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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For Quarter Ended: September 30, 2006
 USN CORPORATION
  COLORADO
    
    33-42701
    
    84-1186026(State or other jurisdiction 
of incorporation)
    
    (Commission
File Number)
    
    (IRS Employer
Identification No.)
 5215 NORTH OCONNOR, SUITE 200, IRVING, TEXAS 76039
 (310) 229-2299
 o þ
 o þ
 þ o
  o þ




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USN Corporation and Subsidiaries
 INDEX
 PagePART I. FINANCIAL INFORMATION (Unaudited)Item 1. Condensed Consolidated Balance Sheet as of September 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Operations for the Six Months Ended
September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2006 and 2005
    
    
    6-7Notes to Condensed Consolidated Financial Statements
    
    
    8-25Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    26-33Item 3. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    35EXHIBIT 31.1.EXHIBIT 32.1.
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USN Corporation and Subsidiaries
 
 Condensed Consolidated Balance Sheet
September 30, 2006
(Unaudited)
 ASSETSCurrent assetsCash and cash equivalents
    
    $
    4,142Restricted cash
    
    
    1,179,122Accounts receivable
    
    
    100,345Inventory, net
    
    
    381,633Prepaid expenses and other assets
    
    
    557,053Total current assets
    
    
    2,222,295Property and equipment, net
    
    
    251,074Restricted cash
    
    
    630,000Deposits and other assets
    
    
    73,098Total assets
    
    $
    3,176,467LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilitiesNote payable to related party
    
    $
    500,000Notes payable
    
    
    691,000Cash overdraft
    
    
    196,832Accounts payable trade
    
    
    4,471,935Accrued expenses and other liabilities
    
    
    14,220,905Liabilities of discontinued operations
    
    
    470,602Due to affiliates
    
    
    4,154,401Total current liabilities
    
    
    24,705,675Commitments and contingenciesStockholders deficitPreferred stock: $.0001 par value; authorized 5,050,000 shares;
no shares issued and outstanding
    
    
    Common stock: $.0001 par value; authorized 195,000,000 shares;
23,936,984 shares issued and outstanding
    
    
    2,394Additional paid in capital
    
    
    11,669,099Stock subscriptions receivable
    
    
    (703,011
    )Deferred compensation
    
    
    (456,294
    )Treasury stock to be returned for cancellation
    
    
    (3,269,112
    )Accumulated deficit
    
    
    (28,772,284
    )Total stockholders deficit
    
    
    (21,529,208
    )Total liabilities and stockholders deficit
    
    $
    3,176,467
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USN Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Product sales
    
    $
    3,572,963
    
    
    $
    6,339,103Cost of sales
    
    
    1,855,796
    
    
    
    4,096,813Gross profit
    
    
    1,717,167
    
    
    
    2,242,290Costs and expensesSelling and distribution
    
    
    4,692,784
    
    
    
    3,671,784General and administrative
    
    
    1,088,829
    
    
    
    1,000,771Noncash compensation expense
    
    
    266,976
    
    
    
    525,000Interest expense
    
    
    180,476
    
    
    
    12,243Total costs and expenses
    
    
    6,229,065
    
    
    
    5,209,798Net loss
    
    $
    (4,511,898
    )
    
    $
    (2,967,508
    )Net loss per share, basic and dilutedNet loss per share, basic and diluted
    
    $
    (0.19
    )
    
    $
    (0.13
    )Weighted average shares outstanding
    
    
    23,936,984
    
    
    
    22,592,859
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USN Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Operations
Six Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Product sales
    
    $
    8,356,874
    
    
    $
    11,649,158Cost of sales
    
    
    4,535,748
    
    
    
    7,547,276Gross profit
    
    
    3,821,126
    
    
    
    4,101,882Costs and expensesSelling and distribution
    
    
    8,800,853
    
    
    
    6,794,656General and administrative
    
    
    1,988,891
    
    
    
    1,819,994Noncash compensation expense
    
    
    337,863
    
    
    
    525,000Interest expense
    
    
    339,204
    
    
    
    31,271Total costs and expenses
    
    
    11,466,811
    
    
    
    9,170,921Loss from continuing operations
    
    
    (7,645,685
    )
    
    
    (5,069,039
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Loss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Net loss
    
    $
    (7,645,685
    )
    
    $
    (5,264,333
    )Net loss per share, basic and dilutedContinuing operations
    
    $
    (0.32
    )
    
    $
    (0.30
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net loss per share, basic and diluted
    
    $
    (0.32
    )
    
    $
    (0.31
    )Weighted average shares outstanding
    
    
    23,736,902
    
    
    
    17,213,985
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USN Corporation and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
Six Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (7,645,685
    )
    
    $
    (5,264,333
    )Loss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Loss from continuing operations
    
    
    (7,645,685
    )
    
    
    (5,069,039
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation
    
    
    40,607
    
    
    
    26,452Noncash compensation expense
    
    
    337,863
    
    
    
    525,000Intrinsic value of beneficial conversion feature
    
    
    203,200
    
    
    
    Changes in operating assets and liabilities, net of effect of
acquisitions and divestitures:Restricted cash
    
    
    (526,122
    )
    
    
    (278,828
    )Accounts receivable
    
    
    36,577
    
    
    
    (24,118
    )Inventories
    
    
    862,338
    
    
    
    (4,511,094
    )Prepaid expenses and other assets
    
    
    (252,589
    )
    
    
    (218,935
    )Cash overdraft
    
    
    196,832
    
    
    
    Accounts payable
    
    
    (2,325,140
    )
    
    
    7,034,976Accrued expenses and other liabilities
    
    
    7,856,832
    
    
    
    (10,236
    )Due to/from affiliates
    
    
    555,192
    
    
    
    1,058,607Net cash used in continuing operations
    
    
    (660,095
    )
    
    
    (1,467,215
    )Net cash used in discontinued operations
    
    
    (104,245
    )
    
    
    (241,620
    )Net cash used in operating activities
    
    
    (764,340
    )
    
    
    (1,708,835
    )Cash flows from investing activitiesCapital expenditures
    
    
    (11,059
    )
    
    
    (51,111
    )Net cash used in investing activities
    
    
    (11,059
    )
    
    
    (51,111
    )Cash flows from financing activitiesLoan proceeds
    
    
    691,000
    
    
    
    Repayment of note payable to related party
    
    
    
    
    
    
    (54,000
    )Advances to LGS Holdings
    
    
    
    
    
    
    (1,608,211
    )Collections on stock subscription receivable
    
    
    
    
    
    
    3,640,959Net cash provided by continuing operations
    
    
    691,000
    
    
    
    1,978,748Net cash used in discontinued operations
    
    
    
    
    
    
    (44,531
    )Net cash provided by financing activities
    
    
    691,000
    
    
    
    1,934,217Net increase (decrease) in cash and cash equivalents
    
    
    (84,399
    )
    
    
    174,271Cash and cash equivalents, beginning of year
    
    
    88,541
    
    
    
    11,941Cash and cash equivalents, end of period
    
    $
    4,142
    
    
    $
    186,212(Continued)
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USN Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows, Continued
Six Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    2005Supplemental cash flow informationCash paid for interest and income taxes:Interest
    
    $
    
    
    
    $
    Income taxes
    
    
    
    
    
    
    Non-cash investing and financing activitiesIssuance of common stock for:Convertible note payable and accrued interest
    
    $
    282,425
    
    
    $
    Accounts payable
    
    
    60,000
    
    
    
    Acquisition of Altron Limited
    
    
    
    
    
    
    5,060,000Liabilities assumed by LGS
    
    
    
    
    
    
    2,600,000Sale of jewelry stores to LGS
    
    
    
    
    
    
    1,021,249
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USN CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of business and significant accounting policies and proceduresBusinessUSN Television Group, Inc. (USN TV) is a retailer of consumer products through interactive
electronic media using broadcast, cable and satellite television and the Internet. USN TV
focuses on presenting consumer products at attractive prices that can leverage the visual
appeal of television, including jewelry, watches, coins and other collectible products. USN
TVs programming is transmitted by satellite to cable television systems, direct broadcast
satellite systems and television broadcasting stations across the United States. Revenues
are primarily generated from sales of merchandise offered through USN TVs television home
shopping programming.USN TV segments its programming into product categories and each program uses a show-host
approach, with the host conveying information about the products and demonstrating their
use. The viewers can purchase any product USN TV offers, subject to availability.Background; corporate structureUSN Corporation (USN) was incorporated in the state of Colorado in 1988, under its former
name, Protron Systems, Inc. In 1994, USN purchased certain assets and assumed certain
liabilities from the bankruptcy estates of American Fashion Jewels, Inc. (Imposters) and,
in a separate transaction, Mirage Concepts, Inc. (Mirage), both of which were retail
chains of reproduction jewelry stores. USNs wholly owned subsidiary, USN TV was
incorporated in Delaware in April 2003. On June 17, 2005, USN acquired Altron Limited
(Altron) from Global Sun Enterprises, Ltd. (Global Sun). The consolidated financial
statements include the accounts of USN, USN TV and Altron (collectively the Company).
 Bankruptcy and Reorganization
 On October 10, 2003, USN filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court
for the Central District of California (the Bankruptcy Court) (Case No. LA 03-36445-EC).
USN continued to manage its properties and operate its businesses as debtor-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code until December 12, 2004, when its plan of reorganization
(Plan) was approved by the Bankruptcy Court. At that time, USNs only business was the
ownership and management of retail jewelry stores. USN did not engage in USN TVs current
business of the sale of consumer products over television and the Internet until the Plan
was approved.The principal elements of the Plan were as follows:
 
    
    USN changed its name from Premier Concepts, Inc. to USN Corporation;
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
    
    USN acquired all of the outstanding stock of USN TV;
    
    The Bankruptcy Court classified and organized the treatment of creditors and
interest holders;
    
    USN issued securities to certain administrative claimants, to the USN TV
shareholders in consideration of the acquisition of USN TV, and to the Plan Trust
for the payment of certain creditors; and
    
    The liquidation of the securities to fund payments under the plan.
 Petition to Retroactively Modify Bankruptcy Plan
 On February 9, 2006, USN submitted a Motion for Order Confirming Second Amended Plan (the
Motion) to the Bankruptcy Court in order to clarify certain ambiguities in the Plan. The
Bankruptcy Court approved the Motion and the Company filed a certificate of correction with
the Secretary of State of Colorado to clear up other unrelated minor issues.
 Acquisition of USN TV
 As part of the reorganization, USN acquired all of the outstanding shares of capital stock
of USN TV, and USN TV became a wholly-owned subsidiary of USN. This acquisition provided USN
the opportunity to sell consumer products over television and the Internet, as USN TV had
already been engaged in this business since April 2003. In consideration for this
acquisition, USN issued an aggregate of 5,539,655 shares of USNs common stock to Michael
Reinstein, Brian Kelly, Phillip Wasserman, and the Philip Roy Fund, the shareholders of USN
TV at the time (USN TV Shareholders). The issuance of such shares by USN to the USN TV
Shareholders was exempt from the registration requirements of Section 5 of the Securities
Act of 1933, as amended (the Securities Act), pursuant to the Bankruptcy Code. USN also
entered into a registration rights agreement with the USN TV Shareholders, pursuant to which
USN has agreed to file a registration statement with the Securities and Exchange Commission
(SEC) covering the resale, from time to time, of the shares of USN common stock held by
the USN TV Shareholders.For accounting purposes, the transaction was treated as the issuance of stock by USN TV for
the net monetary assets of USN, accompanied by a recapitalization of USN TV. The accounting
treatment is identical to accounting for a reverse acquisition, except that no goodwill or
other intangible asset is recorded. The historical operations prior to December 13, 2004,
are those of USN TV.
 Acquisition of Altron
 On June 17, 2005, USN entered into a stock purchase agreement with Global Sun, pursuant to
which USN acquired all of the issued and outstanding shares of Altron. The Altron
acquisition provided four primary benefits to USN. First, at the time of USNs acquisition
of Altron, Altrons net assets consisted primarily of a $5,000,000 stock subscription
receivable. As of September 30, 2006, a balance of $584,061 remained payable to USN. Second,
Altron was a source of additional product for the Company. Altron allowed the Company to
satisfy a larger portion of its inventory supply needs by
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enabling the Company to purchase loose diamonds, gems and finished jewelry directly from
manufacturers rather than purchasing on consignment. This shift in the Companys inventory
purchasing arrangement resulted in improvements to both gross margins and operating margins.
Also, Altron could ultimately allow USN to manufacture finished jewelry. Lastly, Altron
provides the Company with the ability to sell certified diamonds, both loose and in finished
settings. The consulting and product sales agreement discussed in note 14 will substantially
eliminate this method of acquiring inventory.In consideration for the acquisition of Altron, USN issued 11,251,244 shares of USN common
stock to Global Sun. Immediately after the acquisition, Global Sun owned approximately 49.8%
of USNs outstanding common stock. USN issued such shares in a private placement exempt from
the registration requirements of the Securities Act and also entered into a registration
rights agreement with Global Sun, pursuant to which USN has agreed to file a registration
statement with the SEC covering the resale, from time to time, of the shares of common stock
issued to Global Sun. As of September 30, 2006, Global Sun owned approximately 47% of the
Companys outstanding common stock.Altron had two subsidiaries, Gem Manufacturing, Inc. and The Diamond Channel which
discontinued operations prior to the acquisition of Altron by USN.
 Sale of Retail Stores to LGS Holdings, Inc. (LGS)
     
    
    USN agreed to satisfy liabilities owed to Spotlight (or to third parties looking
to USN to satisfy Spotlights liabilities) in the amount of approximately $1.4
million;
    
    LGS agreed to assume liability for the remaining $2.6 million of liabilities
owed by USN to Spotlight or third parties;
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
    
    LGS acquired the 14 retail stores and all liabilities associated therewith;
    
    USN issued 1,368,422 shares of USN common stock to LGS in a private placement
exempt from the registration requirements of the Securities Act and also entered
into a registration rights agreement with LGS, pursuant to which USN agreed to file
a registration statement with the SEC covering the resale, from time to time, of
the shares of common stock issued to LGS; and
    
    USN and LGS agreed that additional shares could be issued to LGS depending upon
a final determination of the total liabilities assumed, subject to approval by the
Companys board of directors.
  Accounts payable, accrued expenses and other liabilities
    
    $
    1,603,278Notes payable
    
    
    366,424Total liabilities transferred
    
    
    1,969,702Less:Current assets
    
    
    558,713Non-current assets, net
    
    
    389,740Total assets transferred
    
    
    948,453Common stock expected to be issued
    
    $
    1,021,249
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
    
    an Amendment to Amended and Restated LGS Asset Purchase Agreement, pursuant to
which (i) LGS agreed to return 1,208,422 shares of USN common stock to USN for
cancellation in exchange for USNs agreement to re-assume and pay the liabilities
owed to Spotlight or third parties in connection with Spotlight, all of which had
been assumed by LGS in the LGS Purchase, and (ii) LGS retained ownership of the
retail stores and responsibility for certain liabilities associated therewith; and
    
    a Consulting Agreement, under which USN agreed to (i) provide certain services
to LGS in connection with the retail stores owned by LGS and (ii) assist LGS in the
closing or sale of the retail stores by December 31, 2005, in exchange for the
delivery by LGS of 10,000 shares of USN common stock, per month, to USN for
cancellation.
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Principles of consolidation and presentation
    -
 -
 Revenue and cost recognition
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Costs and expenses
 
    
    Cost of sales includes the cost of products sold, incoming freight charges, lost
shipments net of insurance reimbursement and product shrink.
    
    Selling and distribution cost includes operating media costs, labor cost for all
operations, postage and delivery and merchant fees and discounts. Shipping and
handling costs amounted to $99,266 and $255,589 during the three months ended
September 30, 2006 and 2005, respectively and amounted to $205,297 and $393,669
during the six months ended September 30, 2006 and 2005, respectively.
    
    General and administrative cost includes administrative labor cost, rent,
insurance, professional services, travel and entertainment, director fees, supplies
and other costs incident to the administration of the business.
 Stock-based compensationThe Company grants non-qualified stock options under its 2005 Stock Incentive Plan (the
2005 Plan). Options which were outstanding when the Company filed a voluntary petition
under Chapter 11 of the Bankruptcy Code were cancelled in the plan of reorganization. The
1993 Incentive Stock Option Plan and the 2002 Nonstatutory Stock Option Plan were terminated
in the plan of reorganization.Prior to April 1, 2006, the Company accounted for options granted under its employee
compensation plan using the intrinsic value method prescribed in Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations including Financial Accounting Standards Board (FASB) Interpretation No.
44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of
APB Opinion No. 25. Under APB 25, compensation expense was recognized for the difference
between the market price of the Companys common stock on the date of grant and the exercise
price. As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation (SFAS 123), stock-based compensation was
included as a pro forma disclosure in the notes to the consolidated financial statements.Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123R (Revised 2004),
Share-Based Payment (SFAS 123R) using the modified prospective transition method for all
stock options issued. SFAS 123R requires measurement of compensation cost for all options
granted based on fair value on the date of grant and recognition of compensation over the
service period for those options expected to vest. Stock-based compensation expense
recorded for the three and six months ended September 30, 2006, includes the estimated
expense for stock options granted on or subsequent to April 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R, and the estimated
expense for the portion vesting in the period for options granted prior to April 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of SFAS 123.
During fiscal 2006, the Company issued options to certain employees with exercise prices
below the deemed fair market value of the Companys common stock at the date of grant. In
accordance with the requirements of APB 25, the Company has recorded deferred stock-based
compensation for the difference between the exercise prices of the stock options and the
deemed fair market value of the Companys stock at the grant date. The deferred
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Expected term
    
    3 yearsExpected volatility
    
    
    58.22%-68.82
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.75
    %Expected annual forfeiture rate
    
    
    0
    %
 Use of estimates
  Fair value determination
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ReclassificationCertain reclassifications were made to the prior years consolidated financial statements to
conform to the current years presentation.Recent accounting pronouncementsIn June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. The provisions of FIN 48 are effective for our fiscal year beginning
April 1, 2007. The Company is evaluating the impact of the provisions of FIN 48.2.
    
    Discontinued operationsIn December 2004, immediately after the acquisition of USN TV, management of USN approved a
plan to dispose of its retail jewelry store operations, in order to concentrate its efforts
and resources on the business of USN TV. Accordingly, the net results of operations of the
retail jewelry stores are included in discontinued operations for all periods presented. On
January 6, 2005, the Board of Directors of the Company unanimously ratified managements
plan.As a result of the approval of the plan of reorganization effective December 13, 2004 and
the acquisition of USN TV, the retail jewelry store operations are included in consolidated
operations only for the period since December 13, 2004. Revenues during fiscal 2006 were
$537,550 and the net loss was $195,294.Liabilities of discontinued operations at September 30, 2006, consist of notes payable of
$5,000, tax claims of $52,875, store lease claims of $255,008 and other accounts payable of
$157,719.3.
    
    Restricted cashAs a part of the agreements with credit card companies, the Company maintains a deposit
with the credit card companies, which amounted to $1,809,122 at September 30, 2006. The
amount of the deposit is based primarily upon historical returns. One of the credit card
companies that process the majority of the Companys sales retains a certain percentage of
sales to allow for potential returns to customers. This retained amount is currently
released to the Company within twelve months and at September 30, 2006 this amounted to
$1,179,122 and is classified as a current asset. Another credit card company requires a
deposit, which is reviewed quarterly. At September 30, 2006, this amounted to $630,000 and
is classified as non-current.
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4.
    
    InventoryInventory, which primarily includes jewelry, watches, coins and other products, at
September 30, 2006, consists of:
 Finished products
    
    $
    2,401,825Less inventory under
consignment or right-of-return
arrangements
    
    
    (2,020,192
    )Net inventory
    
    $
    381,633
 5.
    
    Property and equipmentProperty and equipment at September 30, 2006, consists of the following:
 Computer and broadcast equipment
    
    $
    271,528Leasehold improvements
    
    
    82,772Furniture and fixtures
    
    
    33,426387,726Accumulated depreciation and amortization
    
    
    136,652Property and equipment, net
    
    $
    251,074
 6.
    
    Notes payableNotes payable consists of the following at September 30, 2006:
 Notes payable:Notes payable to a group of lenders with interest
payable monthly at 12% per annum; due in 90 days;
collateralized by 750,000 shares of USN common stock,
currently issued to LGS and a part of the treasury
stock to be returned (Note 9); convertible into USN
common stock at $1.00 per share; loan origination fee
of 65,000 shares of USN common stock; 3-year warrants
for 650,000 shares of USN common stock were issued to
the note holders at $1.35 per share; past due
    
    $
    650,000Demand note payable with interest payable monthly at
8% per annum; convertible into USN common stock at
$.25 per share
    
    
    41,000Total notes payable
    
    $
    691,000Note payable to related party:Note payable to an affiliate of the principal
shareholder with interest payable monthly at 8%
commencing April 1, 2005; due March 21, 2006;
collateralized by USN TVs accounts receivable and
inventory; convertible into common stock at $2.00 per
share; interest payments since April 1, 2005, are
past due; principal is past due
    
    $
    500,000
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During the six months ended September 30, 2006, the Company issued convertible promissory
notes payable for $691,000. The notes are convertible into 814,000 common shares.
Management has determined that these notes qualify as conventional convertible debt pursuant
to APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants and EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios and accordingly the embedded
conversion option is not a derivative. The Company computed an intrinsic value of the
beneficial conversion of $203,200 based on the quoted stock price on the grant date. The
$203,200 was credited to additional paid-in capital and charged to interest expense when the
agreements commenced since the notes can be converted when issued.7.
    
    Accrued expenses and other liabilitiesAccrued expenses and other liabilities at September 30, 2006, consist of the following:
 Customer refunds
    
    $
    6,433,084Deferred revenue
    
    
    5,536,129Reserve for customer returns
    
    
    373,000Accrued payroll and payroll taxes payable
    
    
    270,338Sales taxes payable
    
    
    104,991Accrued deferred compensation
    
    
    885,444Spotlight liabilities re-assumed from LGS
    
    
    132,709Accrued media, interest and other
    
    
    485,210Total
    
    $
    14,220,905
 8.
    
    Related party transactionsThe Company had several transactions with related parties during fiscal 2007 and fiscal
2006, as follows:The Company purchased approximately $3,693,000 of merchandise inventory during fiscal 2006
(none in fiscal 2007), from Spotlight, a company previously owned by Messrs. Kelly and
Reinstein, two of the Companys major stockholders. In addition, the Company made payments
of approximately $1,380,000 to Spotlight during fiscal 2006. Spotlight was sold to LGS (see
Note 1 Sale of Retail Stores to LGS Holdings) in June 2005.
 18




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##### Table of Contents



In addition, the Company had numerous transactions with several companies affiliated with
Global Sun. As of September 30, 2006, Global Sun owned approximately 47% of the Companys
outstanding common stock (see Note 1 Acquisition of Altron). The Company purchased
approximately $1,976,000 and $6,588,000 of merchandise inventory (net of product returns)
from these companies, during the six months ended September 30, 2006 and 2005, respectively.
The Company made payments of approximately $1,940,000 and none during the six months ended
September 30, 2006 and 2005, respectively, and owes these companies approximately $3,941,000
at September 30, 2006.In March 2005, the Company issued a note payable to FJR, an affiliate of Global Sun, in the
amount of $500,000. The note was originally scheduled to mature on September 21, 2005;
however, the maturity date was extended to March 21, 2006. Interest is payable monthly at 8%
per annum; however, no payments had been made as of September 30, 2006.In December 2004, the Company entered into consulting and license agreements with companies
owned by Messrs. Kelly and Reinstein (see Note 11). The Company incurred fees of
approximately $240,000 during both the six months ended September 30, 2006 and 2005, and
owed approximately $214,000 to these companies at September 30, 2006.9.
    
    Capital stockPreferred stockThe Company has 5,050,000 shares of $.0001 par value preferred stock authorized and no
shares issued or outstanding at September 30, 2006.Common stockThe Company has 195,000,000 shares of $.0001 par value common stock authorized and
23,936,984 shares issued and outstanding at September 30, 2006.Stock Subscriptions ReceivableAs a part of the acquisition of Altron, the Company acquired a $5,000,000 stock subscription
receivable, which had a balance of $584,061 at September 30, 2006.Two former officers of USN TV have notes payable to USN in the original amount of $158,600
for the purchase of 610,000 shares of the Companys common stock. The notes are due in four
annual installments of $39,650 plus interest at 3.56% on January 2. If the officers were
still employed on the January 2 anniversary date, USN TV had agreed to pay the officers a
bonus equal to the amount due. The first payments were recorded on January 2, 2006, leaving
a balance of $118,950. Both individuals have left employment with the Company and the note
agreements remain in full force and effect. The scheduled payment due each January
2nd shall be forgiven by USN TV, provided that the individuals are not in
material breach of their separation agreements.
 19




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##### Table of Contents



Deferred CompensationDeferred compensation is unearned compensation and includes: (a) the unvested portion of
compensation accrued for the difference between the exercise price and the trading price of
the stock on the date of the grant and (b) the unvested portion of the compensation cost of
options required by FAS 123(R). Deferred compensation will be amortized over the vesting
periods.Treasury Stock to be Returned for Cancellation Upon Payment of DebtAt September 30, 2006, treasury stock to be returned for cancellation upon payment of debt
represents the net effect of the transactions described above relating to the LGS Purchase
and non-performance by LGS and is summarized below.Common stock that was expected to be issued for:
 Liabilities assumed in excess of assets transferred on June 17,
2005, representing the sale of the jewelry store operations to LGS
    
    $
    1,021,249
 Common stock to be returned by LGS for cancellation, consisting of the following:
 Funding provided to LGS to satisfy liabilities assumed by LGS in the
June 17, 2005 purchase of Spotlight and the jewelry store operations
    
    $
    3,589,899Balance of liabilities of discontinued operations re-assumed from LGS
    
    
    470,602Balance due Spotlight vendors which was re-assumed from LGS
    
    
    132,709Management income, pursuant to Consulting Agreement between USN and
LGS, under which USN agreed to provide certain services to LGS in
connection with the retail stores owned by LGS, in exchange for the
delivery by LGS of 10,000 shares of USN common stock, per month, to
USN for cancellation (64,767 shares)
    
    
    97,151Total common stock to be returned for cancellation
    
    
    4,290,361Net treasury stock to be returned for cancellation (1,273,189 shares)
    
    $
    3,269,112
 10.
    
    Stock Compensation PlanOptions which were outstanding when the Company filed a voluntary petition under Chapter 11
of the Bankruptcy Code were cancelled in the plan of reorganization. The 1993 Incentive
Stock Option Plan and the 2002 Nonstatutory Stock Option Plan were terminated in the plan of
reorganization.On December 15, 2005, the USN board of directors approved the adoption of the USN
Corporation 2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan allows for the
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##### Table of Contents



grant of incentive and nonqualified stock options, stock appreciation rights, restricted
stock awards, restricted stock unit awards, performance awards and qualified performance
awards. The maximum number of shares of the Companys common stock that may be issued under
the 2005 Plan is 5,000,000, with a maximum of 1,000,000 shares, or $1,250,000 in the case of
a qualified performance award, granted to any one participant during a calendar year. All
employees and consultants of the Company, as well as those persons extended an offer of
employment with the Company, are eligible to receive an award under the 2005 Plan. The
compensation committee of the Board shall determine who is to be granted an award, what type
of award and the number of shares or units to be awarded.The 2005 Plan will become effective upon, and any grant is subject to and may not be
exercised before, the approval by a majority of the Companys stockholders (the Effective
Date). Such approval must be made prior to the first anniversary of the Board adopting the
2005 Plan. If the 2005 Plan is so approved, the 2005 Plan will remain available for the
grant of awards until the tenth anniversary of the Effective Date. As of September 30,
2006, options to acquire 1,256,000 shares have been granted and options to acquire 3,744,000
shares are available for grant. The options vested when granted, subject to stockholder
approval and are included in the schedule below.Data concerning stock option activity for the six months ended September 30, 2006 is as
follows (none in the six months ended September 30, 2005):
 Weighted-Number
    
    
    AverageOf
    
    
    ExerciseOptions
    
    
    PriceOutstanding  Beginning of year
    
    
    1,014,584
    
    
    $
    1.11Granted
    
    
    95,000
    
    
    
    1.20Granted
    
    
    440,000
    
    
    
    .25Granted
    
    
    1,256,000
    
    
    
    1.03Exercised
    
    
    
    
    
    
    Canceled or forfeited
    
    
    
    
    
    
    Outstanding  End of period
    
    
    2,805,584
    
    
    $
    .94Exercisable  End of period (1)
    
    
    1,721,278
    
    
    $
    1.00
 21




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##### Table of Contents



Data concerning stock options at September 30, 2006 follows:
 Options OutstandingWeighted-Average
    
    NumberNumber
    
    Remaining
    
    ofOf
    
    Contractual
    
    OptionsExercise Price
    
    Options
    
    Life (Years)
    
    Exercisable$0.01
    
    
    100,000
    
    
    
    9.05
    
    
    
    100,000$0.25
    
    
    440,000
    
    
    
    9.99
    
    
    
    $1.00
    
    
    500,000
    
    
    
    9.45
    
    
    
    245,833$1.03 (1)
    
    
    1,256,000
    
    
    
    9.79
    
    
    
    1,256,000$1.20
    
    
    95,000
    
    
    
    9.53
    
    
    
    13,194$1.50
    
    
    414,584
    
    
    
    9.05
    
    
    
    106,2512,805,584
    
    
    
    
    
    
    
    1,721,278
 
 (1)
    
    Includes options to acquire 1,256,000 shares at $1.03 which were vested when
issued. However, the options cannot be exercised without stockholder approval. The Company issued three-year warrants to acquire a total of 650,000 shares of its common
stock at $1.35 per share as a part of a convertible promissory note financing during the
three months ended June 30, 2006.11.
    
    Commitments and ContingenciesThe Company has two office sub-lease agreements which require a combined monthly payment of
$54,000, including parking, through October 2006. The space includes the broadcast
facility, warehouse, distribution center and operating and corporate offices. The Company
occupied approximately 9,400 square feet of new space at the end of October 2006 which also
houses all of its operations. The five-year lease has an initial rental of $20,195 per
month and requires a letter of credit in the initial amount of $200,000. The rent increases
annually up to $22,731 per month plus any adjustment for the allocable share of the
landlords direct costs. The letter of credit can be reduced $40,000 each year during the
term of the lease. Future minimum lease payments are: 2007 (6 months)  $155,000; 2008 -
$245,000; 2009  $252,000; 2010  $260,000; 2011  $268,000; and 2012 (7 months)  $159,000.As more fully described in Note 1, the Company has established an accrual relating to
certain liabilities initially assumed by LGS, the purchaser of Spotlight and the jewelry
store operations in June 2005. On November 21, 2005, the Company amended the original asset
purchase agreement with LGS, and agreed to re-assume and pay all of the remaining
liabilities owed to Spotlight, in exchange for the return of 1,208,422 shares of its common
stock for cancellation. The accrued balance at September 30, 2006, consists of $470,602 in
liabilities of discontinued operations and $132,709 as the amount due Spotlight vendors
which was re-assumed from LGS. The amount due Spotlight vendors is included as a component
of accrued expenses and other liabilities in the accompanying
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##### Table of Contents



consolidated balance sheet (see Notes 7 and 9). The Company believes that it has established
an adequate accrual based on the amount it estimates is required to settle the remaining
liabilities owed to previous vendors and creditors of Spotlight and the retail stores.
However, the actual amount required may differ from the estimate.USN TV has a number of media contracts which are contingent upon the Company making the
required payment for air time in advance.The Company had a consulting agreement with a company owned by two major shareholders which
provided for consulting fees in the amount of $30,000 per month through December 17, 2005.
In addition, the Company had a lease, license and software support agreement with another
company owned by these two shareholders which provided for monthly payments of $10,000
through December 17, 2005. The license and software agreement is continuing on a
month-to-month basis and the consulting agreement terminated on September 30, 2006.12.
    
    LegalUSN will remain subject to the jurisdiction of the Bankruptcy Court until it makes its final
payment to unsecured creditors. USN has been a party to a number of disputes arising from
the bankruptcy, principally with former landlords. Management of the Company believes that
an adequate accrual for any potential loss has been provided at September 30, 2006.13.
    
    Going ConcernAt September 30, 2006, the Company had a working capital deficit of over $22,483,000. The
Company had a net loss of $14,627,550 and $5,804,666 for the years ended March 31, 2006 and
2005, respectively, and incurred a loss of $7,645,685 during the six months ended September
30, 2006. The Company does not have sufficient cash flows to meet its obligations due
within the next 12 months. These conditions raise substantial doubt about the Companys
ability to continue as a going concern.During 2006, the Companys gross margin averaged less than 30%. During the first six-month
period of 2007, the gross margin has improved to approximately 46%. The Company has a
backorder liability of approximately $5,536,000 as of September 30, 2006, as compared to
approximately $36,000 at March 31, 2006. Net sales have declined 28% in the first
six-months of 2007 as compared to the 2006 period. See note 14 regarding new purchase
contract.The Company commenced acquiring inventory on a COD basis during the first quarter of 2007.
This allows the Company to maintain a lower inventory and also gives the Company the best
pricing possible with the level of its purchases. Using a more just-in-time inventory model
will also allow the Company to reduce inventory shrink.The Company has also added new product mixes. Chanel Sunglasses and Dale Earnhardt
Collectibles were added in the first quarter of 2007 with favorable results. The Company
also intends to add to its product mix, focusing on branded closeout products, such as
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##### Table of Contents



Lalique and Fendi handbags. The Company expects this expanded product mix to increase sales
further in 2007.The Company is negotiating an agreement with a company that will enable it to offer
multi-pay options for sales. This should allow the Company to increase sales to customers
who are unable to afford a one-payment purchase, but can afford a multi-payment plan to
purchase the Companys products.During fiscal 2006, the Companys on-line sales amounted to $115,877 or 0.4% of total
revenue. The Company has recently completed a major overhaul of its website which is
expected to make the online order process friendlier and from which the Company expects to
see an increase in revenues. Competitors of the Company generate from 12% to 23% of their
total revenue from on-line sales. The Companys initial goal is to reach 5% to 7% of total
sales during 2008. Increased on-line sales should be incremental and thus not negatively
impact the Companys principal sales environment.The Company has retained an investment banker to assist it in raising funds.If the Company is (i) unable to grow its business or improve its operating cash flows as
expected, (ii) unable to raise additional funds through private placement sales of its
common stock, or (iii) unable to borrow additional funds, then the Company may be unable to
continue as a going concern. There can be no assurance that additional financing will be
available when needed or, if available, that it will be on terms favorable to the Company
and its stockholders. If the Company is not successful in generating sufficient cash flows
from operations, or in raising additional capital when required in sufficient amounts and on
terms acceptable to the Company, these failures would have a material adverse effect on the
Companys business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of the Companys
current shareholders would be diluted. These consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.14.
    
    Consulting and Product Sales AgreementOn October 19, 2006, the Company entered into a consulting and product sales agreement with
Aanshi Gems Inc. (Aanshi). The agreement includes the following:
 
    
    Aanshi will provide jewelry product at discounted prices for 24 hours per day of
TV programming;
    
    Aanshi will administer and manage the Companys jewelry sales via TV programming
during a period of 20 hours per day;
    
    Aanshi will pay selling, marketing and general and administrative expense in an
initial amount of approximately $1,650,000 per month and increasing to 110% of the
budget beginning in month two of the agreement;
    
    The Company issued an option to Aanshi for 2,916,667 shares at $.18 per share,
of which one-third is exercisable immediately and the balance vests based on a
predetermined milestone schedule;
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##### Table of Contents




    
    Aanshi has issued credit to USN customers with outstanding orders in the amount
of approximately $525,000 as of October 19, 2006, and the Company has issued a
convertible note to Aanshi in exchange for this assumption of its liability. To
the extent Aanshi satisfies any of the Companys outstanding obligations to its
customers, this amount will be added to the Aanshi Convertible Note. The Company
has granted a security interest in substantially all of its assets to
collateralized the convertible note with Aanshi;
    
    Aanshi has the right to designate one individual to serve as a member of the
Companys board of directors and the Company will nominate and recommend the
individual for election by the stockholders; and
    
    The initial term of the agreement is for five years and is automatically renewed
for an additional five-year term if neither party objects.
  25




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##### Table of Contents



ITEM 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  LIQUIDITY AND CAPITAL RESOURCES
 GOING CONCERN
    26




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##### Table of Contents



GENERAL
  a.
    
    We filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on October 10, 2003. Our plan of reorganization was approved on December
12, 2004, which included the acquisition of USN TV.b.
    
    On June 17, 2005, we acquired Altron Limited, whose principal asset was a $5,000,000
stock subscription receivable and on the same date we completed the sale of the retail
jewelry stores to LGS. LGS also acquired Spotlight from Messrs. Kelly and Reinstein.
Spotlight was the principal jewelry supplier of USN TV and we owed Spotlight approximately
$3,990,000 at the time of the acquisition by LGS.c.
    
    We determined that LGS was not paying the Spotlight vendors pursuant to the agreement
and ultimately reached an agreement with LGS for USN TV to re-assume and pay the remaining
liabilities in exchange for return of the majority of the shares originally issued to LGS.
The liabilities assumed have been recorded as a portion of the cost of the treasury stock
to be returned and cancelled upon payment of debt.
 27




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##### Table of Contents



RESULTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 SALES AND COST OF SALES
  2006
    
    
    2005
    
    
    Inc (Dec)Gross sales
    
    $
    5,946,858
    
    
    
    
    
    
    $
    8,838,372
    
    
    
    
    
    
    
    (33
    %)Returns and allowances
    
    
    (2,435,104
    )
    
    
    
    
    
    
    (2,675,920
    )
    
    
    
    
    
    
    (9
    %)Shipping and handling
    
    
    61,209
    
    
    
    
    
    
    
    176,651
    
    
    
    
    
    
    
    (65
    %)Net sales
    
    
    3,572,963
    
    
    
    100
    %
    
    
    6,339,103
    
    
    
    100
    %
    
    
    (44
    %)Cost of sales
    
    
    1,855,796
    
    
    
    52
    %
    
    
    4,096,813
    
    
    
    65
    %
    
    
    (55
    %)Gross profit
    
    $
    1,717,167
    
    
    
    48
    %
    
    $
    2,242,290
    
    
    
    35
    %
    
    
    (23
    %)
 SALES
 RETURNS
AND ALLOWANCES
 SHIPPING
AND HANDLING
 NET
SALES
 COST OF
SALES
 GROSS
PROFIT PERCENTAGE
 28




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##### Table of Contents



COSTS AND EXPENSES
  2006
    
    
    2005
    
    
    Inc (Dec)Selling and distribution expense
    
    $
    4,692,784
    
    
    $
    3,671,784
    
    
    
    28
    %General and administrative
    
    
    1,088,829
    
    
    
    1,000,771
    
    
    
    9
    %Non-cash compensation expense
    
    
    266,976
    
    
    
    525,000
    
    
    
    (49
    %)Interest expense
    
    
    180,476
    
    
    
    12,243
    
    
    
    1,374
    %Total
    
    $
    6,229,065
    
    
    $
    5,209,798
    
    
    
    20
    %
 SELLING
AND DISTRIBUTION
 2006
    
    
    2005
    
    
    Inc (Dec)Operating media
    
    $
    3,392,813
    
    
    $
    2,371,645
    
    
    
    43
    %Salaries and wages
    
    
    825,049
    
    
    
    738,177
    
    
    
    12
    %Merchant fees and discounts
    
    
    372,663
    
    
    
    296,525
    
    
    
    26
    %Postage and delivery
    
    
    99,266
    
    
    
    255,589
    
    
    
    (61
    %)Other costs
    
    
    2,993
    
    
    
    9,848
    
    
    
    (70
    %)Total
    
    $
    4,692,784
    
    
    $
    3,671,784
    
    
    
    28
    %
 OPERATING MEDIA COSTS
 SALARIES AND WAGES
 MERCHANT FEES AND DISCOUNTS
 POSTAGE
AND DELIVERY COSTS
 29




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##### Table of Contents



GENERAL
AND ADMINISTRATIVE EXPENSE (G&A)
 2006
    
    
    2005
    
    
    Inc (Dec)Salaries and wages
    
    $
    241,163
    
    
    $
    250,743
    
    
    
    (4
    %)Rent and parking
    
    
    169,528
    
    
    
    94,445
    
    
    
    79
    %Management fees with stockholders
    
    
    90,000
    
    
    
    90,000
    
    
    
    Software agreement with stockholders
    
    
    30,000
    
    
    
    30,000
    
    
    
    Professional services
    
    
    272,017
    
    
    
    223,076
    
    
    
    22
    %Other general and administrative costs
    
    
    286,121
    
    
    
    312,507
    
    
    
    (8
    %)Total
    
    $
    1,088,829
    
    
    $
    1,000,771
    
    
    
    9
    %
  NON-CASH
COMPENSATION EXPENSE 
 INTEREST
EXPENSE 
 30




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##### Table of Contents



SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 SALES AND COST OF SALES
  2006
    
    
    2005
    
    
    Inc (Dec)Gross sales
    
    $
    13,634,112
    
    
    
    
    
    
    $
    16,321,706
    
    
    
    
    
    
    
    (16
    %)Returns and allowances
    
    
    (5,438,164
    )
    
    
    
    
    
    
    (4,996,704
    )
    
    
    
    
    
    
    9
    %Shipping and handling
    
    
    160,926
    
    
    
    
    
    
    
    324,156
    
    
    
    
    
    
    
    (50
    %)Net sales
    
    
    8,356,874
    
    
    
    100
    %
    
    
    11,649,158
    
    
    
    100
    %
    
    
    (28
    %)Cost of sales
    
    
    4,535,748
    
    
    
    54
    %
    
    
    7,547,276
    
    
    
    65
    %
    
    
    (40
    %)Gross profit
    
    $
    3,821,126
    
    
    
    46
    %
    
    $
    4,101,882
    
    
    
    35
    %
    
    
    (7
    %)
 SALES
 RETURNS
AND ALLOWANCES
 SHIPPING
AND HANDLING
 NET
SALES
 COST OF
SALES
 GROSS
PROFIT PERCENTAGE
 31




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##### Table of Contents

]

COSTS AND EXPENSES
  2006
    
    
    2005
    
    
    Inc (Dec)Selling and distribution expense
    
    $
    8,800,853
    
    
    $
    6,794,656
    
    
    
    30
    %General and administrative
    
    
    1,988,891
    
    
    
    1,819,994
    
    
    
    9
    %Non-cash compensation expense
    
    
    337,863
    
    
    
    525,000
    
    
    
    (36
    %)Interest expense
    
    
    339,204
    
    
    
    31,271
    
    
    
    985
    %Total
    
    $
    11,466,811
    
    
    $
    9,170,921
    
    
    
    25
    %
 SELLING
AND DISTRIBUTION
 2006
    
    
    2005
    
    
    Inc (Dec)Operating media
    
    $
    6,197,645
    
    
    $
    4,433,880
    
    
    
    40
    %Salaries and wages
    
    
    1,648,984
    
    
    
    1,357,584
    
    
    
    21
    %Merchant fees and discounts
    
    
    741,269
    
    
    
    567,255
    
    
    
    31
    %Postage and delivery
    
    
    205,297
    
    
    
    393,669
    
    
    
    (48
    %)Other costs
    
    
    7,658
    
    
    
    42,268
    
    
    
    (82
    %)Total
    
    $
    8,800,853
    
    
    $
    6,794,656
    
    
    
    30
    %
 OPERATING MEDIA COSTS
 SALARIES AND WAGES
 MERCHANT FEES AND DISCOUNTS
 POSTAGE AND DELIVERY COSTS
 32




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##### Table of Contents



GENERAL
AND ADMINISTRATIVE EXPENSE (G&A)
 2006
    
    
    2005
    
    
    Inc (Dec)Salaries and wages
    
    $
    429,469
    
    
    $
    418,167
    
    
    
    3
    %Rent and parking
    
    
    294,653
    
    
    
    190,237
    
    
    
    55
    %Management fees with stockholders
    
    
    180,000
    
    
    
    180,000
    
    
    
    Software agreement with stockholders
    
    
    60,000
    
    
    
    60,000
    
    
    
    Professional services
    
    
    433,197
    
    
    
    384,265
    
    
    
    13
    %Other general and administrative costs
    
    
    591,572
    
    
    
    587,325
    
    
    
    1
    %Total
    
    $
    1,988,891
    
    
    $
    1,819,994
    
    
    
    9
    %
  NON-CASH
COMPENSATION EXPENSE 
 INTEREST
EXPENSE 
 DISCONTINUED OPERATIONS
 33




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##### Table of Contents



ITEM 3:
    
    CONTROLS AND PROCEDURES
     34




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##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 5: OTHER INFORMATION
  ITEM 6: EXHIBITS
 31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, Section 302 of the Sarbanes-Oxley Act
of 2002
    
    Page 3632.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act
of 2002
    
    Page 37
 
 SIGNATURE
  USN CORPORATIONDate: November 21, 2006
    By:
    /s/ Mark J. MillerMark J. MillerChief Executive Officer

And Principal Accounting Officer 35