,250 relating
      to
      minimum payments for royalties due to related parties.




During
      the three months ended June 30, 2007 and 2006 the Company incurred marketing
      expense of $25,000 and $25,000, respectively, to related parties. During the
      six
      months ended June 30, 2007 and 2006 the Company incurred marketing expense
      of
      $50,000 and $50,000, respectively, to related parties


**12**




During
      the three months ended June 30, 2007 and 2006, the Company recorded sales of
      $354,695 and $333,460 to related parties, respectively. During the six months
      ended June 30, 2007 and 2006, the Company recorded sales of $865,078 and
      $445,766 to related parties, respectively.




At
      June
      30, 2007 and December 31, 2006, accounts receivable included $100,751and
      $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 June 30, 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**





Second
      Installment Payment of Convertible Notes





On
      July
      2, 2007, the Company paid the second principal payment totaling $1,016,667
      and
      accrued interest of $198,250 on its convertible notes. In accordance with the
      terms of the Notes, eight of our affiliated noteholders elected to defer the
      payment of $101,111 of principal and $20,432 of interest due to them on April
      2,
      2007 for 30 to 90 days.


**13**


**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, ACafe 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
      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 June 30, 2007 as compared to the three
      months ended June 30, 2006**




Net
      sales
      for the three months ended June 30, 2007 totaled $4,796,000, an increase of
      $2,314,000 or 93.3% from net sales of $2,482,000 for the three months ended
      June
      30, 2006. Of the increase, $2,739,000 resulted from sales of loose diamonds
      sold
      to increase market penetration and brand awareness. Sales of our Kathy Ireland
      and Elizabeth branded jewelry products increased $264,000 for the three months
      ended June 30, 2007 compared to the same period in 2006, while the HOTJ branded
      jewelry product decreased $730,000. Net sales for the three months ended June
      30, 2007 also include $355,000 of related party sales as compared to $333,000
      in
      the comparable period in 2006. During the three months of June 30, 2006,
      s ales
      included $ 90,000 in
      closeout merchandise, primarily in our discontinued Mirabelle products.


**14**




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 June 30, 2007 totaled $764,000, an increase
      of
      $590,000 from a gross profit of $174,000 for the three months ended June 30,
      2006. Gross profit as a percentage of sales increased to 15.9% for the three
      months ended June 30, 2007 from 7.0% for the comparable period in 2006. The
      increase in gross profit margin resulted from the increase in the Kathy Ireland
      and Elizabeth branded products but was partially offset by the sales of
      $3,529,000 of loose diamonds to wholesale trade for the three months ended
      June
      30, 2007 at margins of under five percent. Gross
      profit as a percentage of sales for the three months ended June 30, 2006 was
      impacted by sales of closeout merchandise of approximately $90,000 at current
      carrying value, sales of loose diamonds of $790,000, and the introduction of
      branded products at low margins.




Selling,
      shipping and general and administrative expenses were $2,217,000 for the three
      months ended June 30, 2007, compared to $2,277,000 for the three months ended
      June 30, 2006, a slight decrease of $60,000. As a percent of sales, selling,
      shipping and general and administrative expenses decreased from 91.8% for the
      three months ended June 30, 2006 to 46.2% for the three months ended June 30,
      2007 due primarily to the increase in sales and decrease in expenses for the
      three months ended June 20, 2007. Advertising, marketing and selling expenses
      increased $62,000 for the three months ended June 30, 2007 including an increase
      in commissions and sales management expense of $110,000 due to the increase
      in
      sales. Royalty expense to related parties decreased $55,000. Expenses related
      to
      being a public company decreased by $86,000. Non-cash compensation expense
      of
      $44,000 associated with options issued to our directors in 2005 was expensed
      in
      the three months ended June 30, 2007 as compared to $97,000 for the comparable
      period in 2006. Professional fees increased by $108,000 for the three months
      ended June 30, 2007 over the comparable period in 2006. Payroll and related
      expense increased $118,000 for three months ended June 30, 2007 as compared
      to
      the comparable period in 2006. Travel and entertainment expenses decreased
      $78,000 for three months ended June 30, 2007 as compared to the comparable
      period in 2006. A decrease in other selling, shipping and general and
      administrative expenses accounted for the balance of the decrease.





Interest
      expense was $1,151,000 for the three months ended June 30, 2007 compared to
      $781,000 for the same period last year. Of the interest expense for the three
      months ended June 30, 2007, $898,000 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 outstanding using the Black-Scholes model.
      The decrease in the fair value of the warrant liability for the three months
      ended June 30, 2007 was $2,624,000 and is a result of the decrease in the
      trading value of our stock in the Second Quarter of 2007.





The
      Company recorded no provision for income taxes for the three months ended June
      30, 2007 and 2006 due to the net loss incurred for the six months ended June
      30,
      2007 and 2006. 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.


**15**





**Results
      of operations for the six months ended June 30, 2007 as compared to the six
      months ended June 30, 2006**




Net
      sales
      for the six months ended June 30, 2007 totaled $9,320,000, an increase of
      $5,472,000 or 142.2% from net sales of $3,848,000 for the six months ended
      June
      30, 2006. Of the increase, $5,831,000 resulted from sales of loose diamonds
      sold
      to increase market penetration and brand awareness. Sales of our branded jewelry
      products increased $620,000 for the six months ended June 30, 2007 compared
      to
      the same period in 2006. Net sales for the six months ended June 30, 2007 also
      include $865,000 of related party sales as compared to $446,000 in the
      comparable period in 2006. During the First Quarter of 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 six months
      of
      June 30, 2006, s ales
      included $ 787,000 in
      closeout merchandise, primarily in our discontinued Mirabelle products which
      were sold at their current carrying value which is lower than their original
      cost.




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 six months ended June 30, 2007 totaled $1,268,000, an increase
      of
      $1,084,000 from a gross profit of $184,000 for the six months ended June 30,
      2006. Gross profit as a percentage of sales increased to 13.6% for the six
      months ended June 30, 2007 from 4.8% for the comparable period in 2006. The
      increase in gross profit margin resulted from the increase in the Kathy Ireland
      and Elizabeth branded products but partially offset by the sales of $6,621,000
      of loose diamonds to wholesale trade for the six months ended June 30, 2007
      at
      margins of under five percent. Sales of $700,000 of closeout merchandise of
      heavily discounted products in the First Quarter of 2007 also impacted the
      gross
      profit margin for the six months ended June 30, 2007. Gross
      profit as a percentage of sales for the six months ended June 30, 2006 was
      impacted by sales of closeout merchandise of approximately $787,000 at current
      carrying value, sales of loose diamonds of $790,000, and the introduction of
      branded products at low margins.




Selling,
      shipping and general and administrative expenses were $4,095,000 for the six
      months ended June 30, 2007, compared to $4,274,000 for the six months ended
      June
      30, 2006, a decrease of $179,000. As a percent of sales, selling, shipping
      and
      general and administrative expenses decreased from 111.1% for the six months
      ended June 30, 2006 to 43.9% for the six months ended June 30, 2007 due
      primarily to the increase in sales and decrease in expenses in 2007.
      Advertising, marketing and selling expenses increased $283,000, including an
      increase in commissions and sales management expense of $212,000 due to the
      increase in sales. Expenses related to being a public company decreased by
      $63,000 as $70,000 of filing fees were incurred in the six months ended June
      30,
      2006 that were associated with the registration statement filed in 2006. $88,000
      of non-cash compensation expense associated with options issued to our directors
      in 2005 was expensed in the six months ended June 30, 2007 as compared to
      $194,000 for the comparable period in 2006. Professional fees decreased by
      $193,000 for the six months ended June 30, 2007 over the comparable period
      in
      2006. Payroll and related expense increased $197,000 for six months ended June
      30, 2007 as compared to the comparable period in 2006. Travel and entertainment
      expenses decreased $118,000 for six months ended June 30, 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 $2,889,000 for the six months ended June 30, 2007 compared to
      $905,000 for the same period last year. Of the interest expense for the six
      months ended June 30, 2007, $2,174,000 is non-cash expenses resulted from the
      amortization of costs of the convertible notes, and the balance is interest
      on
      the convertible notes and related party notes.


**16**





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 outstanding using the Black-Scholes model.
      The decrease in the fair value of the warrant liability for the six months
      ended
      June 30, 2007 was $2,732,000 and is a result of the decrease in the trading
      value of our stock in the First Half of 2007.





The
      Company recorded no provision for income taxes for the six months ended June
      30,
      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.




During
      the six months ended June 30, 2007, the Company used $880,000 for operations.
      The principal components of the cash used in operations included the net loss
      of
      $2,969,000, a decrease in accounts payable of $1,812,000, an increase in prepaid
      expenses and other expenses of $493,000 and a non-cash change in the fair value
      of the warrant liability of $2,732,000. These uses were offset by a decrease
      in
      accounts receivable of $2,889,000 due to lower sales in the first half of 2007
      versus the fourth quarter of 2006, an increase in accrued liabilities of
      $725,000, a decrease in inventory of $434,000 and $3,079,000 of non-cash
      expenses





For
      the
      six months ended June 30, 2006, the Company used $3,788,000 for operations.
      The
      principal components of the cash used in operations included the net loss of
      $2,395,000, a reduction in the allowance for returns and bad debts of $208,000,
      increase of accounts receivable of $484,000, an increase in inventory of
      $549,000, an increase in prepaid expenses of $625,000, a decrease in accrued
      expenses of $186,000 and
      a
      change in the fair value of the warrant liability of $2,557,000 .
      These
      decreases were offset by an increase in accounts payable of $1,488,000, non-cash
      operating expenses of $1,747,000.




For
      the
      six months ended June 30, 2007, investing activities used $121,000 for the
      purchase of computer software and hardware and the acquisition of an additional
      safe.





Investing
      activities used $28,000 in the six months ended June 30, 2006 for the
      acquisition of additional safes.





For
      the
      six months ended June 30, 2007, financing activities provided $890,000. On
      January 11, 2007, the Company issued a promissory note for $1,000,000 to a
      related party. 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


**17**





For
      the
      six months ended June 30, 2006, financing activities provided approximately
      $10,020,000 consisting of the net proceeds of our convertible note offering
      of
      approximately $10,360,000 reduced by a decrease in notes payable to shareholder
      $335,000 and a decrease in our line of credit that exceeded the release of
      restricted cash by approximately $6,000.





On
      July
      2, 2007, the Company paid the second principal payment totaling $1,016,667
      and
      accrued interest of $198,250 on its convertible notes. In accordance with the
      terms of the Notes, eight of our affiliated noteholders elected to defer the
      payment of $101,111 of principal and $20,432 of interest due to them on April
      2,
      2007 for 30 to 90 days.





**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
      June 30, 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 June 30, 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.


**18**





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 inherent limitations in its
      electronic data processing software and plans to replace its electronic data
      processing software during 2007.


**19**


**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


**20**


**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:
                August 10, 2007
            /s/
                Jack AbramovJack
                Abramov
              Chief
                Executive OfficerDated:
                August 10, 2007
            /s/
                Robert RankinRobert
                Rankin
              Chief
                Financial Officer
              (Principal
                Accounting Officer)


**21**