**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**


(Mark
                One)ý
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the fiscal year ended June 30, 2006****OR**q
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 [NO FEE REQUIRED]****For
                the transition period from _______ to _____**


**Commission
      file number 0-27887**









**COLLECTORS
      UNIVERSE, INC.**




**(Exact
      name of Registrant as specified in its charter)**


**Delaware**
            
            **33-0846191****(State
                or other jurisdiction of**
            
            **(I.R.S.
                Employer Identification No.)****Incorporation
                or organization)****1921
                E. Alton Avenue, Santa Ana, California**
            
            **92705****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**




**(949)
      567-1234**


**(Registrant's
      telephone number, including area code)**




Securities
      registered pursuant to Section 12(b) of the Act: Common Stock, par value $.001
      per share




Securities
      registered pursuant to Section 12(g) of the Act: None




Indicate,
      by check mark, whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports); and (2) has been subject to such filing requirements
      for
      the past 90 days. YES [X] NO [ ]




Indicate,
      by check mark, if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act, (check
      one):





Large
      accelerated filer o   Accelerated
      filer ý  Non-accelerated
      filer o





Indicate
      by check mark whether the Registrant is a shell company (as defined in
      Securities Exchange Act Rule 12b-2).


YES
      [ ]
      NO x





As
      of
      December 31, 2005, the aggregate market value of the Common Stock held by
      non-affiliates was approximately $121,664,000, based on the per share closing
      price of $16.03 of Registrant’s Common Stock as of such date as reported by the
      Nasdaq Global Market.




As
      of
      August 1, 2006, a total of 8,350,000 shares of Registrant's Common Stock were
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Except
      as
      otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of the Form
      10-K are incorporated by reference from Registrant's Definitive Proxy Statement,
      which is expected to be filed with the Securities and Exchange Commission on
      or
      before October 28, 2006, for its Annual Meeting of Stockholders scheduled to
      be
      held on December 5, 2006.













**COLLECTORS
      UNIVERSE, INC.**


**FORM
      10-K**


**FOR
      THE FISCAL YEAR ENDED JUNE 30, 2006**




**TABLE
      OF CONTENTS**











PART
                I
            
            
            **Page**Forward
                Looking Statements
            1Item
                1.
            Business
            1Item
                1A
            Risk
                Factors
            27Item
                2.
            Properties
            34Item
                3.
            Legal
                Proceedings
            34Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            34Executive
                Officers of RegistrantPART
                IIItem
                5.
            Market
                for Common Stock and Related Stockholder
                Matters
            36Item
                6.
            Selected
                Consolidated Financial Data
            37Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            40Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            57Item
                8.
            Financial
                Statements and Supplementary Data
            58Report
                of Independent Registered Public Accounting Firm
                (Grant Thornton LLP)
            59Report
                of Independent Registered Public Accounting Firm
                (Deloitte & Touche LLP)
            60Consolidated
                Balance Sheets at June 30, 2006 and 2005
            61Consolidated
                Statements of Operations for the Years ended June 30, 2006, 2005
                and
                2004
            62Consolidated
                Statements of Stockholders' Equity for the Years Ended June 30, 2006,2005
                and 2004
            63Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2006, 2005
                and
                2004
            64Notes
                to Consolidated Financial Statements for the Years Ended June 30,
                2006,
                2005 and 2004
            66Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            93Item
                9A
            Controls
                and Procedures
            93Item
                9B
            Other
                Information
            96PART
                IIIItem
                10.
            Directors
                and Executive Officers
            96Item
                11.
            Executive
                Compensation
            96Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
            96Item
                13.
            Certain
                Relationships and Related Transactions
            96Item
                14.
            Principal
                Accountant Fees And Services
            96PART
                IV
            Item
                15.
            Exhibits
                and Financial Statement Schedules
            97SIGNATURES
            S-1INDEX
                TO EXHIBITS
            E-1











(i)


**FORWARD-LOOKING
      STATEMENTS**




Statements
      contained in this Annual Report that are not historical facts or that discuss
      our expectations, beliefs or views regarding our future operations or future
      financial performance, or financial or other trends in our business, constitute
      “forward-looking statements” as defined in the Private Securities Reform Act of
      1995. Forward-looking statements can be identified by the fact that they do
      not
      relate strictly to historical or current facts. Often, such statements include
      the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”
“project,” or words of similar meaning, or future or conditional verbs such as
“will,” “would,” “should,” “could,” or “may”. Forward looking statements are
      estimates or predictions about the future that are based on current information
      and are subject to a number of risks and uncertainties that could cause our
      financial condition or operating results in the future to differ significantly
      from those expected at the current time, as described in the forward-looking
      statements that are contained in this Annual Report. Those risks and
      uncertainties are described in Item 1A of Part I of this Annual Report as “Risk
      Factors,” and in Item 7 of Part II under the caption “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations.” Accordingly,
      readers of this Annual Report are urged to read the cautionary statements
      contained in those items of this Annual Report.





Due
      to
      these uncertainties and risks, readers are cautioned not to place undue reliance
      on such forward-looking statements contained in this Annual Report, which speak
      only as of the date of this Annual Report. We undertake no obligation to update
      or revise any forward-looking statements, whether as a result of new
      information, future events or otherwise.





**PART
      I**


**ITEM
      1.****BUSINESS**




**Overview**




We
      are a
      leading provider of value-added authentication, grading and information services
      to dealers and collectors of high-value coins, sportscards, autographs, stamps
      and vintage U.S. currency notes (which we will sometimes refer to generally,
      as
“collectibles”) and
      to
      sellers and purchasers of diamonds, colored gemstones and other high value
      assets .




*Collectibles* .
      The
      collectibles that we authenticate and grade have market values generally ranging
      from $200 to over $1 million, due principally to their rarity, age or
      association with famous individuals or historical events.




The
      authenticity and the state of preservation, or quality, of these collectibles
      are also important determinants of their value in the collectibles markets.
      For
      that reason, sellers, purchasers and collectors submit their high-value
      collectibles to us for:




•
            Certifications
                by our independent experts of their authenticity; that is, confirmation
                that the collectibles are real and are what they have been represented
                to
                be; and




•
            Evaluations
                of their physical condition and appearance and the assignment of
                a grade
                by our independent experts on the basis of uniform quality
                standards.




1


Once
      we
      have authenticated and assigned a grade to a collectible, we encapsulate it
      in a
      tamper-evident, clear plastic holder, or issue a certificate of authenticity,
      that (i) identifies the specific collectible, (ii) sets forth the
      quality grade we have assigned to it and (iii) bears one of our brand names
      and logos: “PCGS” for coins, “PSA” for sportscards, “PSA/DNA” for autographs and
      memorabilia, “PSE” for stamps and “PCGS Currency” for U.S. vintage currency
      notes 1  .
      Additionally, we warrant our certification of authenticity and the grade that
      we
      assign to the coins and sportscards that we authenticate and grade and have
      recently begun offering warranties with respect to our determinations of
      authenticity and our assignment of quality grades to stamps.




*Diamonds
      and Colored Gemstones* .
      In
      November 2005, we began offering diamond grading services to wholesale and
      retail dealers and to purchasers of diamonds as a result of our acquisition
      of
      Gem Certification & Appraisal Lab (GCAL), an international forensic diamond
      certification and grading laboratory. In August 2006, we extended our diamond
      grading business to include the grading of high value colored gemstones,
      including emeralds, rubies and sapphires, by means of our acquisition of
      American Gemological Laboratories (AGL), an international forensic colored
      gemstone certification and grading laboratory.




The
      market values of the diamonds and colored gemstones that we grade generally
      range from approximately $500 to over $1 million, depending, in the case of
      diamonds, primarily on their weight, color and clarity and, in the case of
      colored gemstones, the presence of and type of enhancements (almost all colored
      gemstones have some treatment to enhance color or clarity or both) and sometimes
      on their country of origin. For that reason, sellers and some purchasers submit
      their diamonds and colored gemstones to us for:




•  Confirmations,
      by our independent experts that their diamonds or colored gemstones are, in
      fact, natural (as opposed to synthetically manufactured) diamonds
      and


colored gemstones; and




•  Evaluations
      of their physical condition and appearance and the assignment of a grade by
      our
      independent experts on the basis of uniform quality standards that, in
      the


case of diamonds, relate to their color and clarity and, in the case of
      colored gemstones relate to color, tone, clarity, enhancements and in some
      cases, their country of origin.




Upon
      completion of the grading process for diamonds, a GCAL certificate is issued
      that sets forth the weight, cut, color and clarity grades assigned to the
      diamond by GCAL along with other measured information such as the dimensions
      of
      the diamond. GCAL also includes a direct light performance analysis of each
      diamond utilizing a proprietary process that measures in a digital image the
      number of pixels of light which pass through a diamond, ranking the light
      performance higher for more light and lower for less light. A similar process
      measures the symmetry of the cut of the diamond, another feature that can have
      a
      direct impact on the brilliance and reflectivity of a diamond. A graphic
      representation of the brilliance and symmetry is included on the certificate.
      Additionally, using a patented technology for non-invasive diamond
      identification that we acquired in December 2005, we digitally capture and
      record the unique refractive light pattern of the diamond (which we refer to
      as
      a “Gemprint”), which we store in our database, cross-indexed to the certificate
      number issued with the diamond 2  .
      This
“Gemprint” process enables us to match GCAL graded diamonds, on a one-to-one
      basis, with their GCAL certificates, thereby providing an additional measure
      of
      protection against misrepresentations of diamond quality that can occur by,
      for
      example, switching a diamond grading certificate issued for a higher quality
      diamond to a lower quality diamond. GCAL warrants the color and clarity grades
      assigned to the diamonds within certain tolerances.




Upon
      completion of the grading process for colored gemstones, an AGL certificate
      is
      issued that sets forth the weight, cut, color, tone and clarity grade assigned
      to the gemstone along with the description of the enhancements to the gemstone,
      if any, and in some cases, the country of origin. A high resolution color image
      of the colored gemstone is included on the certificate for identification
      purposes. We are currently testing a variety of colored gemstones with the
      Gemprint process to determine which colored gemstones can be identified using
      this non-invasive identification process and, if those test are successful,
      we
      plan on including Gemprint in the certification process with the associated
      database as may be applicable to a particular colored gemstone.







1 *Collectors
        Universe, PCGS, Professional Sports Authenticator and PSA/DNA, Set Registry,
        CU3000 First* *Strike,
        and each of the logos associated with those names,*
 *are
        registered service or trade marks of the* *Company.*
  2 *GCAL,
        Gemprint and AGL and each of the logos associated with their respective names,
        are registered* *service
        marks of the Company.*




2




We
      believe that our authentication and grading services increase the liquidity
      and
      marketability and, therefore, add to the value, of the collectibles, diamonds
      and colored gemstones that we authenticate and grade. Our services provide
      sellers, purchasers and collectors with (i) the confidence of knowing that
      the collectibles, diamonds or colored gemstones they are buying or selling
      are
      authentic or natural, as the case may be; (ii) information, in the form of
      objective and uniform measures of quality, that enable sellers, purchasers
      and
      collectors to assess the value of those collectibles, diamonds or colored
      gemstones; and (iii) information, based on analysis of the colored gemstone
      and
      technological comparisons to known origin specimens, relating to the country
      of
      origin of a colored gemstone. Armed with this information, a prospective buyer
      who might otherwise be reluctant to purchase a high-priced collectible, diamond
      or colored gemstone, is more confident about, and more willing to make the
      purchase, particularly “sight-unseen,” on Internet auction sites such as those
      operated by eBay and Blue Nile. We also believe that collectibles dealers who
      sell collectibles that have been authenticated and graded by us are more readily
      able to sell, and are more likely to obtain higher prices for those
      collectibles, than if the collectibles had not been authenticated and graded
      by
      us.




We
      originated the standards and methodologies we use for authenticating and grading
      coins, sportscards, autographs and stamps. Those standards and methodologies
      have become generally accepted in the collectible coin, sportscard and autograph
      markets. Since we are the only company to have launched an independent third
      party stamp grading service, and the concept of stamp grading is relatively
      novel, our stamp grading standards have not yet become generally accepted;
      however, we believe that these standards have been gaining wider acceptance
      in
      that market. The standards and methodologies we use in grading diamonds are
      generally accepted in the diamond market and were developed by the Gemological
      Institute of America, a non-profit educational corporation. AGL has developed
      certain proprietary standards for the colored gemstone market relating to color,
      tone and clarity of colored gemstones and descriptive terms used in the
      disclosure of colored gemstone enhancements.




We
      also
      have developed some of the leading brands in the collectibles, diamonds and
      colored gemstones markets in which we conduct our business:




•  “PCGS”
      (Professional Coin Grading Service), which is the brand name for our independent
      coin authentication and grading service;




•  “PSA”
      (Professional Sports Authenticator), which is the brand name for our independent
      sports and trading cards authentication and grading service;




•  “PSA/DNA”
      (PSA/DNA Authentication Services), which is the brand name for our independent
      authentication and grading service for vintage autographs and memorabilia;
      and




•  “PSE”
      (Professional Stamp Experts), which is the brand name for our independent stamp
      authentication and grading service;




•  “PCGS
      Currency” the brand name for our recently inaugurated currency authentication
      and grading service;




•  “GCAL”
      (Gem Certification & Assurance Lab), which is the brand name for our
      independent diamond authentication and grading service; and




•
            “AGL”
                (American Gemological Laboratories), which is the brand name of our
                independent third party colored gemstone grading
                business.




PCGS
      and
      PSA are among the leading independent authentication and grading services in
      the
      collectible coin and sportscard markets in the United States. PSA/DNA and PSE
      also are among the leading independent authentication services and, to our
      knowledge, provide the only independent grading services, in their respective
      markets. Currency authentication and grading are new to the currency market
      and
      PCGS Currency is one of the leading independent authentication and grading
      services in the currency market. GCAL is among the top quality independent
      authentication and grading services in the diamond market and is, to the best
      of
      our knowledge, the only service that offers a non-invasive and unchangeable
      diamond identification method that makes it possible to detect the switching
      or
      alteration of diamond grading certificates. AGL is one of the world leaders
      in
      colored gemstone authentication, grading, enhancement disclosure and for the
      most valuable colored gemstones, identification of the country of
      origin.




3


We
      began
      offering our PCGS coin authentication and grading services in 1986 and, from
      inception through fiscal year ended June 30, 2006, we had authenticated and
      graded more than 12 million coins. In 1991, we launched our PSA sportscard
      authentication and grading service and, through June 30, 2006, had authenticated
      and graded over 9 million sportscards. In 1999, we launched our PSA/DNA vintage
      autograph authentication business and in June 2004 we extended that business
      by
      introducing vintage autograph grading services to dealers and collectors of
      autographed sports memorabilia. We started our PSE stamp authentication and
      grading service in 2000. We launched PCGS Currency as an extension of the PCGS
      brand in March 2005. In the second quarter of fiscal 2006, we acquired GCAL
      and
      the Gemprint technology. We acquired AGL in the first quarter of fiscal
      2007.




The
      following table provides information regarding the respective numbers of coins,
      sportscards, autographs and stamps that we authenticated or graded from 2004
      to
      2006, the number of currency notes that we graded since the inception of our
      currency authentication and grading service in the third quarter of fiscal
      2005
      and the number of diamonds we authenticated and graded since the acquisition
      of
      the diamond authentication and grading service in the second quarter of fiscal
      2006.




**Units
                Processed****2006**
            
            **2005**
            
            **2004**Coins
            
            
            1,789,000
            
            
            55
            %
            
            1,670,000
            
            
            58
            %
            
            1,241,000
            
            
            53
            %Sportscards
            
            
            1,199,000
            
            
            37
            %
            
            1,084,000
            
            
            38
            %
            
            998,000
            
            
            43
            %Autographs
            
            
            181,000
            
            
            6
            %
            
            77,000
            
            
            3
            %
            
            68,000
            
            
            3
            %Stamps
            
            
            38,000
            
            
            1
            %
            
            26,000
            
            
            1
            %
            
            16,000
            
            
            1
            %Currency
            
            
            29,000
            
            
            1
            %
            
            3,000
            
            
            -
            
            
            -
            
            
            -Diamonds
            
            
            5,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            
            3,241,000
            
            
            100
            %
            
            2,860,000
            
            
            100
            %
            
            2,323,000
            
            
            100
            %





**Declared
                Values (000)****2006**
            
            **2005**
            
            **2004**Coins
            
            $
            1,613,000
            
            
            90
            %
            $
            1,191,000
            
            
            91
            %
            $
            993,000
            
            
            90
            %Sportscards
            
            
            75,000
            
            
            4
            %
            
            66,000
            
            
            5
            %
            
            67,000
            
            
            6
            %Autographs
            
            
            15,000
            
            
            1
            %
            
            26,000
            
            
            2
            %
            
            31,000
            
            
            3
            %Stamps
            
            
            21,000
            
            
            1
            %
            
            17,000
            
            
            1
            %
            
            10,000
            
            
            1
            %Currency
            
            
            43,000
            
            
            2
            %
            
            8,000
            
            
            1
            %
            
            -
            
            
            -Diamonds
            
            
            27,000
            
            
            2
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,794,000
            
            
            100
            %
            $
            1,308,000
            
            
            100
            %
            $
            1,101,000
            
            
            100
            %





We
      generate revenues principally from our authentication and grading service fees.
      For collectibles, those fees. range from $4 to over $200 per item authenticated
      and graded, based primarily on the type of item authenticated or graded and
      the
      turn-around times selected by our customers, which range from 1 to approximately
      60 days. In fiscal 2006, our authentication and grading fees averaged $10.25.
      As
      a general rule, collectibles dealers and, to a lesser extent, individual
      collectors, request faster turn-around times and, therefore, generally pay
      higher fees for more valuable, older or “vintage” collectibles, than they do for
      modern collectibles. Diamond authentication and grading fees, generally range
      from $60 to over $300 based on the weight of the diamond and are fixed with
      specific delivery times; although fees sometimes vary in the case of contracts
      that provide for volume submissions. Authentication and grading fees for AGL
      range from $150 to over $1,000 based on the weight of the colored gemstone
      and
      if the country of origin is requested.





We also generate revenues, to a lesser extent, from sales of (i) advertising
      on
      our websites; (ii) our printed publications and price guides and advertising
      placed in such publications; (iii) our rarity or “population” reports that
      contain data regarding the total number of coins and sportscards we have graded
      since our inception, categorized by item type and grade determination; and
      (iv)
      monthly subscription fees associated with our Internet-based, dealer to dealer
      exchange “CCE” (Certified Coin Exchange) for certified coins. We believe that
      our printed publications, price guides and reports make collectors better
      informed consumers and make collecting more interesting and exciting for them
      while our dealer to dealer exchange adds liquidity to certified
      coins.




4


In
      July
      2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company
      that operates two of the larger and better known coin, stamp and collectibles
      shows in Long Beach and Santa Clara, California, respectively. This acquisition
      assures us of the continued availability of these two show venues for our onsite
      authentication and grading services, provides us a platform for inaugurating
      and
      conducting collectibles shows in our other markets and adds management personnel
      who are experienced in managing and conducting collectibles trade
      shows.




**Industry
      Background**




The
      primary determinants of the prices of, and the willingness of sellers,
      purchasers and collectors to purchase, high-value or high-priced collectibles,
      diamonds, colored gemstones or other high-value assets are their authenticity
      and quality. The authenticity of a collectible relates not only to the
      genuineness of the collectible, but also to the absence of any alterations
      or
      repairs that may have been made to hide damage or to restore the item. The
      authenticity of a diamond or colored gemstone relates to its formation in a
      natural method and mined from the earth as opposed to laboratory grown or
      synthetically produced, and in the case of colored gemstones, the country of
      origin. The quality of a collectible relates to its state of preservation
      relative to its original state of manufacture or creation. The quality of a
      diamond is largely a function of its color and clarity. The quality of a
      gemstone relates to  color,
      tone, clarity, enhancements and in some cases, the country of origin. With
      regard to value, confirmation of authenticity generally is required before
      a
      buyer is willing to proceed with a purchase of a high-priced collectible,
      diamond or colored gemstone. Quality directly affects value and price, usually
      on an exponential basis, with higher quality collectibles, diamonds and colored
      gemstones, generally attracting dramatically higher prices than those of lower
      quality. Even a relatively modest difference in quality can translate into
      a
      significant difference in perceived value and, therefore, in price. For example,
      a 1952 Mickey Mantle baseball card that received a PSA grade from us of 10
      on
      our PSA grading scale of 1-to-10 was sold in 2001 for $275,000. By comparison,
      a
      similar 1952 Mickey Mantle baseball card that received a PSA grade of 8 was
      sold
      in 2006 for $72,057. Although for diamonds and colored gemstones, the weight
      of
      the stone (as measured by mechanical devices) has a significant impact on value,
      quality ratings also have a material impact on value. A round brilliant cut
      two
      carat natural diamond with a GCAL grade D color (which is the most desirable
      blue-white color on the scale from D to the yellow tint of a P color) and a
      clarity grade of flawless or “FL” (which indicates that the diamond has no
      imperfections or inclusions) has a market value of approximately $68,000 -
      $78,000. By comparison a similar cut two carat diamond with a GCAL grade I
      color
      and a clarity grade of SI2 (which is in the midpoint range of clarity) has
      a
      market value of approximately $11,000 - $12,000. In the same manner, a
      rectangular cut two carat emerald with AGL color grade 3, tone of 70 (a very
      attractive and intense green) and a clarity grade of “LI” (or lightly
      included) has a market value of approximately $18,000 - $21,000. By comparison,
      a similar cut emerald with AGL color grade 6, tone of 50 (an average color
      and
      intensity of green) and a clarity grade of “MI2” (moderately included) has
      a market value of approximately $2,600 - $3,800. With respect to country of
      origin, the same oval cut two carat Blue Sapphire AGL color grade 3, tone of
      70
      (rich and deep blue) with a clarity grade of “LI” has a market value of
      approximately $2,800 - $3,400 if the country of origin is Burma, but has a
      market value of approximately $20,000 - $22,000 if the country of origin is
      Kashmir.




Until
      the
      advent of independent third party authentication and grading, most prospective
      buyers, including experienced collectibles, diamond and colored gemstone dealers
      and retailers, insisted on physically examining high-priced collectibles,
      diamonds and colored gemstones before consummating transactions. However, unlike
      professionals in the trade, most purchasers and collectors lacked the experience
      and knowledge needed to determine, with confidence, the authenticity or the
      quality, and hence the value, of high-priced collectibles, diamonds and colored
      gemstones, even when they had the opportunity to examine them physically. As
      a
      result, purchasers and collectors had to rely on representations made by sellers
      regarding authenticity and quality. For these reasons, “buyer beware”
characterized the high-value collectibles, diamond and colored gemstone markets,
      and “sight-unseen” markets for rare coins, diamonds, colored gemstones and other
      high-value collectibles were practically non-existent.




5


High-value
      collectibles have been traditionally marketed at retail by dealers through
      direct mail, catalogues, price lists and advertisements in trade publications,
      and sold and purchased them at collectibles shows, auction houses and local
      dealer shops. Diamonds and colored gemstones have been marketed at retail
      through tens of thousands of retail jewelry stores or in departments of large
      general retail stores. These markets were highly inefficient
      because:




•
            they
                were fragmented and localized, which limited both the variety of
                available
                collectibles, diamonds and colored gemstones and the number of potential
                buyers;




•
            transaction
                costs were often relatively high due to the number of intermediaries
                involved;




•
            buyers
                usually lacked the information needed to determine the authenticity
                and
                quality and, hence the value, of the collectibles, diamonds and colored
                gemstones being sold; and




•
            buyers
                and sellers were vulnerable to fraudulent practices because they
                had to
                rely on the dealers or other sellers in the often long distribution
                channel for opinions or representations as to authenticity and
                quality.




*Coin
      Market* .
      In an
      effort to overcome some of these inefficiencies, approximately 30 years ago,
      professional coin dealers began using a numerical grading scale for grading
      coins. That scale ranged from 1 to 70, with higher numbers denoting a higher
      quality. Previously, professional dealers used descriptive terms, such as
“Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they
      sold, a practice that continued after the development of the numeric grading
      system. However, whether using a numeric or a descriptive system, grading
      standards varied significantly from dealer to dealer, depending on a dealer’s
      subjective criteria of quality. Moreover, dealers were hardly disinterested
      or
      independent since, as the sellers or buyers of the coins they were grading,
      they
      stood to benefit financially from the assignment of a particular
      grade.




*Sportscard
      Market* .
      Misrepresentations of authenticity and quality also operated as a barrier to
      the
      liquidity and growth of the collectibles market for sportscards. Even
      experienced and knowledgeable dealers insisted on physically examining
      purportedly rare and higher priced sportscards. Most collectors lacked the
      knowledge needed to purchase collectible sportscards with confidence, even
      when
      they had physically examined them. Sportscard dealers eventually developed
      a
      rudimentary adjectival system to provide measures of quality, using descriptive
      terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of
      quality were assigned on the basis of such characteristics as the centering
      of
      the image on the card and the presence or absence of bent or damaged corners,
      scratches and color imperfections. However, as was the case with coins, grading
      standards varied significantly from dealer to dealer, depending on a dealer’s
      subjective criteria of quality. Additionally, since the dealers who bought
      and
      sold sportscards were the ones that assigned these grades, collectors remained
      vulnerable to fraudulent practices.




*Autographed
      Memorabilia Market* .
      The
      market for autographed sports, entertainment and historical memorabilia has
      been
      plagued by a high incidence of forgeries and misrepresentations of authenticity.
      For example, Operation Bullpen, initiated by the FBI and other law enforcement
      agencies beginning in 1997, has uncovered a high volume of outright forgeries
      of
      signatures and widespread misrepresentations as to the genuineness of sports
      memorabilia. We believe that the high incidence of such fraudulent activities
      was due, in large part, to a dearth of independent third party memorabilia
      authentication services and an absence of systematic methodologies and specimen
      data needed for verification of authenticity.




*Stamp
      Market* .
      Stamp
      dealers developed an adjectival system, similar to the one developed for
      sportscards, by which they valued and priced stamps based primarily on the
      centering of the stamp image on the stamp paper background, ignoring other
      faults in the stamp. As a result, experienced and knowledgeable dealers insisted
      on physically examining purportedly rare and higher priced stamps before
      purchasing them. Additionally, most collectors lacked the knowledge and
      experience needed to purchase higher priced stamps with confidence.
      Consequently, as was the case with coins and sportscards, collectors were forced
      to depend on representations of authenticity and quality from the very dealers
      from whom they purchased or to whom they sold stamps. However, prior to our
      entry into the market, independent third-party stamp grading was
      non-existent.




6


*Currency
      Market* .
      There
      has been some grading of currency in the past, but none of the grading
      businesses have been successful as the market was not developed, such that
      there
      was not substantial demand for grading services. In addition, the grading
      businesses were not third-party independent grading businesses, as they were
      operated and owned by currency dealers, who also bought and sold the same
      materials that they graded; thereby, creating potential conflicts of interest.
      PCGS Currency is an independent third-party grading service that does not have
      such conflicts of interest. Our currency grading utilizes a numerical 70 -
      point
      system to determine the overall grade or condition of a note.




*Diamond
      Market.* Approximately
      70 **** years
      ago, the Gemological Institute of America (“GIA”), a non-profit educational
      corporation, developed a system for classifying and grading diamonds which
      consisted of the “4C’s” of carat, cut, color and clarity. The system provided
      terminology for identifying (1) the weight of a diamond denominated as “carats,”
(2) the shape and proportion of the diamond with a cut analysis; (3) the
      relative color of the diamond using an alphabetic scale from a high quality
      color of “D” to the lowest quality color of “P”; and (4) the relative clarity
      of, or imperfections in the diamond using descriptive terms on a scale from
      “Flawless” (“FL”) to “Very Slightly Included” (“VSI”) to “Slightly Included”
(“SI”) to “Included” (I”). In its gemologist educational programs, the GIA
      taught this grading system as a required part of the curriculum. Notwithstanding
      the widespread use of common terminology, these measures of quality can be
      subjectively and inconsistently applied.




*Colored
      Gemstone Market.* **** Although
      the GIA has held classes on the identification, authentication and grading
      of
      colored gemstones for approximately 30 years, no significant standard and system
      of color, tone and clarity grading has been in widespread use in the
      marketplace. In addition, the availability of sample gemstones for technical,
      trace element analysis needed to determine country of origin was very limited,
      in part because of the limitation of the number of trusted samples from various
      regions of the world and in part due to the limitations of the technology to
      examine and classify the samples. As a result, buyers were largely dependent
      on
      subjective assessments of quality and country of origin from the dealers from
      whom they purchased colored gemstones, and no sight-unseen market for colored
      gemstones existed.




These
      conditions created a need and the demand for independent authentication and
      grading services from which sellers, purchasers and collectors could
      obtain:




• determinations,
      from independent, third party experts, of the authenticity of the high-value
      collectibles, diamonds and colored gemstones that sellers, purchasers and
      collectors purchased, particularly “sight-unseen” or over the
      Internet;




• representations
      of quality based on uniform standards applied by independent, third party
      experts; and




• authoritative
      information, compiled by a credible third party, to help purchasers and
      collectors understand the factors that affect an item’s perceived value and
      price, including:




—  its
      rarity;




—  its
      quality or grade; and




—  its
      historical and recent selling prices.




*The
      Impact of eBay and other e-Commerce Websites on the Collectibles, Diamond and
      Colored Gemstone Markets* .
      The
      advent of the Internet and, in particular, eBay’s development of an Internet or
“virtual” marketplace and other Internet-selling websites such as Blue Nile and
      Amazon, have overcome many of the inefficiencies that had characterized the
      traditional collectibles, diamond and colored gemstone markets. eBay and other
      online marketplaces (i) offer enhanced interaction between and greater
      convenience for sellers and buyers of high-value collectibles, diamonds and
      colored gemstones; (ii) eliminates or reduces the involvement of dealers
      and other “middlemen;” (iii) reduces transaction costs; (iv) allows
      trading at all hours; and (v) provides continually updated information.
      However, Internet commerce still raises, and has even heightened, concerns
      about
      the authenticity and quality of the collectibles, diamonds and colored gemstones
      that are listed for sale on the Internet. Buyers have no ability to physically
      examine them, and no means to confirm the identity or the credibility of the
      dealers or sellers on the Internet. As a result, we believe that the growth
      of
      Internet selling websites, such as eBay, Blue Nile and Amazon, has increased
      awareness of the importance of, and the demand for, independent third party
      authentication and grading services of the type we provide. Our services enable
      purchasers and collectors to use the Internet to purchase collectibles, diamonds
      and colored gemstones “sight-unseen,” with the confidence of knowing that they
      are




7


authentic
      and are of the quality represented by sellers. The importance and value of
      our
      services to purchasers and collectors, we believe, are demonstrated by eBay’s
      inclusion, on its collectibles websites, of information that identifies, and
      encourages visitors to use, our independent third party authentication and
      grading services, as well as similar services offered by some of our
      competitors.




**Our
      Services**




*PCGS
      Coin Authentication and Grading Services* .
      Recognizing the need for third party authentication and grading services, we
      launched Professional Coin Grading Service in 1986. PCGS employs expert coin
      graders, who are independent of coin buyers and sellers, to provide impartial
      authentication and grading services. Currently, we employ 19 experts who have
      an
      average of 26 years of experience in the collectible coin market. We also
      established uniform standards of quality measured against an actual “benchmark”
set of coins kept at our offices. We place each coin that we authenticate and
      grade in a tamper-evident, clear plastic holder that bears our logo, so that
      any
      prospective buyer will know that it is a PCGS authenticated and graded coin.
      We
      also provide a warranty as to the accuracy of our coin authentication and
      grading.




By
      providing an independent assessment by coin experts of the authenticity and
      quality of coins, we believe that PCGS has increased the liquidity of the
      trading market for collectible coins. Following the introduction of our
      independent, third party authentication and grading service, buyer confidence,
      even between dealers, increased to such a degree that coins authenticated and
      graded by PCGS were able to be traded “sight-unseen.” As a result, PCGS
      facilitated the development, in 1990, of a dealer market, known as the
“Certified Coin Exchange,” on which coin dealers traded rare coins
“sight-unseen,” over a private satellite network, which now operates on the
      Internet. In addition, we began to provide a range of authoritative content
      on
      coin collecting to inform and communicate with the collector community,
      including guides and reports that track the trading prices and the rarity of
      PCGS-graded coins.




More
      recently, our coin authentication and grading services have facilitated the
      development of a growing Internet or “virtual” marketplace for collectible
      coins. A prospective buyer, who might otherwise be reluctant to purchase a
      high-priced coin listed on the Internet, is able to rely on a PCGS certification
      in deciding whether or not to bid and in determining the amount to offer for
      the
      coin. As a result, to enhance the marketability of higher priced coins, many
      sellers submit their coins to PCGS for authentication and grading. That enables
      the sellers to include, in their Internet sales listings, digital images of
      the
      coins in their tamper-evident, clear plastic holders, which identify the coins
      as having been authenticated and graded by PCGS as well as their PCGS-assigned
      grades.




*PSA
      Sportscard Authentication and Grading Services* .
      Leveraging the credibility and using the methodologies that we had established
      with PCGS in the coin market, in 1991 we launched Professional Sports
      Authenticator (PSA), which instituted a similar authentication and grading
      system for sportscards. Our independent sportscard experts certify the
      authenticity of and assign a grade to sportscards using a numeric system with
      a
      scale from 1-to-10 that we developed, together with an adjectival system to
      describe their condition. Currently, we employ 13 experts who have an average
      of
      22 years of experience in the collectible sportscard market. We believe that
      our
      authentication and grading services have removed barriers that were created
      by
      the historical seller-biased grading process and, thereby, have improved the
      overall marketability of and facilitated commerce in sportscards, including
      over
      the Internet and at telephonic sports memorabilia auctions.




*PSA/DNA
      Autograph Authentication and Grading Services* .
      In
      1999, we launched our vintage autograph authentication business, initially
      offering authentication services for “vintage” sports autographs and memorabilia
      that were autographed or signed prior to the time they were presented to us
      for
      authentication. The vintage autograph authentication business is distinctly
      different from the “signed-in-the-presence” authentication of autographs where
      the “authenticator” is present and witnesses the actual signing. Vintage
      autograph authentication can involve the rendering of an opinion of authenticity
      by an industry expert based on (i) an analysis of the signed object, such
      as the signed document or autographed item of memorabilia, to confirm its
      consistency with similar materials or items that existed during the signer’s
      lifetime; (ii) a comparison of the signature submitted for authentication
      with exemplars; and (iii) a handwriting analysis. We currently employ 3
      autograph experts with an average of 21 years of experience in the autograph
      memorabilia market, as well as 3 consultants on a contract basis.




8


In
      June
      2004, we also began offering grading services for autographs, beginning with
      baseballs containing a single signature or autograph. We use uniform grading
      standards that we have developed and a numeric scale of 1-to-10, with the
      highest number representing “Gem Mint” condition or top quality. We assign
      grades to the collectibles based on the physical condition or state of
      preservation of the autograph. Autograph grading is in its infancy, and we
      cannot predict whether it will gain market acceptance.




*PSE
      Stamp Authentication and Grading Services* .
      In
      January 2000, we launched our Professional Stamp Experts (PSE) as an
      independent, third party stamp authentication and grading service. We use both
      an adjectival system and a numeric scale from 1-to-100 to grade stamps. We
      assign grades based on the centering of the stamp image on the stamp paper
      background and the absence or presence of other faults on the stamp. There
      have
      been viable third party stamp authentication services in operation for several
      decades, and stamp dealers and collectors had been using a subjective grading
      system based primarily on the centering of the stamp image on the stamp paper
      background, ignoring other faults. However, prior to our entry into the stamp
      market, independent third party stamp grading was non-existent. As a result,
      we
      have encountered some resistance to this concept in the stamp collectibles
      market, which is steeped in tradition and slow to change, as we did from coin
      dealers when we launched PCGS and from sportscard dealers when we launched
      PSA.
      In October 2005, the Philatelic Foundation based in New York began using PSE’s
      numerical grading system to assign grades to stamps. In the Spring of 2006,
      Scott Publishing Company, the long-time publisher of the Scott Catalogs also
      adopted PSE’s numerical grading system into their bi-annual valuing supplement.
      These two events have established PSE’s numerical grading scale, and we believe
      has ensured its continuing spread of third-party stamp authentication and
      grading, throughout the philatelic industry. Currently, we employ 4 stamp
      graders, and use another expert on a part-time basis, who have an average of
      36
      years of experience in the collectible stamp market.




*Vintage
      U.S. Paper Currency Authentication and Grading* .
      In the
      third quarter of fiscal 2005, we began marketing a U.S. paper currency
      authentication and grading service, which we decided to brand as “PCGS Currency”
because many of the dealers of currency notes are familiar with and have used
      PCGS’ coin authentication and grading service. Currently we employ 1 Currency
      expert with 21 years of experience. However, we also use two other experts
      on a
      contract basis.




*GCAL
      Diamond Authentication and Grading Services.* In
      November 2005, we acquired Gem Certification & Assurance Lab (GCAL), which
      is as an independent, third party diamond authentication and grading service
      that has been in the business of diamond authentication and grading since 2001.
      We use the internationally recognized system of grading diamonds, commonly
      referred to as the “4C’s” to authenticate and grade diamonds. In December 2005,
      we acquired the assets of Gemprint Corporation, which consisted primarily of
      a
      patented non-invasive diamond identification technology
      that enables us to create and record
      the digital
      image of the unique refractive light pattern or “fingerprint” (which
      we
      refer to as the “Gemprint”) of
      each
      diamond that
      GCAL
      grades. We store the digital image of the “Gemprint” in our database,
      cross-indexed to the diamond’s grading certificate that is issued by GCAL, which
      is assigned its own number for recordkeeping purposes. This “Gemprint” process
      enables us to match GCAL graded diamonds, on a one-to-one basis, with their
      GCAL
      certificates, thereby providing an additional measure of protection against
      misrepresentations of diamond quality that can occur by, for example, altering
      the grading certificate or switching
      a diamond grading certificate issued for a higher quality diamond to a lower
      quality diamond.




There
      are
      more than ten diamond grading services in operation. Four of those existing
      grading services, including GIA, have been in operation for more than 20 years
      and are larger and better known than GCAL. However, unlike GCAL, almost all
      of
      the key competitors are owned, managed or governed by diamond dealers that
      are
      in the business of selling diamonds, including those graded by such grading
      services. As a result, we believe that those grading services potentially have
      inherent conflicts of interest when grading diamonds submitted by those dealers
      and, therefore, do not provide truly independent third party grading services.
      Additionally, unlike GCAL, none of these existing services have any process
      to
      secure the identification of diamonds that they have certified in order to
      make
      it possible to detect misrepresentations of the quality which can occur by
      altering the information on or switching a grading certificate. As a result,
      we
      believe that GCAL’s greater independence and its Gemprint diamond identification
      technology provide it with a competitive advantage that we are promoting as
      a
      means of increasing GCAL’s share of the diamond grading market. Also, we are the
      only diamond authentication and grading service to provide a warranty with
      respect to the accuracy of the color and clarity grades of each diamond we
      certify. Currently, we employ 6 diamond graders who have an average of 20 years
      of diamond grading experience.




9


*AGL
      Colored Gemstone Authentication and Grading Services* .
      In
      August 2006, we acquired American Gemological Laboratories (AGL), one of the
      leading independent third party authentication and grading services for colored
      gemstones, such as emeralds, rubies and sapphires. Its services are used by,
      among others, Sotheby’s and Christies for their jewelry auctions and by jewelry
      retailers such as Cartier and Fred Leighton. AGL has been in the business of
      authenticating and grading colored gemstones since 1977. We utilize the
      fundamental information obtained in GIA vocational classes but express the
      color
      and tone using a three digit system we developed called ColorScan, and express
      color and hue combinations using a 1 to 10 scale in half-point increments,
      describe tone on a scale of 0-100 and identifies clarity grades on a scale
      using
      descriptors such as “FI” meaning “Free from Inclusions”, to “MI1” and “MI2”
meaning “Moderately Included” to “E1”, “E2” and “E3” meaning “Excessively
      Included”. Enhancement and country of origin analysis is determined by
      comparison to our database and of over 5,000 colored gemstone samples, perhaps
      one of the largest such reference collections in the world, personally
      accumulated by AGL’s president in travels around the world to various mining
      sites. There are more than six competing services, with only three such services
      in operation for a similar period of time as AGL.




*CCE
      Certified Coin Exchange.* In September 2005, we acquired the Certified Coin
      Exchange (CCE), a subscription-based, dealer-to-dealer Internet bid-ask market
      for third party certified coins. CCE has been a marketplace in U.S. certified
      rare coin trading between major coin dealers in the United States since 1990
      with similar operations for uncertified coins dating back to the 1960’s. 
The CCE website features over 100,000 bid and ask prices for certified
      coins at www.certifiedcoinexchange.comand
      over 11,000 offerings to the retail coin buyer at the Collectors Corner. The
      CCE
      provides liquidity in the geographically dispersed and highly fragmented market
      for rare coins. The enhanced liquidity for certified coins increases volume
      and
      turnover for certified coins, a benefit for the PCGS coin certification
      business. We believe that we can extend the success of the CCE into other
      markets where the Company offers certification services such as the stamp and
      sportscard markets.




*Publications
      and Advertising* .
      We
      publish authoritative price guides, rarity reports and other collectibles data
      to provide collectors with information that makes them better informed consumers
      and makes collecting more interesting and exciting. Our publications also enable
      us to market our services, create increased brand awareness and to generate
      advertising revenues. Our publications include the *Sports
      Market Report,* which
      we
      publish on a monthly basis primarily for distribution to approximately 7,000
      PSA
      Collectors Club members, and the *Stamp
      Market Quarterly* ,
      which
      we publish for distribution to approximately 2,500 stamp dealers and collectors.
      In addition, we publish Palmieri’s Market Monitor, an educational and
      informative diamond and gemstone-industry publication. We sell advertising
      to
      dealers and vendors for placement in our publications. We manage a Collectors
      Universe website and individual websites for authentication and grading
      services. On those websites, we offer collectible content, some of which is
      available for a fee and some of which is available without charge. On a combined
      basis, our PCGS, PSA, PSA/DNA and PSE websites attracted, on average,
      approximately 227,000, 167,000 and 154,000 unique visitors per week during
      the
      fiscal years ended June 30, 2006, 2005 and 2004, respectively. As a result
      of
      the increasing number of collectors visiting our websites, in fiscal year 2005,
      we began selling advertising on our websites to dealers and other vendors that
      serve the collectibles markets.




**Our
      Mission**




Our
      mission is to provide the finest available authentication and grading services
      to sellers and buyers of high-value collectibles and other high-value assets
      in
      order to:




•  increase
      the values and liquidity of the high value collectibles and other high value
      assets;




•  enable
      and facilitate transactions in high value collectibles and other high value
      assets;




•  generally
      enhance interest, activity and trading in high value collectibles and other
      high
      value assets; and




•  achieve
      profitable growth, build long-term value for our stockholders and provide
      rewarding opportunities for our employees.




10


**Our
      Growth Strategy**




Our
      growth strategies include:




• Leveraging
      the strong brand awareness that we have achieved in our existing collectibles
      markets:




—
            to
                increase the demand for and use of our services not only by dealers,
                but
                also by collectors, only a relatively small percentage of which use
                independent authentication or grading services;
                and




—
            to
                introduce new value-added services to customers in our existing
                collectibles markets.




•  Increasing
      the GCAL market share by offering services, such as its Gemprint diamond
      identification service, that are not available from its competitors and by
      implementing marketing programs targeted at sellers and purchasers of diamonds
      that generally do not avail themselves of diamond authentication and grading
      services;




• Increasing
      the AGL market share at the high-end of the market by offering enhanced grading
      services which may include a guarantee of accuracy of color, tone and clarity
      and Gemprint identification on appropriate colored gemstones, and at the middle
      market, offer a lower priced authentication and grading certificate identifying
      appropriate enhancements that would benefit the retail customer.




•
            Identifying
                and entering other high-value collectibles or high-value asset markets
                where we believe we can succeed in building and meeting the demand
                among
                dealers, sellers and buyers for independent, third party authentication
                and grading services.




We
      are
      pursuing the following strategic initiatives in order to achieve these growth
      objectives:




*Increasing
      the Demand for our Services in Existing Collectibles Markets* .
      We have
      established leading brands in our existing collectibles markets, including
      PCGS,
      PSA, PSA/DNA and PSE. We intend to use those brands, as well as our new PCGS
      Currency brand, to promote Collectors Universe as the premier provider of
      authentication and grading services in the high-value collectibles markets
      in
      order (i) to increase our market share among existing users of authentication
      and grading services and (ii) to increase the use of our services by the
      numerous collectors that do not currently use any independent third party
      authentication or grading services.




Although
      we have authenticated and graded over 12 million coins since the inception
      of
      PCGS and over 9 million sportscards since the inception of PSA, we estimate
      that
      less than 10% of the vintage United States coins and vintage sportscards have
      been authenticated and graded. According to recent data available on eBay’s
      websites, the number of coins being sold at any one time on eBay generally
      ranges from approximately 150,000 to 180,000, of which only approximately 15%
      are authenticated and graded by a third party authentication and grading
      service, such as ours. Similarly, the number of sportscards being sold at any
      one time on eBay generally ranges from approximately 250,000 to 300,000, of
      which only about 10% are independently authenticated and graded. Additionally,
      we are not aware of any other companies that offer grading services for
      autographs, and we estimate that we have authenticated and graded less than
      1%
      of the potential market of autographs and stamps in the United States. Also,
      new
      collectibles are introduced each year into the markets in which we operate,
      some
      of which are authenticated and graded in the year of manufacture. Over time,
      these collectibles will increase the supply of vintage items that are sold
      by
      dealers and collectors and, therefore, that will be submitted for independent
      third party authentication and grading.




To
      take
      advantage of these market opportunities, we have:




• enhanced
      our marketing programs to promote our brands and services directly to Internet
      and other auction-related businesses. These programs emphasize the benefits
      of
      using our services, including increased marketability and the prospect of higher
      bids for collectibles;




• initiated
      joint marketing programs with collectibles dealers that are designed to make
      their customers aware of the availability and benefits of our authentication
      and
      grading services;




11


• established
      authorized PCGS and PSA dealer networks to increase the visibility of our brands
      and the use of our services by those dealers and their customers;




• developed
      and expanded our Set Registry SM programs
      to increase demand for our collectible coin, sportscard and stamp authentication
      and grading services among collectors and to increase traffic on our websites;
      and




• increased
      the promotion of our Collectors Clubs to attract and to provide incentives
      for
      collectors to use our services.




*Expanding
      Services in our Existing Markets* .
      Using
      the brand recognition we have established in the markets we serve, we have
      expanded services in our existing markets. These services include:




•
            *Collectors
                Universe Invitationals*.
                Since 2001, we have been holding special “invitation-only” events for our
                authorized PCGS and PSA dealers. At those events, dealers have the
                opportunity to meet and engage in collectibles trading with other
                invited
                dealers. To facilitate collectibles trading at these events, we offer
                same
                day, on-site authentication and grading services, enabling the dealers
                to
                complete their transactions while at the invitationals. In fiscal
                2006, we
                held nine dealer invitationals.




•
            *Participation
                at Collectibles Trade Shows*.
                Each year we participate in approximately 30 collectibles trade shows
                that
                attract collectibles dealers and collectors who buy and sell collectibles
                at those shows. We offer same day, on-site authentication and grading
                services, which facilitate the trading and sales of collectibles
                at these
                shows and conventions. At the same time, we obtain additional brand
                exposure and generate increased revenues, because dealers and collectors
                generally are willing to pay higher fees for same day, on-site services.
                In July 2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow
                management company that operates two of well-known coin, stamp and
                collectibles shows in Long Beach and Santa Clara, California,
                respectively. This acquisition assures us of the continued availability
                of
                these two show venues for our authentication and grading services,
                provides us a platform for inaugurating and conducting collectibles
                shows
                in our other markets and adds management personnel who are experienced
                in
                managing and conducting collectibles trade
                shows.




•
            *Sales
                of Website Advertising*.
                We began selling advertising on our websites to collectibles dealers
                and
                auctioneers in the markets in which we offer our branded authentication
                and grading services. Due to the increasing number of visitors to
                our
                websites, we are able to offer those dealers and auctioneers the
                opportunity to market their products and services to an increased
                number
                of prospective customers.




•
            *Dealer
                Financing Program*.
                Under this program, we offer short-term loans, primarily to established
                collectibles dealers and collectors that use our authentication and
                grading services. The loans, which are collateralized by the collectibles
                that dealers submit to us for authentication and grading, are intended
                to
                provide those dealers and collectors with working capital. We believe
                these loans will provide an incentive to dealers to submit additional
                collectibles to us for authentication and grading, as well as generating
                interest income for us.




•
            *Autograph
                Grading Services*.
                We launched autograph grading services, beginning with single signed
                baseballs. Our autograph grading service meets existing and creates
                additional demand for differentiation in the quality, and thus in
                the
                value, of autographed memorabilia. Our grading is based primarily
                on
                sharpness, intensity, readability and clarity of
                autographs.




•
            *Expansion
                of Website Information Services*.
                We have been expanding the information available on our websites,
                including the addition of: (i) historical coin auction prices; (ii)
                reproductions of historical reference books; and (iii) the contents
                of
                famous coin, sportscard and stamp collections. These services are
                designed
                to attract new collectors, increase the number of visitors to our
                websites
                and increase advertising revenues. During the years ended June 30,
                2006,
                2005 and 2004, on a combined basis, our five websites attracted,
                on
                average, over 227,000, 167,000, and 154,000 visitors, respectively,
                per
                week.




12


•
            *Photography
                Services*.
                We now offer digital photography for collectibles that are submitted
                to us
                for authentication and grading. The digital images can be used by
                dealers
                for recordkeeping purposes and by both dealers and collectors when
                listing
                collectibles on internet auction sites, such as eBay. We believe
                that we
                are able to offer digital photography services more efficiently than
                other
                service providers, because we will be able to easily incorporate
                this
                service as part of our authentication and grading
                processes.




•
            *eBay
                Promotional Programs*.
                Leveraging our expertise and reputation as a leading independent
                third
                party authenticator and grader of high-value collectibles, we work
                with
                eBay to create programs designed to increase the marketability of
                collectibles on its auction websites and, at the same time, promote
                our
                authentication and grading services. We offer a fee-based “Quick Opinion”
                autograph authentication service to visitors on eBay’s sports memorabilia
                auction website. Our autograph experts render an authenticity opinion
                based on an examination of the digital image of the autograph posted
                on
                eBay. We also have included, at eBay’s request, information about the
                benefits of our authentication and grading services on our websites,
                to
                which eBay has placed links on its collectibles websites in order
                to make
                that information readily accessible to its
                users.




•
            *“First
                Strike®” Program*.
                Every January, the U.S. Mint produces, in limited quantities, issues
                of
                newly minted gold and silver coins in sealed containers showing a
                date of
                sealing by the U.S. Mint in January. In the third quarter of fiscal
                2005,
                PCGS introduced a new “*First
                Strike*”
                program designed to generate submissions of these coins to us for
                authentication and grading. If those coins are submitted to us in
                their
                original Mint-sealed containers or with other evidence that they
                are part
                of such an issue and are uncirculated, we authenticate and grade
                and,
                then, encapsulate them in our tamper-evident, clear plastic holders
                with
                an imprint designating the coins as*First
                Strike*coins. We inaugurated our*First
                Strike*authentication and grading program in January 2005 for newly-minted
                U.S.
                Gold and Silver Eagle bullion coins. We believe that, due to their
                limited
                availability,*First
                Strike*coins will generate interest among and demand for our authentication
                and
                grading services from dealers and collectors seeking to buy or sell
                Gold
                Eagle and Silver Eagle bullion coins. In fiscal year 2006, we increased
                the number of*First
                Strike*units graded and authenticated to 253,000 from 75,000 in fiscal
                2005.




*Increasing
      GCAL’s Share of the Diamond Market* .
      We
      believe that we can increase GCAL’s share of the diamond grading market,
      notwithstanding competition from the larger and more established grading
      services, such as GIA, by promoting GCAL’s independence, its policy, practice
      and reputation for consistent and rigorous application of diamond grading
      standards, and the services that GCAL is able to offer that are not available
      from its competitors. Additionally, we believe that approximately 50% of the
      diamonds larger than 0.25 carat are offered with third party authentication
      and
      grading services but have found that many diamond retailers do not promote
      the
      availability of diamond grading services and that the majority of consumers
      do
      not request such services when purchasing diamonds, which we believe gives
      us an
      opportunity to promote GCAL’s services, which should help us grow GCAL’s
      business and market share.




To
      take
      advantage of this opportunity, since acquiring GCAL, we have:




• Enhanced
      and established GCAL as a brand providing high quality and consistent
      authentication and grading services.




•
            Provided
                increased security for purchasers of diamonds by including, with
                each
                diamond that is graded by GCAL, a “Gemprint” of the diamond, which is a
                digital image of its unique refractive light pattern, using our patented
                non-invasive diamond identification process. GCAL stores the Gemprint
                in
                its computer database, cross-indexed to the diamond’s GCAL grading
                certificate. As a result, if a dealer or consumer wants to sell the
                diamond at a future date, the seller can provide the prospective
                purchaser
                with evidence that the diamond being sold is, in fact, the diamond
                that
                was originally graded by and described in the grading certificate
                issued
                by GCAL, by (i) using the Gemprint process to produce another digital
                image of the diamond at the time of sale and (ii) comparing that
                digital
                image to one stored in GCAL’s database. Consequently, the Gemprint process
                enables GCAL to provide an additional measure of protection against
                misrepresentations of diamond quality that can occur by, for example,
                switching a diamond grading certificate issued for a higher quality
                diamond to a lower quality diamond or by altering the grading certificate.






13




•
            Launched
                the Five Star Diamond Grading Certificate that includes five distinct
                services bundled into one certificate at a 20% to 50% discount to
                the fees
                that we believe the customer would have to pay to purchase these
                services
                separately. GCAL’s Five Star certificate also means that the customer need
                only keep a single grading certificate, rather than having to maintain
                multiple grading certificates issued by the different grading services.
                The five bundled services include:




—
            *Direct
                Light Performance Analysis*,
                which is a service that directly measures the light return from a
                diamond
                and expresses that return in calculations, of Optical Brilliance
                and,
                Optical Symmetry, using descriptive terms from Excellent, Very Good,
                and
                Good to Fair. These results are based on the measurement of the number
                of
                pixels in light return from incident light. The results are shown
                on the
                certificate in two digital images of the diamond along with the two
                associated adjectival descriptions for Brilliance and Symmetry. The
                easily
                understood graphics and rating assist a potential diamond buyer in
                comparing the visual qualities of one diamond to
                another.




*—*
            *Gemprint
                Security Registration*,
                which is a service that captures the unique light refraction pattern
                of a
                diamond in a digital format and records the unique “fingerprint” of the
                diamond, and registers that image in a database. At any time after
                the
                diamond has been certified by GCAL and a Gemprint registered, the
                diamond
                may be matched to this database by taking another Gemprint of the
                diamond
                and comparing the digital image of the requested diamond to the registered
                database using the Gemprint proprietary algorithm. This process provides
                assurance that a GCAL certified diamond can be matched to the original
                certificate making it possible to detect misrepresentations of the
                quality
                of the diamond by switching or altering its grading
                certificates.




*—*
            *Laser
                Inscription*,
                which is a service that inscribes information using a cold laser
                on the
                girdle of the diamond. Laser inscription is often used for quick
                identification, engraving of logos or particular phrases. Laser
                inscription is only a few microns deep into the diamond and can be
                easily
                removed and is one of the most often requested extra services that
                is
                included in the GCAL bundled
                services.




*—*
            *Grading
                Guarantee*,which
                isa
                limited warranty that provides assurance to thediamond
                purchaser thatif****the
                diamond****is
                submitted for re-grading,****withinone yearfollowingthe date ofits
                originalexamination(which may occur as a result of a resale of the diamond),the color and clarity gradeson
                the re-grading will bewithin one gradeof
                the color and clarity grades assigned onthe diamond’soriginal
                grading.This
                guarantee is the first and onlywarranty
                issuedin
                the industry and provides the buyer with increased confidence in
                the
                quality rating provided by GCAL.




*—*
            *Fair
                and Consistent Clarity and Color Certification*,
                which is the result of the consensus processemployedby
                GCAL, where at least two qualified diamond experts must agree on
                the
                subjective grading of Clarity and Color, two of the four “C’s” of diamond
                grading. The other two “C’s” are Carat and Cut, both of which are measured
                by high technology machines. Differences in one grade of Clarity
                or one
                grade of Color may result in value differences in the marketplace
                of from
                10% to 50%.




•
            Launched
                the Source VeritasSMPassport that includes all of the benefits of the Five Star Diamond
                Grading Certificate and provides the assurance that the diamondwascut and polished from a rough diamondminedin
                compliance with the Kimberley Process (www.kimberleyprocess.com)
                and the
                2003 Clean Diamond Act, as may be applicable, which are designed
                to assure
                that the diamond being sold was not mined in a country where diamond
                sales
                are used to fund rebel movements against legitimate countries.




• Launched
      the GemFacts SM Digital
      Certification Data Delivery
      System, by which the  information on a GCAL
      grading certificate is
      delivered, digitally , on a
      mini-CD along with the printed certificate at the time of retail sale or on
      the
      I nternet in a
      certificate look-up feature on the GCAL website. This digital
      delivery system allows for co-marketing of certain diamond retail
      programs , including co-branding with the retail seller and may
      include a digital marketing video for the
      retail seller. Educational “pop-up” windows are available when any one of 19 key
      terms are touched with the cursor , making
      the GemFacts digital certificate interactive for the user
      and a helpful sales tool at the retail counter.




14


*Increasing
      AGL’s Share of the Colored Gemstone Market.* We
      believe we can increase AGL’s share of the colored gemstone authentication and
      grading market, even though in the general market we estimate that
      authentication and grading services are purchased on less than 1% of all the
      colored gemstones valued at $500 or more. According
      to the 2004 U.S. Census Report, imports into the United States of cut and unset
      colored gemstones included 4 million carats of emeralds, 3.75 million
      carats of rubies **** and
      7.5
      million carats of sapphires, **** along
      with 1.1 billion carats of other
      colored gemstones. In
      the
      high value market with auctioneers Sotheby’s and Christies, we estimate third
      party authentication and grading of colored gemstones to be 30% to 50% of the
      offerings. Of such certification , we estimate that AGL’s market share to be
      approximately 50%, and we believe we can increase our volume with additional
      services such as the introduction of a grading guarantee on color, tone and
      clarity and the implementation of Gemprint on applicable colored gemstones.
      In
      the general market, colored gemstones are generally sold at retail in similar
      stores and in similar venues as diamonds providing a selling environment already
      familiar with the concept of third party authentication and grading of the
      stones. Further, the Federal Trade Commission has promulgated regulations,
      requiring disclosure of enhancements to colored gemstones that (a) are not
      permanent or may not be permanent; (b) the treatment creates special care
      requirements; or (c) the treatment has a significant effect on the stone’s
      value. Because most retailers do not have sufficient information or expertise
      to
      determine the enhancements to colored gemstones, we believe we can increase
      the
      volume of our certificate services by offering an independent, third party
      certificate of color, tone and clarity with disclosure about enhancements,
      priced at a level that makes the certificate economically feasible for a larger
      number of colored gemstones. In addition, we believe there is a cross-marketing
      opportunity between GCAL and AGL through (i) marketing AGL services to the
      retailers with which GCAL has existing relationships including Blue Nile, and
      (ii) marketing GCAL services to the auctioneers and retailers with which AGL
      has
      existing relationships such as Sotheby’s, Christies and Cartier.




*Entering
      Other Collectibles and High-Value Asset Markets* .
      There
      are additional high-value collectibles and high-value assets with respect to
      which marketability and value depend primarily on their authenticity and state
      of preservation or quality. We believe that the growth of some of these markets
      has been hampered by the absence or limited availability of independent
      authentication and grading services. We continue to evaluate opportunities
      with
      the intention to expand our business into one or more of those markets.




Other
      markets that we
      are considering for possible expansion include:




Antique
                silver
            Musical
                instrumentsArt
            Political
                memorabiliaArt
                glass
            PostcardsComic
                books
            Rare
                booksEntertainment
                memorabilia
            WatchesEstate
                jewelry
            Wine




We
      intend
      to consider the following criteria in selecting markets for future
      expansion:




• *Market
      Size* .
      The
      size of the target market, measured both in terms of the volume and the value
      of
      the collectibles or high-value assets that trade in the market.




• *Trading
      Prices* .
      The
      prices at which collectibles or other high-value assets trade in the target
      market, because we have found that the more valuable the collectible or asset,
      the greater is the demand for authentication and grading services.




• *Competitive
      Environment* .
      The
      presence or absence of existing independent authentication and grading services
      in the target market, its capacity for new entrants and the satisfaction of
      dealers and collectors with the services offered by existing
      providers.




• *Availability
      of Experts* .
      The
      availability of experts needed to succeed in entering a target
      market.




• *Means
      of Entry* .
      The
      benefits and costs of entry by means of an opportunistic acquisition, as opposed
      to starting a new authentication and grading service that would require the
      development of a new brand.




15


The
      largest of these currently targeted markets are estate
      and pre-owned jewelry ,
      including watches, and
      entertainment memorabilia, such as Hollywood props, scripts and wardrobes.
      According to data available from eBay, at any one time there are approximately
      300,000 to 500,000 items of entertainment memorabilia and from 80,000 to 100,000
      watches listed on eBay ’s
      auction websites. We
      are
      not aware of any significant third party authentication or grading services
      in
      any of these markets.




There
      is
      no assurance that we will succeed in expanding our business into any of these
      new markets or, even if we do succeed in doing so, that the authentication
      or
      grading services we will offer in those markets will gain market acceptance
      or
      become profitable.




**Operations**




We
      offer
      authentication and grading services for coins, sportscards, autographs and
      autographed memorabilia, stamps, vintage U.S. and currency
      notes , and for diamonds and
      colored gemstones .
      Our
      trained and experienced authentication and grading experts determine the
      authenticity of and, using uniform quality standards, assign a quality grade
      to
      these collectibles and to diamonds and
      colored gemstones .




*PCGS* .
      Since
      our inception in 1986, we have graded approximately 12 million coins. We now
      authenticate and grade approximately one million coins per year. We typically
      charge authentication and grading fees that range between $5 and $200 per coin,
      depending primarily on the turn-around time requested by the customer, which
      varies from one day for the highest level of service to approximately 60 days
      for the lowest level of service. In the fiscal year ended June 30, 2006, our
      fee
      per coin averaged approximately $12.50. We authenticate and grade coins in
      accordance with standards that we developed and which have become generally
      accepted in the industry. We use both an adjectival and numeric system, with
      a
      scale of 1-to-70, to rate the quality of the coins, with the highest number
      representing “gem” or perfect quality. We have authenticated and graded, either
      before or after sale, two of the three highest priced U.S. coins ever sold
      at
      public auction, including an 1804 Draped Bust Silver Dollar, that was sold
      by
      the owner at an auction in 1999 for approximately $4.1 million, and a U.S.
      1913
      Liberty Head Nickel, that was recently sold for $4.15 million, the second
      highest price paid for any coin.




Our
      grading of coins involves an exacting and standardized process. We receive
      coins
      from dealers and collectors and remove all packaging that identifies the
      submitter in any way. We then enter information regarding the coins into our
      proprietary computerized inventory system, which tracks the coins at every
      stage
      of our authentication and grading process. Generally, our process requires
      that
      two of our experts evaluate each coin independently, and no authenticity opinion
      is issued and no quality grade is assigned unless their opinions of authenticity
      and the grades independently assigned by each of them are the same. In some
      cases, depending on the type of coin being authenticated and graded or on the
      results of the initial review process, a third expert is involved to make the
      final determinations of authenticity and grade. The coin, the determination
      of
      authenticity and its grade are then verified by one of our senior experts,
      who
      has the authority to resubmit the coin for further review if deemed to be
      necessary. Only after this process is complete is the coin reunited with its
      invoice, thus keeping the authentication and grading process independent of
      the
      identity of the owner and the history of the coin. The coin is then sonically
      sealed in our specially-designed, tamper-evident, clear plastic holder, which
      also encases a label describing the coin, the quality grade that we have
      assigned to it, a unique certificate number and bar code, and the PCGS hologram
      and brand name.




*PSA* .
      We
      launched our PSA sportscard authentication and grading service in 1991 and,
      through June 30, 2006, had authenticated and graded over 9 million sportscards.
      Our sportscard grading system uses both an adjectival and a numeric system
      with
      a scale from 1-to-10, with the highest number representing “mint” condition or
      perfect quality. We employ sportscard authentication and grading procedures
      that
      are similar to our coin authentication and grading procedures and at a minimum,
      two graders are assigned to every card. On receipt of sportscards from dealers
      and collectors, we remove all packaging that identifies the submitter in any
      way
      and enter information regarding the sportscards into our proprietary
      computerized inventory system that enables us to track the sportscards
      throughout our authentication and grading process. Only after the authentication
      and grading process is complete is the sportscard reunited with its invoice,
      thus keeping the authentication and grading process independent of the identity
      of the owner and the history of the sportscard. The sportscard is then sonically
      sealed in our specially-designed, tamper-evident, clear plastic holder, which
      also encases a label that identifies the sportscard, the quality grade that
      we
      have assigned to it and a unique certificate number, and the PSA hologram and
      brand name.




16


We
      primarily authenticate and grade baseball sportscards and, to a lesser extent,
      football, basketball and hockey sportscards, as well as entertainment and other
      collectible cards. We typically charge fees ranging between $4 and $50 per
      card,
      with an average fee of $6 per card in 2006. As is the case with coin
      authentication and grading, sportscard authentication and grading fees are
      based
      on the particular turn-around time requested by the submitter, ranging from
      one
      day’s turn-around for the highest level of service to approximately 60 days for
      the lowest level of service.




The
      sportscards submitted to us for authentication and grading include primarily
      (i)
      older or vintage sportscards, particularly of memorable or historically famous
      players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle,
      and
      (ii) modern or newly produced sportscards of current or new athletes who have
      become popular with sports fans or have achieved new records or milestones,
      such
      as Nolan Ryan and Roger Clemens. These sportscards have, or are perceived to
      have, sufficient collectible value and are sold more frequently than are
      sportscards of less notable athletes, leading dealers and collectors to submit
      them for grading to enhance their marketability. Also, the production and sale
      of each new series of sportscards, which take place at the beginning and during
      the course of each new sports season, create new collectibles that provide
      a
      source of future additional authentication and grading submissions to us. Among
      the sportscards that we have authenticated and graded is a 1909 Honus Wagner
      baseball card, which received a PSA grade of NM-MT8 and was sold by the owner,
      via auction, in 2000 for approximately $1.3 million.




*PSA/DNA* .
      In
      1999, we began offering authentication services for vintage sports autographs.
      Because of the variability in the size of autographed memorabilia, the
      procedures we use necessarily differ from those used in authenticating and
      grading coins and sportscards. Customers may ship the autographed memorabilia to us for authentication at our offices or, in the case of dealers
      or collectors that desire to have a large number of items authenticated, we
      will
      sometimes send an expert to the customer’s location for “on-site” examination
      and authentication. Our experts reference what we believe is one of the largest
      databases of known genuine examples of signatures for comparison to a submitted
      specimen and draw upon their training and experience in handwriting analysis.
      In
      most cases, we take a digital photograph of the autographs that we authenticate
      and store those photographs in a master database. Before shipping the item
      back
      to the customer, a tamper-evident label is affixed to the collectible. The
      label
      contains our PSA/DNA name and logo and a unique certificate number. For
      additional security, in all cases when an item is fully authenticated, we tag
      the items with synthetic DNA-laced ink, which is odorless, colorless and
      tasteless and visible only when exposed to a narrow band wavelength of laser
      light using a hand-held, battery-powered lamp. As a result, if the label is
      removed from the item, it is still possible to verify that the item was
      authenticated by us.




Memorabilia
      that have been authenticated by our vintage autograph service include Mark
      McGwire’s 70th home run baseball, which was sold at auction in 1999 for more
      than $3 million, and a baseball bat autographed by Babe Ruth, which he used
      to
      hit the first home run ever hit in Yankee Stadium in 1923. That bat recently
      was
      sold by Sotheby’s for more than $1.2 million.




We
      also
      offer grading services for autographs. We use uniform grading standards that
      we
      have developed to assign two grades to the collectible, one based on the
      physical condition or state of preservation of the autograph, and the other
      based on the physical condition of the collectible, using a numeric scale of
      1-to-10, the highest number representing “Gem Mint” condition or perfect
      quality.




*PSE* .
      We
      commenced our PSE stamp authentication and grading service in January 2000.
      In
      rating the quality of stamps, we assign a numeric grade to each stamp that
      ranges from 1-to-100. The grade assigned to a stamp is based on several
      characteristics, including the centering of the image on the stamp and the
      absence or presence of various faults, such as creases, perforation problems
      and
      other imperfections that, if present, will reduce the value of the stamp. For
      a
      stamp to receive a grade of 100, which means that it is in “gem” condition, the
      image on the stamp must be perfectly centered and the stamp must be faultless.
      Stamps submitted to us for grading are independently examined and graded by
      at
      least two of our stamp experts. After a stamp has been authenticated and graded,
      we generally issue a certificate of authentication that briefly describes the
      stamp and the grade assigned to it and has a digital image of the stamp
      attached. The certificate bears the PSE name and logo and a unique certification
      number that we assign to the stamp for record keeping purposes. We also offer
      our customers the option of having the stamp encapsulated in a tamper-evident,
      clear plastic holder with an encased label that, like the certificate,
      identifies the stamp and sets forth the grade assigned to it, its unique
      certification number and the PSE name and logo.




17


Stamps
      that have been authenticated and graded by us include an 1868 1¢ “Z” Grill U.S.
      postage stamp, which received a PSE grade of Extremely Fine (XF) 90 and was
      last
      sold at auction in 1989 for more than $900,000. The owner submitted the stamp
      to
      us shortly after we initiated our stamp authentication and grading service
      in
      2000.




The
      volume of stamp authentication and grading submissions through fiscal 2006,
      relative to the number of coin and sportscard submissions, has not been
      material. Since stamp grading services are relatively new to
      the market, we cannot predict when or even whether our services will gain the
      level of market acceptance needed for stamp grading to become a material
      contributor to our operating results.




*Vintage
      U.S. Paper Currency* .
      PCGS
      began marketing a vintage U.S. paper currency grading service, under the brand
      name “PCGS Currency” in the third quarter of fiscal 2005. We have engaged a
      number of paper currency experts to grow this business and to authenticate
      and
      grade vintage paper currency. We use an adjectival and numeric grading system,
      with a scale of 1-to-70, which is similar to the system that we use for grading
      coins, largely because most vintage currency dealers are already familiar with
      that system. Currently, there are two relatively small vintage paper currency
      authentication and grading companies with
      which we compete, one of
      which
      is a subsidiary of, Numismatic Guaranty Corporation of America, our principal
      coin authentication and grading competitor, which started a separate vintage
      paper currency authentication and grading service in the first calendar quarter
      of 2005. The rare currency market is smaller than our other collectibles markets
      and there is no assurance that our currency authentication and grading service
      will gain broad market acceptance or
      that demand for
      such
      services or  our
      entry
      into that market will generate material revenues for us or enable
      this service to become
      profitable.




*Diamonds* . ** GCAL
      was
      founded in 2001 and was acquired by the Company in the second quarter of fiscal
      2006. We employ diamond grading experts and mineralogists to examine,
      authenticate and grade diamonds. We use a combination of technology and the
      application of industry standards in this process. To authenticate diamonds,
      we
      use a Raman Spectrometer to examine the chemical composition and Fourier
      Transform Infrared Spectrometer to assist in determining various treatments
      that
      may be applied to diamonds. In addition, we use DiamondSure and DiamondView
      to
      verify diamonds and Sarin instruments to weigh and measure the dimensions along
      with a Colorimeter to assist in color grading. Experts review each diamond
      with
      respect to established color reference sets and various magnification devices
      to
      closely examine for imperfections and inclusions that would affect the clarity
      grade and application of clarity standards. In addition to providing information
      relative to the “4C’s” of diamond grading, we also provide a direct measurement
      of light performance with technology acquired as part of the GCAL acquisition,
      and we provide a registration of the Gemprint of each diamond using the patented
      technology that produces, records, stores, sorts and matches digital refractive
      images from a pinpoint, single laser light source applied to the
      diamond.




GCAL
      assigns a quality grade to the diamond by measuring its Cut,
      Carat, Color and
      Clarity (which
      are known as the “4C’s” of the diamond) .
      Cut and
      Carat are measured using
      measurement equipment ,
      while
      the Color and Clarity are determined by our experts through the application
      of
      industry standards. Grades are applied using a scale in Color from a top Color
      grade of “D” to a faint yellow lower Color grade of “M” or lower, and a Clarity
      grade of “Flawless” (“FL”) to “Very, Very Slightly Included 1” to “Very, Very
      Slightly Included 2” (“VS1” and “VS2”), to the much lower quality grade of
“Included 3” (“I3”).





*Colored
      Gemstones* . **** AGL
      was
      founded in 1977 and was acquired by the Company in the first quarter of fiscal
      2007. We employ colored gemstone experts to examine, authenticate, grade,
      identify enhancements and determine the country of origin. We utilize a
      combination of technology, industry standards and standards, systems and
      terminology that were developed by AGL. To authenticate colored gemstones,
      we
      use one or more technologies including Raman Spectrometer, near infrared,
      specimen comparison and trace element comparison to authenticate colored
      gemstones from our extensive reference collection of over 5,000 samples. Weight
      is measured by technologically sophisticated scales. Color and tone are reviewed
      by our experts to determine the application of the three digit code for color
      and tone from a system we developed called ColorScan. Color and hue are
      described on a numeric scale from 1 to 10 in half point increments with tone
      set
      forth on a scale from 0-100. Clarity is reviewed to determine the application
      of
      a scale using descriptors such as “FI”
      meaning “Free from Inclusions”, to “MI1” and “MI2” meaning “Moderately Included”
to “E1”, “E2” and “E3” meaning “Excessively Included”. A
      critical review of the stone for enhancements is completed relying on the
      reference collection and other testing resulting in the use of descriptions
      and
      disclosures that we developed. If requested, an analysis of the country of
      origin is performed, comparing the subject stone and its trace elements and
      crystalline structure to those in the reference collection.




18


*Publications
      and Content* .
      We
      publish authoritative price guides and rarity reports for coins, sportscards,
      sports autographs and memorabilia and stamps. This information is available
      on
      our website and in our publications. These publications include:




• *Price
      Guides* .
      We
      provide a wide variety of authoritative price guides for a number of collectible
      markets. For example, we track the prices at which the 3,000 most
      actively-traded U.S. coins are sold, dating back to 1970, and compile and
      publish this information in a generally recognized collectible coin index,
      known
      as the *CU3000* .




• *Rarity
      Reports* .
      We
      compile and publish reports that list the total number of coins and sportscards
      we have graded since our inception, categorized by item type and grade
      determination. We can publish, for example, the exact number of Mint State
      (MS)
      67-grade 1881-S Morgan silver dollars that we have graded. We believe that
      collectors use this information to make more informed decisions regarding the
      purchase of particular coins.




• *Articles* .
      Collecting is a passion for many and has nuances and anecdotes that are well
      suited to a library of articles for each category of collectibles. We write
      informative articles and publish them on our websites. A sense of community
      is
      also important to collectors. We therefore encourage our customers to
      communicate and to write articles which we sometimes publish on our websites
      or
      include in our publications.




• *Historical
      Content* .
      Collecting is often about history, and, in many instances, historical events
      associated with a collectible enhance its value. In our publications, we provide
      short histories about unusual and rare collectibles. We believe that these
      historical accounts add to the attractiveness and excitement of purchasing
      such
      items. During 2004, House of Collectibles, a division of Random House, published
      the second edition of the *Official
      Guide to Coin Grading and Counterfeit Detection* ,
      which
      was authored by our collectible coin experts. To enhance the historical content
      that we are able to provide dealers and collectors, in the first quarter of
      the
      current fiscal year we acquired CoinFacts.com, which operates a website at
      www.coinfacts.com, at which we are now able to offer coin dealers and collectors
      proprietary information about the date and mintmark combinations of U.S.
      Colonial Coins, early U.S. coins, such as the Liberty Cap Half Cent of 1794,
      to
      the most recent U.S. minted coins, such as the Fifty State QuartersTM and the One
      Ounce American Eagle Gold and Silver Bullion Coins currently being produced
      by
      the U.S. Mint.




• *News* .
      We
      provide market news and information that are accessible to collectors and
      dealers on our websites. The news and information most often relate to recent
      events, such as sales of collectibles at record prices, the introduction of
      new
      collectibles and trends and developments in the collectibles markets we
      serve.




**Marketing**




We
      employ
      both “pull” and “push” strategies in marketing our services to dealers and
      collectors of high-value collectibles and diamonds. For collectibles, our “pull”
strategies are designed to promote our brands and increase the preference among
      collectors for our authentication and grading services and to encourage
      collectors to communicate that preference to their collectibles dealers, because
      most authentication and grading submissions are made by dealers. In our
      experience, if a customer requests a particular grading service,
      the dealer ordinarily will comply with that request. On the other hand, if
      the
      customer expresses no preference, the dealer will make its own choice of
      authentication and grading service or may even decide not to submit the
      collectible to an independent service for authentication and grading.




For
      diamonds and colored gemstones, our “pull” strategy is designed to promote our
      brands to the retail consumers who are interested in buying a diamond or colored
      gemstone, principally communicating over the Internet to this
      target market through our websites primarily in response to search engine
      inquiries for information on diamonds or colored gemstones, diamond and colored
      gemstone pricing, purchasing assistance and other searches. Each of our websites
      are planned to be one of the few websites that
      offers  independent,
      third party education, information and price guides that is not associated
      with
      the sale of diamonds or diamond jewelry or colored gemstones. Since most diamond
      submissions come from diamond “sightholders” (authorized buyers of rough
      diamonds from the mining companies) and jewelry manufacturers, the objective of
      our
“pull” strategy is to create demand from retail
      consumers for our brand at the retail counter. For
      colored gemstones, the supply chain is




19
 
  more
        diversified than for diamonds, but the strategy to “pull” demand from the
        retailers and consumers is similar. We believe that consumer demand will
        lead
        diamond and colored gemstone and jewelry retailers to order
        diamonds, colored gemstones and diamond and colored gemstones jewelry that have
        been
        graded by one of our services. In
        addition, we promote our services to the many independent and chain store
        retailers through trade publication advertising and trade show appearances
        to
        demonstrate the benefits of selling diamonds and colored gemstones with our
        diamond and colored gemstone grading certificates in
        order to
        encourage retailers to ask for or even demand our brand of certification
        on
        diamonds and colored gemstones and diamond or colored gemstone
        jewelry they
        purchase from sightholders and wholesale distributors .




Therefore,
      our “pull” oriented marketing programs emphasize (i) the protections that
      collectors and retail customers will have if they purchase collectibles,
      diamonds and colored gemstones that we have authenticated and graded, and
      (ii) the improved marketability and higher prices that they and the
      associated retailers can realize if they use our independent third party
      authentication and grading services.




*Our
      “Push” Strategy* ,
      on the
      other hand, is designed to market our services directly to collectibles dealers
      and to diamond sightholders, colored gemstone suppliers and diamond and colored
      gemstone jewelry manufacturers to encourage them to use and promote our
      services.




*Our
      “Pull” Strategy* .
      We have
      developed and implemented a number of marketing programs and initiatives
      designed to create consumer preference for collectibles that have been
      authenticated and graded by us. Those programs and initiatives
      include:




•
            *Direct
                Advertising*.
                We directly address collectors by advertising our services in trade
                journals and periodicals in each of our markets. Those journals include*Coin
                World*,*Linn’s
                Stamp News*,*Sports
                Collectors Digest*and*Autograph
                Collector Magazine*.
                We make personal appearances at major, national-market trade shows
                around
                the United States that are attended by collectors, as well as dealers.
                We
                also participate in and support programs conducted by non-profit
                associations whose members are primarily collectors, such as the
                American
                Numismatic Association and the American Stamp Dealers
                Association.




•
            *Set
                Registry Programs*.
                We provide collectors with the opportunity to participate in freeInternet“Set
                Registry” programs that we host on our collectibles websites. These
                programs encourage collectors to assemble full sets of related
                collectibles that have been authenticated and graded by us. Generally,
                each registered set is comprised of between 50 and 200 separate,
                but
                related, collectibles. Examples include particular issues of coins,
                such
                as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular
                sets of sportscards, such as all Hall of Fame pitchers or a particular
                team, like the 1961 Yankees; or sets of collectible stamps, such
                as
                Columbian Commemoratives or Graf Zeppelin Airmail stamps. Our Set
                Registry
                programs enable collectors:




—
            to
                register their sets on our websites, which provides them with an
                off-site
                reference source for insurance and informational
                purposes;




—
            to
                display on our websites, and compare the completeness and quality
                grades
                of, the collectibles making up their sets to those of other collectors
                who
                have registered similar sets on our websites, thereby creating a
                competitive aspect to collecting that adds to its excitement;
                and




—
            to
                enter our annualCompany-sponsored
                Set Registry competitions and awards programs in which collectors
                can win
                awards for having collected the most complete and highest graded
                sets of
                particular series or issues of coins, sportscards or
                stamps.




The
      collectibles that may be registered on our Set Registries and included in our
      Set Registry competitions are limited to collectibles that have been
      authenticated and graded by us. To register the collectibles to be included
      in a
      particular set, a collector is required to enter the unique certificate number
      that we had assigned to each of the collectibles when last authenticated and
      graded by us. We use the certificate number to compare the information being
      submitted by the collector with our database of information to verify that
      the
      collectibles being registered by a participant for inclusion in a particular
      set
      qualify to be included in that set.




20


We
      have
      found that our Set Registry competitions (i) create a preference and
      increase demand among collectors for our brands, and (ii) promote the
      trading of collectibles authenticated and graded by us by set registrants
      seeking to improve the completeness and overall quality of their sets, which
      generally results in additional authentication and grading submissions to us.
      Annual awards for set completeness and quality have been issued by PCGS and
      PSA
      each year since 2002 and by PSE beginning in 2004. As an indication of the
      popularity of our Set Registry programs, more than 40,000 sets were registered
      on our Set Registries as of June 30, 2006, which represents a 34% increase
      over
      the number registered as of June 30, 2005.




• *Collectors
      Clubs Subscription Program* .
      We also
      have established “Collectors Clubs” for coin, currency and sportscard
      collectors. For an annual membership fee, ranging from $50 to $200, collectors
      receive a number of benefits, including (i) the right to have, without any
      further charge, a specified number of collectibles authenticated and graded
      by
      us, a privilege that non-member collectors do not have; and (ii) access to
      certain proprietary data that we make available on our websites or in print.
      As
      of June 30, 2006, there were approximately 15,000 members in our Collectors
      Clubs.




• *Retail
      Diamond Buyer Website* . We are
      in
      the process of completing our diamond website that will make educational information and our
      pricing guide, *The
      Market Monitor* , accessible
      to the retail consumer as a valuable information
      tool that will assist
      the consumer in making his
      or
      her diamond purchase decision, based primarily on
      quality and value. Using our GemCalc diamond calculator, the consumer will
      be
      able to use the
      website to identify various diamond qualities that can
      be
      obtained at different price points. Because
      the information and price guides will
      be valid only on
      GCAL
      certified diamonds, we anticipate that some of the users will request GCAL
      certification at the retail counter. We plan to launch this website in October
      2006. **




• *Diamond
      Certificate Co-Branding* .
      GCAL
      has a program of co-branding the diamond sightholder or the retailer on the
      diamond grading certificate in order to provide point-of-sale support for the
      brand or after-sale support for the brands once the consumer has taken the
      diamond home.  Diamond
      sightholders are requested by many diamond mining interests to conduct marketing programs to
“brand” a diamond from that mining interest at the retail counter. Co-branding
      on the diamond grading certificate is one of the most cost effective ways by
      which
      a sightholder can brand the diamonds it purchases and resells. Retailers
      are searching for various points of differentiation in a sales presentation
      and
      co-branded diamond grading certificates can create a
      point of differentiation between
      the retailer and those
      of its
      competitors who are not using GCAL’s services .




• *Colored
      Gemstone Brand Extension.* Because
      AGL has an established brand associated with the high-value colored gemstones,
      we believe we can extend that brand “down market” to the middle value market
      using the existing retail distribution channels and providing the retailers
      and
      customers with information about the AGL brand and its prominence for high
      value
      colored gemstones. **




• *Retail
      Colored Gemstone Buyer Website.* In
      a
      similar manner to the diamond buyer website now in production, we plan on
      providing a website for colored gemstone buyers that would provide education,
      information and fair market pricing information, based on our pricing guide *The
      Market Monitor* .
      The
      design will be focused on functionality for the retail consumer with all
      information centered on the AGL brand, including the pricing information for
      AGL
      certified colored gemstones. It is our belief that because the information
      and
      education will be provided by AGL and the associated fair market pricing will
      be
      based on AGL’s certified colored gemstones, the website users will ask for AGL
      certification at the retail counter.




*Our
      “Push” Strategy* .
      We also
      market our services directly to collectibles dealers and auctioneers to promote
      their use of our authentication and grading services. Our marketing message
      is
      focused on the potential increase in marketability of the collectibles due
      to
      the increase in consumer confidence that is attributable to our authentication
      and grading of those collectibles. These marketing programs
      include:




•
            *Trade
                Publication Advertising and Direct Communications*.
                We communicate to dealers and auctioneers by direct contact and through
                advertising in trade journals and publications in the respective
                markets.
                Those journals include*Coin
                World*,*Linn’s
                Stamp News*,*Sports
                Collectors Digest*and*Autograph
                Collector Magazine*.
                We also communicate with our dealers and with auctioneers by direct
                mail,
                email, and telephone.




21




•
            *Trade
                Shows and Conventions*.
                There are numerous collectibles trade shows and conventions held
                annually
                in the United States, of which approximately 30 generally are considered
                to be the largest and most significant in the collectible coin,
                sportscard, autograph and stamp markets. At these shows and conventions,
                collectibles dealers gather on a trading floor or “bourse” to buy and sell
                collectibles. We offer same day, on-site authentication and grading
                services, which facilitate the trading and sales of collectibles
                at these
                shows and conventions. At the same time, we obtain additional brand
                exposure and generate increased revenues, because dealers and collectors
                generally are willing to pay higher fees for same day, on-site
                services.




In
      July
      2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company
      that operates two of the larger and better known coin, stamp and collectibles
      shows in Long Beach and Santa Clara, California, respectively. This acquisition
      assures us of the continued availability of these two show venues for our onsite
      authentication and grading services, provides us a platform for inaugurating
      and
      conducting collectibles shows in our other markets and adds management personnel
      who are experienced in managing and conducting collectibles trade
      shows.




•
            *Our
                Dealer Invitationals*.
                We sponsor and host 8-to-10 “invitation-only” events per year for our
                larger dealers that provide them with forums for buying and selling
                their
                collectibles. We also offer same day, on-site authentication and
                grading
                services at these invitationals. Like the other trade shows and
                conventions we attend, these invitationals enable us to generate
                additional authentication and grading revenues. At the same time,
                because
                we host the invitationals, they provide additional brand exposure
                and
                build goodwill for us among the collectibles
                dealers.




•
            *Authorized
                Dealer Network*.
                We have implemented authorized dealer programs for coin and sportscard
                collectibles dealers and auction companies. Authorized dealers are
                able to
                use our marketing materials which are designed to promote our services
                and
                those of our authorized dealers to collectors. Those materials include
                “point of sale” and “point of purchase” displays and brochures and direct
                mail pieces for insertion in customer mailings. In addition, authorized
                dealers may use our brand logotypes on their websites to attract
                buyers
                for coins and sportscards that have been authenticated and graded
                by us.
                We also conduct joint marketing programs with our authorized dealers
                in
                which we provide financial support for dealer marketing programs,
                approved
                by us, that promote both the dealer’s products and services and our
                authentication and grading
                services.




•
            *Jewelry
                Trade Publication Advertising, Trade Show Appearances and Educational
                Seminars.*GCAL
                advertises in the major jewelry trade publications and maintains
                an active
                press relations campaign. GCAL was featured in the June 2006 issue
                of*Modern
                Jeweler*for the launch of the new GCAL service Source Veritas Passport. GCAL
                also
                attends the major jewelry trade shows primarily in the summer (targeted
                at
                the fall and holiday selling season) and late fall and winter (targeted
                at
                the Valentine’s Day and Mother’s Day season). GCAL also has the
                opportunity to hold educational seminars at some of the trade shows
                and
                in-store training on grading issues and the use of the GCAL diamond
                grading certificate in retail transactions. Because colored gemstones
                are
                sold at retail through virtually identical channels of distribution,
                AGL
                will utilize these same communication channels in trade publications,
                trade show appearances and educational seminars. This increased
                utilization of the existing communications links, will allow for
                significant synergy between GCAL and AGL with respect to the time,
                energy,
                messaging and expenses in these venues.




•
            *Cross-Marketing
                Between GCAL and AGL.*GCAL
                is establishing relationships with retailers to provide diamond
                authentication and grading services for the middle market. By introducing
                the AGL brand to the retailers and drawing on the high value brand
                recognition of AGL and a more value-driven pricing program, we believe
                we
                can cross-market AGL services to the GCAL relationships. On the other
                hand, AGL has relationships with some of the high value sellers like
                Sotheby’s and Christies. By introducing GCAL to these high value sellers
                and describing the benefits of GCAL certification including guaranteed
                grading and the security benefits of Gemprint, we believe we can
                cross-market GCAL to the AGL
                relationships.




22


*eBay
      Promotional Programs* .
      Since
      1999, we have worked with eBay on programs to increase the volume of
      collectibles traded on eBay and, at the same time, to provide greater exposure
      for our authentication and grading services. Current programs
      include:




•
            *Informative
                and Educational Web Pages*.
                We have created web pages for eBay specifically designed to inform
                and
                educate eBay buyers and sellers about the benefits of our authentication
                and grading services. eBay includes, on its collectibles web pages,
                links
                to our web pages and encourages its collectibles customers to use
                our
                services. eBay has similar programs with other collectibles authentication
                and grading services.




•
            *Quick
                Opinion Autograph Authentication Service*.
                We have developed, for eBay’s customers that visit its sports memorabilia
                auction website, a fee-based “Quick Opinion” autograph authentication
                service. For a prescribed fee, currently $7 per autograph, an eBay
                visitor
                that is interested in selling or buying an autographed item of memorabilia
                on the eBay auction website can obtain, from one of our autograph
                experts,
                a “quick” opinion as to the authenticity of the autograph, generally
                provided within a day of submission. The opinion is based on an
                examination of a digital image of the autograph posted on eBay and,
                due to
                the limitations inherent in this process, we do not warrant the accuracy
                of these opinions. The fees generated by this service are shared
                between
                us and eBay.




•
            *Other
                Initiatives*.
                We have maintained an ongoing dialogue with eBay regarding other
                programs
                that will attract collectibles sellers and buyers and make it easier
                for
                them to complete collectibles transactions on eBay’s collectibles auction
                websites. For example, the Chief Executive Officer of the Company
                has been
                invited and attended the eBay Collectibles Summit meetings where
                there is
                discussion and an exchange of ideas relating to increasing the listings
                and sales on eBay in the collectibles
                markets.




**Intellectual
      Property**




Our
      intellectual property consists primarily of trademarks, copyrights, proprietary
      software and trade secrets. As part of our confidentiality procedures, we
      generally enter into agreements with our employees and consultants and limit
      access to, and distribution of, our software, documentation and other
      proprietary information. The following table sets forth a list of our
      trademarks, both registered and unregistered, that are currently being used
      in
      the conduct of our business:




**Registered
                Marks**
            
            **Unregistered
                Marks**Collectors
                Universe
            
            World
                Series of Grading
            
            PSEPCGS
            
            CU3000
            
            Coin
                UniverseProfessional
                Sports Authenticator
            
            PSE
            
            Collectors.comPSA
            
            History
                in Your Hands
            
            Record
                UniversePSA/DNA
            
            First
                Strike
            
            PCGS
                CurrencyCurrency
                Universe
            
            Diamond
                Market Monitor
            
            Set
                RegistryFirst
                Strike
            
            Diamond
                Profile
            
            Expos
                UnlimitedGemprint
                Appraiser
            
            Gemprint
            
            Long
                Beach Coin, Stamp and Collectibles ExpoPalmieri’s
                Market Monitor
            
            Professional
                Currency Grading
            
            Santa
                Clara Coin, Stamp and Collectibles ExpoQuick
                Opinion
            
            Source
                VeritasSports
                Market Report
            
            AGL




We
      have
      not conducted an exhaustive search of possible prior users of the unregistered
      trademarks listed above and, therefore, it is possible that our use of some
      of
      these trademarks may conflict with others.




The
      Company owns several patents related to the Gemprint process and scanning
      device. The principal patent is number 5,828,405 issued by the United States
      Patent and Trademark Office (“USPTO”) in 1998. Generally, this patent provides
      for the capture of the unique optical response of a gemstone (or optical
“fingerprint”) where a laser beam is focused on the gemstone and the optical
      response is recorded in a digital image. This is accomplished at a controlled
      site, currently in the form of a small rectangular box about the size of a
      breadbox, and connected to a desktop computer or other computing system for
      receiving and displaying a data signal from a two dimensional video camera.
      The
      two dimensional video camera id part of a light image capture arrangement
      comprising a laser diode in combination with optical means for producing a
      collimated light beam directed at a gemstone. The gemstone is oriented in a
      predetermined manner relative to the light beam and a screen surface is located
      to collect and display the unique light pattern from a gemstone. The video
      camera directed at the screen surface is sized to collect the image in a digital
      format and directs the data signal to the attached computing device. With a
      communication link to a database through a local area network or through the
      Internet, the digital image is stored in a standardized manner. In a similar
      manner, subsequent digital images can be obtained and then compared using an
      algorithm to those images on the database. Other related patents are 5,124,935
      and 2,679,821 issued by USPTO and related patents filed in the United Kingdom,
      Canada and Israel.






23




**Collectibles
      Experts**




As
      of
      June 30, 2006, we employed 47 experts in our authentication and grading
      operations, who have from 1 to 50 years, and an overall average of 25 years,
      of
      experience. Our experts include individuals that either (i) had previously
      been collectibles dealers or were recognized as experts in the markets we serve,
      (ii) who we have trained in our authentication and grading methodologies
      and procedures, or in the case of diamonds, who have been trained in the
      vocational schools and/or have experience in grading in competing organizations.
      However, talented authentication and grading experts in collectibles are in
      short supply and there is considerable competition among collectibles
      authentication and grading companies for their services. As a result, we have
      recently increased our focus on training young authenticators and graders who
      we
      believe have the skills or knowledge base to become collectibles experts. We
      also sometimes contract with outside experts, usually collectibles dealers,
      to
      assist us with special grading issues or to enable us to address short-term
      increases in authentication and grading orders.




**Service
      Warranties**




We
      issue
      an authenticity or grading warranty with every coin and sportscard authenticated
      or graded by us. Under the terms of the warranty, if a coin or sportscard that
      was graded by us later receives a lower grade upon resubmission to us for
      grading, we are obligated either to purchase the coin or sportscard at the
      price
      paid by the then-owner of the coin or sportscard or, instead, if we so choose,
      to pay the difference in value of the item at its original grade as compared
      with its lower grade. Similarly, if a coin or sportscard that has been
      authenticated by us is later determined not to have been authentic, we are
      obligated under our warranty to purchase the coin or sportscard at the price
      that the then-owner paid for that collectible. We accrue for estimated warranty
      costs based on historical claims experience.




Before
      returning an authenticated or graded coin or sportscard to our customer, we
      place the coin or sportscard in a tamper-evident, clear plastic holder that
      encapsulates a label identifying the collectible as having been authenticated
      and graded by us. The warranty is voided in the event the plastic holder has
      been broken or damaged or shows signs of tampering.




We
      recently began offering a similar warranty for stamps and currency notes that
      we
      authenticate and grade. To obtain such a warranty, the customer must elect
      to
      have his or her stamp encapsulated in a in a tamper-evident, clear plastic
      holder that includes a label identifying the collectible as having been
      authenticated or graded by us, because we do not offer such a warranty in those
      cases where the customer chooses, instead, to have us issue a certificate of
      authenticity and grade.




We
      do not
      provide a warranty with respect to our opinions regarding the authenticity
      or
      quality of autographs.




We
      recently began offering a warranty with respect to the color and clarity grades
      assigned by GCAL to the diamonds it grades, which is the first such warranty
      offered by any diamond grading service. Under the terms of the warranty, if
      a
      diamond certified by GCAL is submitted for subsequent grading by GCAL within
      one
      year of the date of the original certification (which often occurs if the
      diamond is being sold), and, on that resubmittal receives a color or clarity
      grade that is more than one grade lower than its original color or clarity
      grade, we will be obligated either to purchase the diamond at the price paid
      by
      the then-owner of the diamond or, instead, if we so choose, to pay the
      difference in value of the diamond at its original grade as compared with its
      lower grade.




24


**Customer
      Service and Support**




We
      devote
      significant resources, including a 25 person staff, to providing personalized
      customer service and support in a timely manner handling approximately 300
      to
      500 customer service calls per day. On our websites, customers are able to
      check
      the status of their collectibles submissions throughout the authentication
      and
      grading process and to confirm the authenticity of the over 18 million
      collectibles that we have graded. When customers need services or have any
      questions, they can telephone or e-mail our support staff, Monday through Friday
      between the hours of 7:00 A.M. and 6:00 P.M., Pacific Time. We also involve
      our
      collectibles and diamond experts in providing support services when necessary
      to
      address special issues.




**Supplies**




In
      order
      to obtain volume discounts, we have chosen to purchase most of the
      injection-molded plastic parts for our clear plastic holders principally from
      a
      single supplier. There are numerous suppliers for these items, however, and
      we
      believe that, if necessary, we could obtain those items from any of those other
      suppliers without significant cost to us. However, if it were to become
      necessary for us to obtain another supplier, we might have to arrange for the
      fabrication of a die for the new supplier. Fabrication of high precision dies
      can be a lengthy process. Therefore, it is our practice to maintain at least
      a
      one month supply of these molded plastic parts in inventory.




**Competition**




*Coin
      Authentication and Grading* .
      We have
      three primary competitors in the coin authentication and grading market:
      Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading and
      ANACS, a subsidiary of Amos Press, Inc.




*Sportscard
      Authentication and Grading* .
      We have
      two primary competitors in sportscard authentication and grading: Beckett
      Sportscard Grading Corporation, and Sportscard Guaranty, LLC.




*Autograph
      Authentication and Grading* .
      In the
      vintage autograph authentication market, we compete with James Spence
      Authentication (“JSA”) and a few smaller competitors.




*Stamp
      Authentication and Grading* .
      In
      stamp authentication, our principal competitors are the Philatelic Foundation
      and the American Philatelic Society, both of which are non-profit organizations.
      The Philatelic Foundation also grades stamps.




*Currency
      Authentication and Grading.* We have
      two competitors in currency: Paper Money Guaranty, (a subsidiary of NGC), and
      a
      smaller startup competitor.




*Diamond
      Authentication and Grading.* In the
      diamond grading market, we compete with ten other grading services, several
      of
      which are larger, have been in business longer and are better known than GCAL.
      Our principal competitors are the Gemological Institute of America, a non-profit
      educational organization (GIA); AGS Laboratories, an affiliate of the American
      Gem Society, a non-profit trade association; European Gemological Laboratories;
      International Gemological Institute; and Gemological Science International. **




*Colored
      Gemstone Authentication and Grading.* In
      the
      colored gemstone market, we compete with six or more such services, some of
      which have operating histories longer than AGL. Our principal competitors are
      Gubelin Gemological Laboratories, Schweizerische
      Stiftung für Edelstein-Forschung (SSEF, or the Swiss Gemological Institute), a
      non-profit organization and Gemological Testing Center of the American Gem
      Trade
      Association, a non-profit trade association.




The
      principal competitive factors in our authentication and grading markets are
      (i) brand recognition and awareness, (ii) an established reputation
      for integrity, independence and consistency in the application of grading
      standards, and (iii) responsiveness of service. Price is much less of a
      factor in the case of vintage collectibles, but is a more important
      consideration with respect to modern coins and sportscards because of their
      significantly lower values. Price is a more important competitive factor in
      the
      Diamond market, due to the larger number of competitors. Because the current
      market in colored gemstones certification is primarily focused on high-value
      colored gemstones, price is not as much of an important consideration as the
      credibility and history of the particular grading service. We believe that
      our
      PCGS, PSA, PSA/DNA, PSE and PCGS Currency brands compete favorably




25
 
  with
        respect to all of these factors and are among the leaders in each of their
        respective markets. We believe that our GCAL brand is a premium brand in
        the
        diamond market, interpreting the grading standards in a rigorous and consistent
        manner, and one of the three or four top quality brands, despite the fact
        that
        it is the smallest, in terms of the volume of grading submissions, as compared
        to its principal competitors. We believe that AGL is a premium brand and
        competes favorably with respect to all of these factors. Barriers to entry
        into
        the authentication and grading market are relatively low, especially in the
        sportscard authentication and grading market. However, brand name recognition
        and a reputation for integrity, independence and consistency in the application
        of grading standards can take several years to develop. The limited supply
        of
        collectibles experts also operates as a barrier to entry or expansion in
        our
        collectibles markets. By contrast, the supply of grading experts in the diamond
        and colored gemstone markets are much more plentiful. In colored gemstones,
        the
        availability of a suitable and trusted reference collection is essential
        to
        providing accurate enhancement and country of origin
        analysis.




**Information
      Technology**




We
      have
      developed proprietary software systems that we use in our authentication and
      grading operations, principally for order tracking, processing and
      recordkeeping, and the operation and maintenance of our Internet websites.
      These
      software systems include Grading Management and Production Systems, Set
      Registry, Population Reports, Price Guides, Market Indexes, Article Libraries
      QuickOpinion Systems and Featured Dealer Systems. These systems operate on
      software platforms in Microsoft Visual Basic.NET, Microsoft ASP.NET and
      Microsoft SQL Server. We also have legacy systems, which we are in process
      of
      replacing, in Cold Fusion and Visual Basic 6. We also maintain an integrated
      local area network that assists in and provides certain controls on production,
      product physical movement, accounting and financial functions, data warehousing
      and other tasks. During the fiscal year ended June 30, 2006, these systems
      tracked the authentication and grading process and generated records and data
      for over 3.2 million collectibles submitted to us for authentication and
      grading, without significant disruption or loss of service.




Although
      we do not primarily conduct our business on the Internet, we do use the Internet
      for information exchange and delivery of market-oriented content and for our
      Set
      Registry and certain of our other marketing programs. As a result, we have
      25
      Dell PowerEdge Servers with RAID, along with a fully redundant SQL Server 2000
      with high-availability cluster supporting over two terabytes of clustered
      storage. The hardware resides at our headquarters in a server room that has
      24/7
      environmental monitoring and alerting through hardware sensors, 24/7 network
      availability and performance monitoring and alerting through network management
      software and 24/7 Internet availability and performance monitoring and alerting
      through third party providers. The Internet connectivity flows through multiple
      Internet providers supporting up to approximately 47 megabit Internet bandwidth
      with multiple layers of Internet firewall protection, including three Cisco
      PIX
      firewalls and Microsoft ISA Server protection. We maintain a multi-tiered
      antivirus and anti-spam SMTP infrastructure scanning all incoming mail through
      four different AV engines. The system is backed up nightly with 1.6 terabyte
      capacity, expandable to over 3 terabytes under current configuration, and is
      managed by administrators certified by Microsoft, Cisco and Linux.




However,
      we do not have redundant computer systems at a location that is remote from
      Southern California, where our computer systems currently are located. As a
      result, any damage to or failure of our computer systems due to a catastrophic
      event in Southern California, such as an earthquake, could cause an interruption
      in our services.




**Government
      Regulation**




With
      the
      exception of laws in some states that require memorabilia authenticators to
      certify to the accuracy of their authentication opinions, there are no material
      government regulations specifically relating to the authentication and grading
      businesses that we conduct, other than regulations that apply generally to
      businesses operating in the markets where we maintain operations or conduct
      business. However, our dealer finance program will be subject to numerous laws
      and regulations in those states in which we may make loans to
      dealers.




**Disposition
      of Collectibles Sales Businesses**




During
      the period from 1999 through the latter part of fiscal 2004, we also were
      engaged in the business of marketing and selling collectible coins, sportscards,
      currency and sports entertainment and historical memorabilia. Most of those
      sales were made at multi-venue auctions that were conducted by our collectibles
      sales businesses, which were comprised of Bowers and Merena Galleries and
      Kingswood Coin Auctions for rare coins, Superior Sports Auctions for vintage
      sportscards and sports memorabilia, Lyn Knight Currency Auctions for currency
      and Odyssey Publications for entertainment and historical memorabilia. We also
      sold collectible coins by direct sales methods.






26




In
      December 2003, our Board of Directors authorized management to implement a
      plan
      to focus our financial and management resources, and collectibles expertise,
      on
      the operations and growth of our authentication and grading businesses, and
      to
      divest the collectibles auctions and direct sales businesses. This decision
      was
      based on a number of factors and considerations that included, among others,
      (i)
      the historical operating results of the collectibles auction and direct sales
      businesses, which had proven to be disappointing as compared to the operating
      results of our authentication and grading businesses; (ii) a lack of synergies
      between the collectibles sales businesses and our grading authentication
      businesses, which made it difficult to achieve a meaningful reduction in our
      operating expenses; and (iii) the additional capital that we believed would
      be
      required to grow our collectibles auction and direct sales businesses in
      comparison to the lower capital requirements of our authentication and grading
      businesses.




As
      a
      result of this decision, we sold our collectibles sales businesses during fiscal
      2004, but retained the collectibles inventory and accounts receivables of those
      businesses, which we have substantially liquidated. We also terminated the
      licenses under which we operated our David Hall Rare Coins Division, which
      had
      been engaged in the business of selling collectible coins at retail. We
      generated cash of $750,000, $2,332,000 and $10,435,000 in fiscal years ended
      June 30, 2006, 2005 and 2004, from the disposition of those businesses and
      the
      liquidation of their inventories and accounts receivables.




The
      divestiture of the collectibles sales businesses has enabled us to focus our
      financial and managerial resources on growing our existing authentication and
      grading revenues and extending our authentication and grading business into
      new
      markets, such as the diamond and colored gemstone markets, and to reduce our
      operating expenses, and, thereby, increase our overall profitability, as
      compared to the periods prior to the disposition of those collectibles sales
      businesses.





**Employees**




As
      of
      June 30, 2006, we had 211 full-time employees and 17 part-time employees, of
      which 172 were employed in our authentication and grading-related businesses,
      including our 47 experts and 25 customer service and support personnel. The
      other employees included 12 in information services, 3 in marketing, 3 in our
      CCE subscription business, and 38 in other business and administrative services.
      We have never had a work stoppage, and no employees are represented under
      collective bargaining agreements. We consider relations with our employees
      to be
      good.




**ITEM
      1A****RISK
      FACTORS**




Our
      business is subject to a number of risks and uncertainties that could prevent
      us
      from achieving our business objectives and that could hurt our future financial
      performance and the price performance of our common stock, and cause our future
      financial condition and future financial performance to differ significantly
      from our current expectations described in the forward-looking statements
      contained in this Annual Report. Those risks and uncertainties, many of which
      are outside of our control, include the following:




**A
      decline in the popularity of high-value collectibles and a resulting decrease
      in
      submissions for our services could adversely impact our business.**




The
      volume of collectibles submitted to us for authentication and grading is
      affected by the demand for and market value of those collectibles. As the demand
      for and value of collectibles increase, authentication and grading submissions,
      as well as requests by submitters for higher price, faster turn-around times,
      also increase. However, that also means that a decline in popularity and,
      therefore in the value, of the collectibles that we authenticate and grade
      would
      cause decreases in authentication and grading submissions and in requests for
      faster turn-around times and, therefore, also in our revenues and profitability.
      We have found, over the years, that the popularity of collectibles can vary
      due
      to a number of factors, most of which are outside of our control, including
      perceived scarcity of collectibles, general consumer confidence and trends
      and
      their impact on disposable income, precious metals prices, interest rates and
      other general economic conditions. For example, declines in gold prices or
      further increases in interest rates could lead to reductions in authentication
      and grading submissions and, therefore, could adversely affect our profitability
      and financial condition.






27




**Declines
      in general economic conditions could result in decreased demand for our
      services, which could adversely affect our operating results.**




The
      availability of discretionary or disposable income is an important factor in
      the
      willingness and ability of collectors and consumers to purchase, and the prices
      that they are willing to pay for, high-value collectibles, diamonds and colored
      gemstones. Declines in purchases and sales, and in the value, of collectibles,
      diamonds or colored gemstones usually result in declines in the use of
      authentication and grading services, as such services are most often used by
      sellers and purchasers of collectibles in conjunction with and to facilitate
      sale and purchase transactions. As a result, economic uncertainties, downturns
      and recessions can and do adversely affect our operating results by
      (i) reducing the frequency with which collectibles dealers and collectors
      submit their coins, sportscards and other collectibles for authentication and
      grading; (ii) consumers purchasing fewer diamonds; thereby leading to a lower
      number of diamonds for grading by retailers; (iii) causing collectibles dealers
      and collectors to request longer authentication and grading turn-around times
      with respect to the collectibles they submit to us for grading, which would
      reduce our revenues and profitability, and (iv) reducing the ability of
      customers to pay outstanding accounts receivable.




**Temporary
      popularity of some collectibles may result in short-term increases, followed
      by
      decreases, in the volume of submissions for our services, which could cause
      our
      revenues to fluctuate.**




Temporary
      consumer popularity or “fads” among collectors may lead to short-term or
      temporary increases, followed by decreases, in the volume of collectibles that
      we authenticate and grade. These trends may result in significant
      period-to-period fluctuations in our operating results and could result in
      declines in our net revenues and profitability, not only because of a resulting
      decline in the volume of authenticating and grading submissions, but also
      because such trends could lead to increased price competition, which could
      require us to reduce our authentication and grading fees in order to maintain
      market share. In the last few years, for example, the popularity of sportscards
      has declined and, at the same time, we have experienced a decline in sportscard
      authentication and grading submissions.




**Our
      revenues and income depend significantly on revenues generated by our coin
      authentication and grading services. A decrease in the level of submissions
      for
      these services, which historically has been impacted by changes in economic
      conditions, could adversely affect our revenues and results of operations.**




Coin
      authentication and grading accounted for approximately 65%, 69% and 66% of
      our
      net revenues in fiscal 2006, 2005 and 2004, respectively. Furthermore, in fiscal
      2005, coin grading was the segment of our authentication and grading business
      that experienced the most significant increase in net revenues. We believe
      that
      this growth in coin grading submissions has been due, at least in part, to
      the
      volatility of and uncertainties regarding the performance of the stock markets,
      coupled with the decline in interest rates and in the value of the U.S. Dollar,
      which have led investors to shift some of their investments from stocks and
      bonds to precious metals. The lack of diversity in our sources of revenues
      and
      our dependence on coin grading submissions for a majority of our net revenues
      make us more vulnerable to adverse changes in economic conditions. These adverse
      changes include declines in the value of precious metals or recessionary
      conditions that could result in declines in collectibles authentication and
      grading submissions generally or, more particularly, in collectible coin
      submissions that would, in turn, result in reductions in our total net revenues
      and income.




**Our
      top 5 customers, account for approximately 22% of our total net revenues.**




During
      the year ended June 30, 2006, five of our coin authentication and grading
      customers accounted for approximately 22% of our total net revenues. As a
      result, the loss of any of those customers, or a lower level of activity by
      any
      of those customers, may cause our net revenues to decline and, therefore, could
      harm our profitability. During the fourth quarter of fiscal 2005, the owner
      of
      the largest of these customers encountered an unexpected and serious medical
      problem, which led to a 55% decrease in revenues earned from that customer
      in
      fiscal 2006, compared to fiscal 2005.




28


**Our
      stamp, currency and diamond authentication and grading businesses are in their
      start-up phases** **.
      There can be no assurance that these businesses will prove to be successful.**




We
      purchased our diamond grading business in November 2005, started our currency
      authentication and grading business in March 2005, and our stamp authentication
      and grading business in fiscal 2000. These businesses have yet to make a
      material contribution to our net revenues. To date, our stamp, currency and
      diamond grading businesses have incurred operating losses and there is no
      assurance that these services will gain market acceptance or will ever make
      a
      material contribution to our net revenues or achieve profitability. If they
      do
      not, we may have to discontinue, and write off our investments in, those
      businesses.




**Future
      acquisitions and the commencement of new businesses present risks, and we may
      be
      unable to achieve the financial and strategic goals of any acquisition or
      commencement of any new business.**




One
      component of our growth strategy is to acquire existing or to start new
      businesses that serve other markets for other collectibles or high-value assets.
      In fiscal 2006, we acquired four businesses and, to-date in fiscal 2007, we
      have
      acquired two other businesses, a colored gemstone grading business and a trade
      show management company. These new businesses will face a number of risks and
      uncertainties, including:





•
            difficulties
                in integrating newly acquired or newly started businesses into existing
                operations, as a result of which we may incur increased operating
                costs
                that would adversely affect our operating
                results;




•
            the
                risk that our current and planned facilities, computer systems and
                personnel and controls will not be adequate to support our expanded
                operations;




•
            diversion
                of management time and capital resources from our existing businesses,
                which could adversely affect their performance and our operating
                results;




•
            dependence
                on key management personnel of acquired or newly started businesses
                and
                the risk that we will be unable to integrate or retain such
                personnel;




•
            the
                risk that new services we may introduce or begin offering, whether
                as a
                result of internal expansion or business acquisitions, will not gain
                acceptance;




•
            competition
                from established or larger competitors in new markets, such as (in
                our
                diamond grading business), which could adversely affect the financial
                performance of any of the businesses we may have acquired or started;
                and




•
            the
                risk that the anticipated benefits of any acquisition or of the
                commencement of any new business may not be realized, in which event
                we
                will not be able to achieve an acceptable return on our
                investment.




**There
      are risks associated with new service offerings, including our dealer financing
      program, with which we have little experience.**




We
      are
      continually exploring new services that we might introduce and offer to our
      existing authentication and grading customers as a means of increasing our
      net
      revenues and profitability. Those new services, however, may prove to be
      unprofitable and negatively impact our operating results.




One
      of
      those new services that we introduced in fiscal year 2005 is a Dealer Financing
      Program that involves our making short-term loans to collectibles dealers that
      are collateralized by the collectibles that they submit or have been submitted
      to us for authentication and grading. There is no assurance that we will be
      successful in achieving sustained profitability in our Dealer Financing Program.
      Additionally the lending business is subject to a number of risks and
      uncertainties, and we have limited loan underwriting and collection experience.
      In addition, the failure or inability of borrowers to repay their loans is
      an
      inherent risk in a lending business. Our ability to minimize loan losses will
      depend on several factors, including:




•
            The
                loan underwriting policies and controls we continue to adopt and
                implement, which could prove to be inadequate to prevent loan losses
                from
                occurring;




29




•
            Our
                ability to sell collateral, when a borrower defaults in the payment
                of a
                loan, for amounts sufficient to offset loan losses, which can be
                affected
                by a number of factors outside of our control, including (i) changes
                in economic conditions, (ii) increases in market rates of interest
                and (iii) changes in the condition or value of the collateral that
                will secure the loans we make; and


•
            The
                reserves we will need to establish for potential loan losses, which
                may
                prove to be inadequate, in which case we would have to incur additional
                charges, which wouldhave the effect of reducing our net income and could negatively impact
                our
                financial condition.




Additionally,
      the business of lending is subject to numerous state and certain federal laws
      and regulations, which may impose significant costs or limitations on the way
      we
      conduct or expand such a business.




We
      currently have a $7 million bank line of credit, expiring in June 2007, that
      we
      can use to fund some of the eligible loans we make. To-date, we have not
      utilized this line of credit, as we have adequate cash resources to fund the
      Dealer Financing Program. However, in the event we make borrowings under this
      line of credit in the future, we cannot assure that our cash flow from the
      operations of our dealer finance program will be sufficient to enable us to
      repay any borrowings under the line of credit. Also, the loan agreements
      establishing the line of credit impose certain restrictive covenants on the
      Company which could operate to restrict our plans to grow our business.




**We
      are dependent on our key management personnel.**




Our
      performance is greatly dependent on the performance of our senior management
      and
      certain other key employees. As a result, the loss of the services of any of
      our
      executive officers or other key employees could harm our business. Some of
      our
      executive officers and key employees are experts in the collectibles markets
      and
      have industry-wide reputations for authentication and grading of collectibles.
      In particular, the loss of Michael R. Haynes, our Chief Executive Officer,
      or
      David G. Hall, our President, could have a negative effect on our reputation
      for
      expertise in the collectibles markets in which we operate and could lead to
      a
      reduction in authentication and grading submissions to us.




**We
      are dependent on our collectibles experts.**




In
      certain of our markets, there are a limited number of individuals who have
      the
      expertise to authenticate and grade collectibles, and competition for available
      collectibles experts is intense. Accordingly, our business and our growth
      initiatives are heavily dependent on our ability (i) to retain our existing
      collectibles experts, who have developed relatively unique skills and enjoy
      a
      reputation for being experts within the collectibles markets, and (ii) to
      implement personnel recruiting, succession and training programs that will
      enable us to add collectibles experts, as necessary, to grow our business and
      offset employee turnover that can occur from time to time. As a result, we
      have
      initiated an “apprentice program” in our coin grading business. If we are not
      successful in retaining our existing collectibles experts or in hiring and
      training new collectibles experts, this could limit our ability to grow our
      business and adversely affect our operating results and financial condition.
      Moreover, some of our experts could leave our company to join a competitor
      or
      start a competing business.




**We
      could suffer losses on authentication and grading warranties.**




Certain
      of our grading service businesses offer customers service warranties. The
      warranties offered by our collectibles grading businesses provide that:




•
            if
                any collectible we have authenticated and sealed in our tamper-evident
                plastic cases is later determined not to have been genuine, we would
                have
                to purchase the collectible at the price paid for it by its then
                owner;
                and




•
            if
                any collectible that was graded by us and sealed in our tamper-evident
                plastic cases later receives a lower grade upon resubmission to us
                for
                grading, we would be obligated either to purchase the collectible
                at the
                price paid by its then owner or to pay the difference in its value
                at its
                original grade as compared to its value at the lower
                grade.




30


GCAL
      offers a grading warranty that provides that if a diamond graded by us is
      submitted for regrading within the succeeding year and, on regrading is assigned
      a color or clarity grade that is more than one grade lower than the original
      color or clarity grade it received, GCAL will become obligated to purchase
      the
      diamond at the price paid by its then owner or, if GCAL so chooses, to pay
      the
      difference in its value at its original grade as compared to its value at the
      lower grade.




We
      have
      no insurance coverage for claims made under these warranties and, therefore,
      we
      maintain reserves to satisfy such warranty claims based on historical
      experience, which in the past have proven to be adequate. If warranty claims
      were to exceed these reserves, we would incur additional charges that would
      adversely affect our operating results and financial condition.




**Increased
      competition could adversely affect our financial performance.**




Although
      there are few major competitors in the collectibles authentication and grading
      markets in which we currently operate, competition in these markets is,
      nevertheless, intense. In addition, in the diamond market there are a number
      of
      grading services that are substantially larger, have been in business
      substantially longer and are better known than GCAL. Increased competition
      in
      our collectibles markets could adversely affect our pricing and profit margins
      and our ability to achieve further growth, and we cannot assure that we will
      continue to be successful in competing against existing or future competitors
      in
      our collectibles markets. In our diamond business, which is just beginning
      to
      implement its growth strategy, we are likely to encounter intense competition
      from larger and more established competitors that have significant market
      shares. Also, our entry into new collectibles or high-value asset markets could
      lead other potential competitors to enter those markets as well. Such
      competition could adversely affect our ability to generate profits and could
      cause us to continue to incur losses in those markets and damage our financial
      condition.




**We
      depend on our ability to protect and enforce our intellectual property rights.**




We
      believe that our patents, trademarks and other proprietary rights are important
      to our success and competitive position. We rely on a combination of patents,
      trademarks, copyright and trade secret laws to establish and protect our
      proprietary rights. However, the actions we take to establish and protect our
      intellectual and other proprietary rights may prove to be inadequate to prevent
      imitation of our services or products or to prevent others from claiming
      violations of their intellectual and proprietary rights by us. In addition,
      others may develop similar trade secrets or other intellectual property
      independently or assert rights in our intellectual and other proprietary rights
      that could lead them to seek to block sales of our services based on allegations
      that use of some of our marks or other intellectual property constitutes a
      violation of their intellectual property rights.




**Our
      unregistered trademarks could conflict with trademarks of others.**




We
      have
      not conducted an exhaustive search of possible prior users of our unregistered
      trademarks, including Coin Universe, Collectors.com and PSE. Therefore, it
      is
      possible that our use of some of these trademarks may conflict with others.
      As a
      result, we could face litigation or lose the use of some of these trademarks,
      which could have an adverse effect on our name recognition and result in a
      decrease in revenues and an increase in expenses.




**The
      imposition of government regulations could increase our costs of doing business.**




With
      the
      exception of state laws applicable to autograph authentication, the collectible
      coin and other high-value collectibles markets are not currently subject to
      direct federal, state or local regulation. However, from time to time government
      authorities discuss additional regulations which could impose restrictions
      on
      the collectibles industry, such as regulating collectibles as securities or
      requiring collectibles dealers to meet registration or reporting requirements,
      or regulating the conduct of auction businesses. Adoption of laws or regulations
      of this nature could lead to a decline in sales and purchases of collectibles
      and, therefore, also to a decline in the volume of coins, sportscards and other
      collectibles that are submitted to us for authentication and grading.




31


**Our
      reliance on a single source for principally all of our “tamper-evident,” clear
      plastic coin and sportscard holders exposes us to potential supply and quality
      problems.**




We
      place
      all of the coins, sportscards and currency notes, and sometimes also the stamps
      that we authenticate and grade, in tamper-evident, clear plastic holders. In
      order to take advantage of volume pricing discounts, we have chosen to purchase
      substantially all of those holders, on a purchase order basis, from one
      principal supplier. Our reliance on a single supplier for a substantial portion
      of those plastic holders exposes us to the potential for delay in our ability
      to
      deliver timely authentication and grading services in the event that supplier
      were to terminate its services to us or to encounter financial or production
      problems. If, in such an event, we were unable to obtain replacement holders
      in
      a relatively short period of time, we could lose customer orders, or incur
      additional production costs. In addition, if the replacement holders were not
      of
      comparable quality to our existing supplier, we could expose ourselves to the
      potential for additional warranty claims in the event that tampering with our
      holders was not evident. These occurrences could cause a decline in our net
      revenues and have a material adverse effect on our results of operations.




**Our
      computer and network systems may be vulnerable to unforeseen problems and
      security risks, and we are vulnerable to system failure due to a lack of
      redundant systems at another location.**




Our
      operations are dependent on our ability to protect our computer systems that
      we
      use in our authentication and grading operations and to maintain our websites
      against damage from fire, power loss, telecommunications failure, earthquakes
      and similar catastrophic events. In this regard, Southern California, where
      we
      are primarily located, is particularly vulnerable to earthquakes and fires
      that
      could result in damage to our computer systems. In addition, our diamond
      operations are located in a New York City high-rise building that could be
      vulnerable to terrorist attacks or to fire or other disasters. We do not have
      redundant computer systems at a location that is remote from Southern
      California. Any damage to or failure of our computer systems could cause an
      interruption in our services that could harm our business, operating results
      and
      financial condition.




In
      addition, our operations are dependent on our ability to protect our computer
      systems and network infrastructure from damage that could occur from physical
      break-ins, security breaches and other disruptive problems caused by the
      technology that we employ in our operations. Computer break-ins and security
      breaches also could jeopardize the security of information stored in and
      transmitted through our computer systems and network infrastructure, which
      could
      cause us to incur significant liability and possibly also damage our reputation.
      Other disruptions due to problems on the Internet or actions of Internet users
      could make it difficult for our customers to access our websites. In either
      case, problems of this nature could adversely affect our business and operating
      results, and security breaches that would adversely affect the privacy of
      customer information could lead existing customers to terminate their business
      relationships with us. Although we intend to continue to implement and upgrade
      sophisticated technology to prevent such disruptions and damage, there is no
      assurance that our security measures will prove to be successful.




**We
      rely on third parties for various Internet and processing services.**




Our
      operations depend on a number of third parties for Internet access and delivery
      services. We have limited control over these third parties and no long-term
      relationships with any of them. For example, we do not own a gateway onto the
      Internet, but, instead, rely on Internet service providers to connect our
      website to the Internet. Should the third parties that we rely on for Internet
      access or delivery services be unable to serve our needs for a sustained time
      period as a result of a strike, natural disaster or other reason, our revenues
      and business could be harmed.




**We
      are exposed to potential risks and we will continued to incur increased costs
      as
      a result of the internal control testing and evaluation process mandated by
      Section 404 of the Sarbanes-Oxley Act of 2002.**




Although
      we continue to document and test the effectiveness of our internal controls
      over
      financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of
      2002, we expect we will continue to incur costs, including increased accounting
      fees, in order to maintain compliance with that Section of the Sarbanes-Oxley
      Act. Also, if our efforts to comply with new or changed laws, regulations and
      standards differ from the activities intended by regulatory or governing bodies
      due to ambiguities related to our practices, our reputation may be harmed or
      we
      may be subject to litigation.




32


**If
      our quarterly results are below the expectations of securities market analysts
      and investors or we decide to suspend or discontinue the payment of dividends,
      the price of our common stock may decline.**




Many
      factors, including those described in this “Risk Factors” section, can affect
      our business, financial condition and results of operations, which makes the
      prediction of our future financial results difficult. These factors include:




•
            increases
                or decreases in number of collectibles or diamonds graded from period
                to
                period;




•
            changes
                in market conditions that can affect the demand for our authentication
                and
                grading services, such as a decline in the popularity of certain
                collectibles;




•
            general
                economic conditions that affect the availability of disposable income
                among collectors and consumers; and




•
            the
                actions of our competitors.




If
      our
      quarterly operating results fall below expectations or we decide to suspend
      or
      discontinue the payment of dividends, securities market analysts may downgrade
      our common stock and some of our stockholders may sell their shares, which
      could
      adversely affect the trading prices of our common stock. Additionally, in the
      past, companies that have experienced declines in the trading price of their
      shares due to events of this nature have been the subject of securities class
      action litigation. If we become involved in a securities class action litigation
      in the future, it could result in substantial costs and diversion of our
      management’s attention and resources, thus harming our business.




**No
      assurance that we will continue to pay cash dividends.**




On
      May
      31, 2006, the Company adopted a dividend policy that calls for the payment
      of an
      expected total annual cash dividend of $0.32 per common share, payable in the
      amount of $0.08 per share, per quarter and since then we have paid two
      consecutive cash dividends, each in the amount of $0.08 per share, in accordance
      with this dividend policy. The payment of cash dividends in the future, pursuant
      to the Company’s dividend policy, is subject to final determination each quarter
      by the Board of Directors based on a number of factors, including the Company’s
      financial performance and its available cash resources, its cash requirements
      and alternative uses of cash that the Board may conclude would represent an
      opportunity to generate a greater return on investment for the Company. For
      these reasons, as well as others, there can be no assurance that the amount
      of
      the Company’s current quarterly cash dividend will not be reduced or that the
      Board of Directors will not decide to suspend or discontinue the payment of
      cash
      dividends in the future.




**Provisions
      in our charter documents or in Delaware law may make an acquisition of us more
      difficult or delay a change in control, which may adversely affect the market
      price of our common stock.**




Our
      Amended and Restated Certificate of Incorporation and Bylaws contain
      anti-takeover provisions, including those listed below, that could make it
      more
      difficult for a third party to acquire control of us, even if that change of
      control would be beneficial to our stockholders:




•
            our
                board of directors has the authority to issue common stock and preferred
                stock and to determine the price, rights and preferences of any new
                series
                of preferred stock without stockholder
                approval;




•
            there
                are limitations on who can call special meetings of our stockholders;
                and




•
            stockholders
                may not take action by written
                consent.




In
      addition, provisions of Delaware law and our stock option plans may also
      discourage, delay or prevent a change in control of our company or unsolicited
      acquisition proposals.




33


**ITEM
      2.****PROPERTIES**




We
      lease
      approximately 59,000 square feet for our California-based headquarters under
      a
      nine-year lease that commenced in November 2000. We currently sublease 2,184
      square feet of this office space to a related party sub-tenant with an
      expiration date that coincides with the expiration of the Company's nine-year
      lease. In addition, we lease approximately 7,300 square feet in New York under
      operating leases through November 2015 in connection with our diamond grading
      business. We believe that our leased offices are sufficient for our current
      business requirements.




**ITEM
      3.****LEGAL
      PROCEEDINGS**




Bill
      Miller v. Collectors Universe, Inc. As previously reported, the Company was
      a
      defendant in this legal action, which was brought in the Superior Court of
      California, County of Orange, by Bill Miller, a former employee of the Company,
      who was president of one of the Company’s collectibles sales businesses that was
      sold in 2004 and an expert in the authentication of autographs and memorabilia.
      Miller alleged that the Company had issued authentication certificates bearing
      his name without his consent, in violation of a California statute prohibiting
      unauthorized appropriation of a person’s name, signature or likeness. The
      statute provides that a person whose name, signature or likeness has been
      misappropriated, in violation of the statute, is entitled to recover the greater
      of $750 or the actual damages suffered as a result of the unauthorized use,
      and
      any profits that were attributable to that unauthorized use that are not taken
      into account in computing the actual damages. The Company denied Miller’s
      allegations and asserted that he was not entitled to any recovery under the
      statute in excess of his actual damages and that he had not suffered any actual
      damages as a result of the issuance of the certificates.




As
      also
      previously reported, at the conclusion of the trial, which took place in October
      2005, (i) the jury found that the Company had used Miller’s name without
      his consent on 14,060 authentication certificates, but that Miller had sustained
      actual damages from that use totaling $14,060; and (ii) the parties entered
      into a stipulated judgment in the case, which, among other things, provides
      that
      Miller’s statutory damages arising from the actions of the Company were zero.
      The court left unresolved and for future determination the issue of which party,
      if any, was the prevailing party in the lawsuit, which would determine which
      party, if any, is entitled to recover its attorney’s fees from the other
      party.




In
      December, 2005, Miller filed a Notice of Appeal seeking an appellate court
      review, a reversal of the judgment entered by the trial court and a finding,
      that as a matter of law, he is entitled to statutory damages equal to $750
      for
      each use of his name by the Company, or more than $10 million in total. Miller
      filed an opening brief in August 2006, and we expect that various responsive
      briefs will be filed through February 2007. The Company has been informed by
      its
      trial counsel that, in California, it sometimes takes as long as two years,
      from
      the filing of an appeal of a damage award, before the appeal is actually heard
      by an appellate court.




The
      Company continues to believe that it will not incur any material liability
      to
      Miller in this case. However, there is little interpretive history with respect
      to the measure of damages in a case such as the Miller case, creating a number
      of relatively novel legal issues. As a result, it is not possible to predict,
      with certainty, how an appellate court will ultimately rule on the issue of
      damages.





Other
      Legal Actions





The
      Company is named from time to time, as a defendant in lawsuits that arise in
      the
      ordinary course of business. Management of the Company believes that none of
      those lawsuits currently pending against it is likely to have a material adverse
      effect on the Company.





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


None.




34


**EXECUTIVE
      OFFICERS OF
      REGISTRANT**




**Name**
            
            **Age**
            
            **Positions**Michael
                R. Haynes
            
            55
            
            Chief
                Executive OfficerDavid
                G. Hall
            
            59
            
            PresidentJoseph
                J. Wallace
            
            46
            
            Chief
                Financial OfficerMichael
                J. Lewis
            
            62
            
            Senior
                Vice President - Finance and Chief Compliance
                Officer









**MICHAEL
      R. HAYNES** has
      served as Chief Executive Officer and Director since January 1, 2003. He served
      as Chief Operating Officer, Chief Financial Officer and Director of Tangible
      Asset Galleries, Inc, a distributor of fine art, from 2000 to 2002. He has
      been
      President, Chief Operating Officer and/or Chief Financial Officer of eight
      collectibles, precious metals, specialty retail, distribution, e-commerce and
      manufacturing businesses. Overall, Mr. Haynes has more than 25 years of
      experience in managing the growth and development of growth companies, which
      includes over 19 years experience in managing both public and private companies
      engaged in the business of selling collectibles at auction, retail and
      wholesale. He was also one of the co-founding board members of the Industry
      Council for Tangible Assets, a Washington, D.C. trade association for dealers
      and auctioneers of tangible and collectible assets, where he served for nine
      years. Mr. Haynes holds a Master's degree in Business and a Bachelor of Science
      degree in mechanical engineering, both from Southern Methodist University.
      He is
      a Certified Public Accountant and a Certified Financial Planner.





**DAVID
      G. HALL** has
      served as President of Collectors Universe, Inc. since September 2001. From
      April 2000 to September 2001, Mr. Hall served as our Chairman of the Board
      and
      Chief Executive Officer. Mr. Hall also has served as Chairman of the Board
      and a
      Director of Professional Coin Grading Services, Inc., the Company’s predecessor,
      since it was founded in February 1986 and also served as its President and
      Chief
      Executive Officer until January 1999. Mr. Hall was honored in 1999 by *COINage
      Magazine* as
      Numismatist of the Century, along with 14 others. In 1990, Mr. Hall was named
      an
      Orange County Entrepreneur of the Year by *INC.
      magazine.* In
      addition, he has written *A
      Mercenary’s Guide to the Rare Coin Market* ,
      a book
      dedicated to coin collecting. Mr. Hall is also a member of the Professional
      Numismatists Guild.





**JOSEPH
      J. WALLACE** became
      the Company’s Chief Financial Officer effective September 15, 2005. Prior to
      becoming Chief Financial Officer, he was the Company’s Vice President of Finance
      from November 2004 and Controller from June 2004. From 1997 to 2003, Mr. Wallace
      was Vice President of Finance, Chief Financial Officer and Secretary of STM
      Wireless, Inc., a public traded company engaged in the business of developing,
      manufacturing and marketing satellite communications products and services,
      which filed for Chapter 11 protection under the Bankruptcy Code in February
      2003. Mr. Wallace is a Fellow of the Institute of Chartered Accountants, a
      member of the Institute of Certified Public Accountants, in Ireland, and a
      CPA
      in the State of California.





**MICHAEL
      J. LEWIS** served
      as
      Chief Financial Officer of Collectors Universe, Inc. from October 2001 until
      September 15, 2006, when he became Senior Vice President of Finance and Chief
      Compliance Officer. From January 2000 to October 2001, Mr. Lewis was a private
      investor. In 1998, Mr. Lewis was Chief Financial Officer of the Young
      Presidents’ Organization. During 1999, Mr. Lewis was an associate with Eureka
      Financial Markets, a venture capital firm. From 1994 to 1997, Mr. Lewis served
      as Chief Executive Officer of National Case Management. Prior to that time,
      Mr.
      Lewis served as a Financial Consultant or as Chief Financial Officer in several
      companies, including Chief Financial Officer of Western Digital Corporation
      and
      Emulex Corporation.





35


**PART
      II**





**ITEM
      5.****MARKET
      FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS**





Our
      common stock is listed on the Nasdaq Global Market, trading under the symbol
      CLCT. The following table sets forth the high and low closing prices of our
      common stock, as reported by NASDAQ for each of the fiscal quarters in the
      fiscal years ended June 30, 2006 and 2005:





**Fiscal
                2006**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            17.54
            
            $
            12.58Second
                Quarter
            
            
            16.14
            
            
            11.78Third
                Quarter
            
            
            17.56
            
            
            13.73Fourth
                Quarter
            
            
            16.18
            
            
            13.44





**Fiscal
                2005**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            14.87
            
            $
            10.53Second
                Quarter
            
            
            20.43
            
            
            14.50Third
                Quarter
            
            
            21.60
            
            
            17.78Fourth
                Quarter
            
            
            19.34
            
            
            14.82





The
      Company had 110 **** holders
      of record of its common stock and approximately 3,122 beneficial owners on
      June
      30, 2006.





*Dividends.* **** On
      May
      31, 2006, the Company adopted a dividend policy that calls for the payment
      of an
      expected total annual cash dividend of $0.32 per common share, payable in the
      amount of $0.08 per share, per quarter. The Board of Directors has declared
      the
      following quarterly cash dividends under this policy.





**Declaration****Date**
            
            **Record
                Date:**
            
            **Dividend****Payment
                Date**May
                31, 2006
            
            June
                14, 2006
            
            June
                28, 2006August
                15, 2006
            
            August
                29, 2006
            
            September
                12, 2006





The
      declaration of cash dividends in the future, pursuant to the Company’s dividend
      policy, is subject to final determination each quarter by the Board of Directors
      based on a number of factors, including the Company’s financial performance and
      its available cash resources, its cash requirements and alternative uses of
      cash
      that the Board may conclude would represent an opportunity to generate a greater
      return on investment for the Company. For these reasons, as well as others,
      there can be no assurance that the amount of the quarterly cash dividend will
      not be reduced or that the Board of Directors will not decide to suspend or
      discontinue the payment of cash dividends in the future.





**Share
      Repurchases**




On
      December 6, 2005, the Company announced that its Board of Directors had approved
      a $10 million stock buyback program. The program authorizes the Company to
      make
      up to $10 million of stock purchases in the open market or private transactions,
      in accordance with applicable SEC rules. The Company is under no obligation
      to
      repurchase any shares under this program, and the timing, actual number and
      value of shares that may be repurchased under this program will depend on a
      number of factors, including the Company’s future financial performance, the
      Company’s available cash resources and competing uses for the cash that may
      arise in the future, prevailing market prices of the Company’s common stock and
      the number of shares that become available for sale at prices that the Company
      believes are attractive. During the year ended June 30, 2006, the Company
      repurchased and retired 181,851 shares, for which it paid a total of
      approximately $2,618,416, which is net of transaction costs of approximately
      $10,000. No shares were purchased pursuant to this program prior to March 2006.




36


The
      following table sets forth information regarding our share repurchases pursuant
      to our share buyback program in each of the months during the year ended June
      30, 2006, which were the initial share repurchases made by the Company under
      this program.






**(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)****Monthly
                Periods**
              **During
                the Year Ended**
              **June
                30, 2006**
            
            **Total
                Number**
              **of
                Shares Purchased**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares Purchased**
              **as
                Part of Publicly Announced**
              **Programs**
            
            **Approximate
                Dollar Value**
              **of
                Shares that**
              **May
                Yet Be**
              **Purchased
                Under**
              **the
                Programs**January
                1 to January 31, 2006
            
            
            0
            
            
            N/A
            
            
            0
            
            $
            10,000,000February
                1 to February 28, 2006
            
            
            0
            
            
            N/A
            
            
            0
            
            $
            10,000,000March
                1 to March 31, 2006
            
            
            50,000
            
            $
            14.02
            
            
            50,000
            
            $
            9,299,202April
                1 to April 30, 2006
            
            
            0
            
            $
            0
            
            
            0
            
            $
            9,299,202May
                1 to May 31, 2006
            
            
            12,451
            
            $
            14.26
            
            
            12,451
            
            $
            9,121,614June
                1 to June 30, 2006
            
            
            119,400
            
            $
            14.57
            
            
            119,400
            
            $
            7,381,584Total
            
            
            181,851
            
            $
            14.40
            
            
            181,851










**ITEM
      6.****SELECTED
      CONSOLIDATED FINANCIAL DATA**




The
      selected operating data for the fiscal years ended June 30, 2006, 2005 and
      2004,
      and the selected balance sheet data at June 30, 2006 and 2005, that are set
      forth below are derived from the Company’s audited consolidated financial
      statements included elsewhere in this Annual Report. The selected operating
      data
      for the fiscal years ended June 30, 2003 and 2002 and the related balance sheet
      data at June 30, 2004, 2003 and 2002 were derived from audited consolidated
      financial statements that are not included in this Annual Report. The following
      data should be read in conjunction with our consolidated financial statements
      and the related notes thereto and with “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” included below in this Annual
      Report.




On
      July
      14, 2005, the Company purchased substantially all the assets of CoinFacts.com,
      which operates an Internet website on which it publishes detailed proprietary
      information and history on U.S. Coins for $500,000 in cash. On September 2,
      2005, the Company acquired the common stock of Certified Coin Exchange (“CCE”),
      which operates a subscription-based dealer-to-dealer Internet bid-ask market
      for
      third-party certified coins for an aggregate purchase price of $2,180,000.




On
      November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
      (“GCAL”), a forensic gemological certification and grading laboratory. As part
      of that transaction, the Company also acquired Diamond Profile Laboratory,
      Inc.
      (DPL), a scientific diamond light performance analysis laboratory, and all
      publishing and other rights to “Palmieri’s Market Monitor,” an educational and
      informative industry publication currently published by the Gemological
      Appraisal Association, Inc. (GAA). The Company paid an aggregate acquisition
      price of $3,000,000 in cash for GCAL, DPL and the publishing and other rights
      to
“Palmieri’s Market Monitor,” and assumed certain transaction-related costs of
      $50,000.




On
      December 22, 2005, the Company acquired the business and substantially all
      of
      the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a
      patented technology for non-invasive diamond identification which Gemprint
      used
      to digitally capture the unique refractive light pattern (or “Gemprint”) of each
      diamond that is processed with that technology. The Company paid a purchase
      price for Gemprint’s business and assets of $7,500,000 in cash, and assumed
      certain pre-acquisition liabilities and lease commitments, and agreed to pay
      additional contingent purchase price of $1 for each diamond that the Company
      registers using the Gemprint process in excess of 100,000 registrations per
      year
      during the five year period ending December 22, 2010.




37


The
      operating results of each of these acquired businesses have been included in
      our
      consolidated results of operations from the respective dates of their
      acquisition by us.




In
      the
      third quarter of fiscal 2005, we completed a public offering in which we sold
      a
      total of 3,450,000 shares of our common stock at a public offering price of
      $17.50 per share, of which 2,195,856 shares were sold by the Company. The net
      proceeds to us, after payment of underwriting commissions and offering expenses,
      were approximately $35,657,000.




As
      previously disclosed, in December 2003 the Company approved, and during the
      balance of fiscal 2004 implemented, a plan to dispose of its collectibles sales
      businesses. As a result, the consolidated selected financial data set out below
      for the five years ended June 30, 2006 have been restated to classify the assets
      and related liabilities of those businesses as held for sale and the related
      operating results as discontinued operations. Therefore, for fiscal years 2002
      through 2006, the income or loss from discontinued operations reflects the
      after-tax results of operations of those businesses through the respective
      dates
      of their disposal, plus any gain or loss recognized on the disposal of those
      businesses, plus any profit or loss realized on the disposal of the remaining
      assets of those businesses. In addition, in fiscal year 2006, discontinued
      operations also include the operations of CTP (a business we acquired as part
      of
      the CCE acquisition). for the period of ownership of the CTP
      business.




38





**Years
                Ended June 30,**(1)(in
                thousands, except per share data)**2006****(3)**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Consolidated
                Statement of Operations Data:**Net
                revenues
            
            $
            36,914
            
            $
            33,607
            
            $
            26,420
            
            $
            20,337
            
            $
            18,635Cost
                of revenues
            
            
            14,890
            
            
            12,239
            
            
            10,322
            
            
            8,754
            
            
            7,935Gross
                profit
            
            
            22,024
            
            
            21,368
            
            
            16,098
            
            
            11,583
            
            
            10,700Selling,
                general and administrative expenses
            
            
            18,255
            
            
            13,901
            
            
            11,829
            
            
            11,486
            
            
            11,884Settlement
                of lawsuit
            
            
            -
            
            
            500
            
            
            -
            
            
            -
            
            
            -Amortization
                of goodwill
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            90Impairment
                of goodwill
            
            
            -
            
            
            -
            
            
            -
            
            
            6
            
            
            51Operating
                income (loss)
            
            
            3,769
            
            
            6,967
            
            
            4,269
            
            
            91
            
            
            (1,325
            )Interest
                income, net
            
            
            2,346
            
            
            906
            
            
            135
            
            
            94
            
            
            191Other
                income (expense), net
            
            
            22
            
            
            26
            
            
            (25
            )
            
            (6
            )
            
            (20
            )Income
                (loss) before provision (benefit) for income taxes
            
            
            6,137
            
            
            7,899
            
            
            4,379
            
            
            179
            
            
            (1,154
            )Provision
                (benefit) for income taxes
            
            
            2,733
            
            
            3,141
            
            
            1,581
            
            
            (557
            )
            
            (502
            )Income
                (loss) from continuing operations
            
            
            3,404
            
            
            4,758
            
            
            2,798
            
            
            736
            
            
            (652
            )Income
                (loss) from discontinued operations, net of gain
              on
                sales of discontinued businesses (net of incometaxes)
            
            
            296
            
            
            60
            
            
            (1,068
            )
            
            (2,202
            )
            
            (1,858
            )Cumulative
                effect of accounting change(net
                of income taxes)
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,973
            )
            
            -Net
                income (loss)
            
            $
            3,700
            
            $
            4,818
            
            $
            1,730
            
            $
            (10,439
            )
            $
            (2,510
            )Net
                income (loss) per basic share:(2)Income
                (loss) from continuing operations
            
            $
            0.40
            
            $
            0.68
            
            $
            0.45
            
            $
            0.12
            
            $
            (0.10
            )Income
                (loss) from discontinued operations, net of gain
              on
                sales of discontinued businesses (net of incometaxes)
            
            
            0.04
            
            
            0.01
            
            
            (0.17
            )
            
            (0.35
            )
            
            (0.30
            )Cumulative
                effect of accounting change(net
                of income taxes)
            
            
            
            
            
            -
            
            
            -
            
            
            (1.45
            )
            
            -Net
                income (loss)
            
            $
            0.44
            
            $
            0.69
            
            $
            0.28
            
            $
            (1.68
            )
            $
            (0.40
            )Net
                income (loss) per diluted share:(2)Income
                (loss) from continuing operations
            
            $
            0.39
            
            $
            0.64
            
            $
            0.44
            
            $
            0.12
            
            $
            (0.10
            )Income
                (loss) from discontinued operations, net of gain
              on
                sales of discontinued businesses (net of incometaxes)
            
            
            0.03
            
            
            0.01
            
            
            (0.17
            )
            
            (0.35
            )
            
            (0.30
            )Cumulative
                effect of accounting change(net
                of income taxes)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1.43
            )
            
            -Net
                income (loss)
            
            $
            0.42
            
            $
            0.65
            
            $
            0.27
            
            $
            (1.66
            )
            $
            (0.40
            )Weighted
                average shares outstanding:(2)Basic
            
            
            8,473
            
            
            7,013
            
            
            6,170
            
            
            6,205
            
            
            6,347Diluted
            
            
            8,782
            
            
            7,452
            
            
            6,463
            
            
            6,294
            
            
            6,347**Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            52,110
            
            $
            65,439
            
            $
            21,454
            
            $
            4,482
            
            $
            4,947Working
                capital - continuing operations
            
            
            54,812
            
            
            68,576
            
            
            22,308
            
            
            4,566
            
            
            5,621Working
                capital - discontinued operations
            
            
            75
            
            
            338
            
            
            991
            
            
            13,803
            
            
            13,732Goodwill
                and Intangibles - continuing
            
            
            14,473
            
            
            79
            
            
            -
            
            
            -
            
            
            -Total
                assets - continuing operations
            
            
            78,138
            
            
            75,123
            
            
            32,690
            
            
            15,926
            
            
            11,503Total
                assets - discontinued operations
            
            
            83
            
            
            411
            
            
            1,384
            
            
            16,365
            
            
            34,006Stockholders'
                equity
            
            
            71,906
            
            
            70,566
            
            
            29,366
            
            
            26,319
            
            
            37,128







(1) In
      fiscal
      2002, the Company’s fiscal year ended on the Saturday closest to June 30 and, as
      a result, fiscal 2002 ended on June 29, 2002. Beginning with fiscal 2003 the
      Company changed its fiscal year end to June 30. For clarity of presentation,
      fiscal 2002 is reported as having ended on June 30.




(2) Per
      share
      data and weighted average shares outstanding in fiscal 2002 and 2001 have been
      retroactively adjusted for a
      1-for-4
      reverse stock split of our outstanding shares, which was effectuated on December
      9, 2002.




(3) Effective
      July 1, 2005, the Company adopted SFAS 123R, using the modified prospective
      transition method. Accordingly, in fiscal year 2006, cost of revenues, sales
      and
      marketing costs, and general and administrative costs, include $302,000, $1,000
      and $367,000, respectively, of stock-based compensation expense that was not
      required to be recognized as an expense in prior years.





39


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




*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the “Selected Consolidated
      Financial Data” and our Consolidated Financial Statements and related notes,
      included elsewhere in Part II of this Annual Report. This discussion also should
      be read in conjunction with the information in Item IA of Part I of this Report,
      entitled “Risk Factors”, which contains information about certain risks and
      uncertainties that can affect our business and our financial performance in
      the
      future.*




**Introduction
      and Overview**




**Our
      Business**




Collectors
      Universe Inc. (the “Company”) provides authentication and grading services to
      dealers and collectors of high-value coins, sportscards, autographs, stamps,
      and
      vintage U.S. currency notes (which we refer to generically as “collectibles”)
      and to sellers and purchasers of diamonds and colored gemstones. We believe
      that
      our authentication and grading services add value to these collectibles and
      to
      diamonds and colored gemstones by enhancing their marketability and, thereby,
      providing increased liquidity to the dealers, collectors and consumers that
      own
      and buy and sell them.




We
      principally generate revenues from the fees paid for our authentication and
      grading services. To a much lesser extent, we generate revenues from the sale
      of
      advertising on our websites; the sale of printed publications and collectibles
      price guides and advertising in such publications; and the sale of historical
      data and information about the collectibles authenticated and graded by us
      (that
      we believe facilitates commerce in those collectibles).




On
      July
      14, 2005, the Company purchased substantially all the assets of CoinFacts.com,
      which operates an Internet website on which it publishes detailed proprietary
      information and history on U.S. Coins.




On
      September 2, 2005, the Company acquired the common stock of Certified Coin
      Exchange (“CCE”), which operates a subscription-based dealer-to-dealer Internet
      bid-ask market for third-party certified coins.




On
      November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
      (“GCAL”), a forensic gemological certification and grading laboratory. As part
      of that transaction, the Company also acquired Diamond Profile Laboratory,
      Inc.
      (DPL), a scientific diamond light performance analysis laboratory, and all
      publishing and other rights to “Palmieri’s Market Monitor,” an educational and
      informative industry publication currently published by the Gemological
      Appraisal Association, Inc. (GAA). The Company paid an aggregate acquisition
      price of $3,000,000 in cash for GCAL, DPL and the publishing and other rights
      to
“Palmieri’s Market Monitor,” and assumed certain transaction-related costs of
      $50,000.




On
      December 22, 2005, the Company acquired the business and substantially all
      of
      the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a
      patented technology for non-invasive diamond identification which Gemprint
      uses
      to digitally capture the unique refractive light pattern (or “Gemprint”) of each
      diamond that is processed with that technology. The Company paid a purchase
      price for Gemprint’s business and assets of $7,500,000 in cash, and assumed
      certain pre-acquisition liabilities and lease commitments, and agreed to pay
      additional contingent purchase price of $1 for each diamond that the Company
      registers using the Gemprint process in excess of 100,000 registrations per
      year
      during the five year period ending December 22, 2010.




GCAL
      has
      incorporated the Gemprint process into its diamond grading process, so that
      each
      GCAL authenticated and graded diamond also carries a Gemprint image stored
      in
      GCAL’s registered database, which enables GCAL to provide an additional measure
      of protection against misrepresentations of diamond quality that can occur
      by,
      for example, switching a diamond grading certificate issued for a higher quality
      diamond to a lower quality diamond.




The
      operating results of these acquired businesses have been consolidated into
      our
      operating results from the respective dates of their acquisition.




40


As
      previously reported, during the period from 1999 through the latter part of
      fiscal 2004, we also were engaged in the business of marketing and selling
      collectible coins, sportscards and sports entertainment and historical
      memorabilia. Most of those sales were made at multi-venue auctions that were
      conducted by our collectibles sales divisions. We also sold collectible coins,
      at retail, by direct sales methods. In December 2003 we adopted a plan to focus
      our financial and managerial resources and collectibles expertise on the
      operation and growth of our authentication and grading and other collectibles
      service businesses, and to divest our collectibles auctions and direct sales
      businesses. Pursuant to that plan, during fiscal 2004 we sold our collectibles
      auction businesses and terminated our direct sales collectible coins business.
      However, we retained the collectibles inventories and the outstanding accounts
      receivables of those businesses, substantially all of which had been liquidated
      by June 30, 2006.




In
      accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, the
      assets and related liabilities of the collectible sales businesses have been
      classified as held for sale and their related operating results have been
      classified as discontinued operations.




In
      connection with our acquisition of CCE in September 2005, we also acquired
      one
      of its affiliated companies (“CTP”) that was engaged in an unrelated business.
      At the time we consummated the CCE acquisition we intended to dispose of CTP
      and, effective November 30, 2005, we disposed of CTP. Accordingly, CTP has
      been
      classified as a discontinued business and its operating results for the period
      during fiscal year 2006 that we owned it, have been included in discontinued
      operations.




As
      a
      result of our divestiture of our collectibles auctions and sales businesses
      and
      the disposition of CTP, the discussion that follows focuses almost entirely
      on
      our authentication and grading businesses, which comprise substantially all
      of
      our continuing operations.




**Factors
      That Can Affect our Financial Position and Operating Results**




*Factors
      that Can Affect our Revenues and Cash Flows* .
      The
      provision of authentication and grading services has provided relatively stable
      and predictable cash flows for us, as the fees for a significant proportion
      of
      the authentication and grading submissions we receive are prepaid. In the years
      ended June 30, 2006, 2005 and 2004, respectively, we generated cash of
      $7,593,000, $7,447,000 and $6,068,000, respectively, from the operations of
      our
      continuing businesses.




During
      the year ended June 30, 2006, 2005 and 2004, we generated cash of $751,000,
      $2,332,000 and $10,435,000 from the sales of our collectibles sales businesses
      and the liquidation of the retained inventories and accounts receivables of
      those businesses. As a result, at June 30, 2006, the remaining assets of those
      businesses, which we are in the process of liquidating, totaled $83,000, as
      compared to $411,000 at June 30, 2005. Therefore, it is not expected that the
      Company will generate any substantial cash flows from the sale of the remaining
      assets of the discontinued businesses in the future.




During
      the year ended June 30, 2006, five of our coin authentication and grading
      customers accounted for approximately 22% of our total net revenues. As a
      result, the loss of any of those customers, or a decrease in the volume of
      grading submissions from any of them to us, would cause our net revenues to
      decline and, therefore, could adversely affect our profitability. During the
      fourth quarter of fiscal 2005, the owner of the largest of these customers
      encountered an unexpected and serious medical problem, which led to a 55%
      decrease in revenues from that customer in fiscal 2006, compared to fiscal
      2005.




The
      Company’s cash flows from investing activities can be impacted by the extent to
      which the Company purchases new businesses, invests in capital expenditure
      and
      makes advances or receives repayments under the Dealer Financing Program. Cash
      used in investing activities in fiscal year 2006 was $18,253,000.




Cash
      flows from financing activities reflects dividends paid to common stockholders,
      payments for the retirement of the Company’s common stock authorized under the
      Company’s buyback program, and proceeds from the exercise of stock options. Cash
      used in financing activities in fiscal 2006 was $3,059,000.




At
      June
      30, 2006, we had cash and cash equivalents totaling $52,110,000, compared with
      $65,439,000 at June 30, 2005.




41


*Factors
      Affecting our Gross Profit Margins* .
      Our
      gross profit margins are primarily affected by the mix and the total number
      of
      units submitted to us for authentication and grading and the level of our
      non-grading revenues. The gross profit on our authentication and grading
      revenues is affected by the (i) mix of submission revenues among coins,
      sportscards and other collectibles; (ii) the mix of submission revenues
      between vintage or “classic” coins and sportscards, on the one hand, and modern
      coins and sportscards, on the other hand, since, as a general rule, customers
      request faster turn-around times for vintage or classic coins and sportscards
      than they do for modern submissions; and (iii) in the case of coins and
      sportscards, the “turn-around” times requested by our customers, because we
      charge higher fees for faster service times. Furthermore, because a significant
      proportion of our direct costs are relatively fixed in nature, our gross profit
      is also affected by the overall volume of collectibles authenticated and graded
      in any period.




*Impact
      of Economic Conditions on Financial Performance* .
      We
      generate substantially all of our revenues from the collectibles and high-value
      asset markets. Accordingly, our operating results are affected by the financial
      performance of those markets, which depends to a great extent on
      (i) discretionary consumer spending and, hence, on the availability of
      disposable income, (ii) on other economic conditions, including prevailing
      interest and inflation rates, which affect consumer confidence, and
      (iii) the performance and volatility of the precious metals and stock
      markets. These conditions primarily affect the volume of purchases and sales
      of
      collectibles and high-value assets which, in turn, affects the volume of
      authentication and grading submissions to us, because our services facilitate
      commerce in collectibles, diamonds and other high-value assets. Accordingly,
      factors such as improving economic conditions which usually result in increases
      in disposable income and consumer confidence, and volatility in and declines
      in
      the prices of stocks and a weakening in the value of the U.S. Dollar, which
      lead
      investors to increase their purchases of precious metals, such as gold bullion,
      other coins, and other collectibles and high-value assets, usually result in
      increases in submissions of collectibles for our services. By contrast, the
      volume of collectibles and high-end value asset sales and purchases and,
      therefore, the volume of authentication and grading submissions, usually decline
      during periods characterized by recessionary economic conditions and by declines
      in disposable income and consumer confidence or by increasing stock prices
      and
      relative stability in the stock markets.




The
      following table provides information regarding the respective numbers of coins,
      sportscards, autographs, stamps, currency notes and diamonds that we graded
      or
      authenticated in the fiscal years ended June 30, 2006, 2005, and 2004 and their
      estimated values, which are the amounts at which those coins, sportscards,
      stamps, currency and diamonds were insured by the dealers, collectors and
      consumers who submitted them to us for grading and authentication.




**Units
                Processed****2006**
            
            **2005**
            
            **2004**Coins
            
            
            1,789,000
            
            
            55
            %
            
            1,670,000
            
            
            58
            %
            
            1,241,000
            
            
            53
            %Sportscards
            
            
            1,199,000
            
            
            37
            %
            
            1,084,000
            
            
            38
            %
            
            998,000
            
            
            43
            %Autographs
            
            
            181,000
            
            
            6
            %
            
            77,000
            
            
            3
            %
            
            68,000
            
            
            3
            %Stamps
            
            
            38,000
            
            
            1
            %
            
            26,000
            
            
            1
            %
            
            16,000
            
            
            1
            %Currency(1)
            
            
            29,000
            
            
            1
            %
            
            3,000
            
            
            -
            
            
            -
            
            
            -Diamonds(2)
            
            
            5,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            
            3,241,000
            
            
            100
            %
            
            2,860,000
            
            
            100
            %
            
            2,323,000
            
            
            100
            %





**Declared
                Values (000)****2006**
            
            **2005**
            
            **2004**Coins
            
            $
            1,613,000
            
            
            90
            %
            $
            1,191,000
            
            
            91
            %
            $
            993,000
            
            
            90
            %Sportscards
            
            
            75,000
            
            
            4
            %
            
            66,000
            
            
            5
            %
            
            67,000
            
            
            6
            %Autographs
            
            
            15,000
            
            
            1
            %
            
            26,000
            
            
            2
            %
            
            31,000
            
            
            3
            %Stamps
            
            
            21,000
            
            
            1
            %
            
            17,000
            
            
            1
            %
            
            10,000
            
            
            1
            %Currency(1)
            
            
            43,000
            
            
            2
            %
            
            8,000
            
            
            1
            %
            
            -
            
            
            -Diamonds(2)
            
            
            27,000
            
            
            2
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,794,000
            
            
            100
            %
            $
            1,308,000
            
            
            100
            %
            $
            1,101,000
            
            
            100
            %







1  *We
      commenced our currency authentication and grading business in fourth quarter
      of
      2005.*


2  *We
      commenced the authentication and grading of diamonds in the second quarter
      of
      2006 when we acquired**GCAL and Gemprint.*  42


**Overview
      of Fiscal 2006 Operating Results**




As
      the
      following table indicates, operating income decreased by 45.9% in fiscal 2006,
      as compared to fiscal 2005, despite a 9.8% increase in revenues, due primarily
      to the combined effects of an increase in costs of revenues, a decline in our
      gross profit margin, and an increase in selling, general and administrate
      expenses. Income from continuing operations decreased by 28.4%, primarily as
      a
      result of the above factors that impacted operating income partially offset
      by
      increased interest income earned in fiscal 2006, but inclusive of a higher
      income tax rate due to stock-based compensation.




**2006**
                **Amount**
              
              **%**
              
              **2005**
                **Amount**
              
              ******%**
              
              **2006
                  vs 2005**
                **%
                  of Change**Net
                  revenues
              
              $
              36,914
              
              
              100.0
              %
              $
              33,607
              
              
              100.0
              %
              
              9.8
              %Cost
                  of revenues
              
              
              14,890
              
              
              40.3
              %
              
              12,239
              
              
              36.4
              %
              
              21.7
              %Gross
                  profit
              
              
              22,024
              
              
              59.7
              %
              
              21,368
              
              
              63.6
              %
              
              3.1
              %Selling
                  and marketing expenses
              
              
              4,918
              
              
              13.4
              %
              
              3,534
              
              
              10.5
              %
              
              39.2
              %General
                  and administrative expenses
              
              
              13,337
              
              
              36.1
              %
              
              10,367
              
              
              30.9
              %
              
              28.6
              %Settlement
                  of lawsuit
              
              
              -
              
              
              0
              %
              
              500
              
              
              1.5
              %
              
              (100.0
              )%Operating
                  income
              
              
              3,769
              
              
              10.2
              %
              
              6,967
              
              
              20.7
              %
              
              (45.9
              )%Interest
                  income, net
              
              
              2,346
              
              
              6.3
              %
              
              906
              
              
              2.7
              %
              
              158.9
              %Other
                  income (expense), net
              
              
              22
              
              
              0.1
              %
              
              26
              
              
              0.1
              %
              
              (15.4
              %)Income
                  before provision for income taxes
              
              
              6,137
              
              
              16.6
              %
              
              7,899
              
              
              23.5
              %
              
              (22.3
              )%Provision
                  for income taxes
              
              
              2,733
              
              
              7.4
              %
              
              3,141
              
              
              9.3
              %
              
              (13.0
              %)Income
                  from continuing operations
              
              
              3,404
              
              
              9.2
              %
              
              4,758
              
              
              14.2
              %
              
              (28.4
              )%Income
                  from discontinued operations(1)
              
              
              296
              
              
              0.8
              %
              
              60
              
              
              0.1
              %
              
              393.3
              %Net
                  income
              
              
              3,700
              
              
              10.0
              %
              $
              4,818
              
              
              14.3
              %
              
              (23.2
              )%Net
                  income per diluted share:Income
                  from continuing operations
              
              $
              0.39
              
              
              
              
              $
              0.64
              
              
              
              
              
              (39.1
              )%Income
                  from discontinued operations(1)
              
              
              0.03
              
              
              
              
              
              0.01
              
              
              
              
              
              200.0
              %Net
                  income
              
              $
              0.42
              
              
              
              
              $
              0.65
              
              
              
              
              
              (35.4
              )%







(1)  Net
      of
      gain on sales of discontinued businesses (net of income taxes).




The
      increase in costs of revenue in fiscal 2006 was primarily attributable to an
      increase in coin grader-related compensation costs and the recognition, pursuant
      to SFAS No. 123(R), of $302,000 of stock based compensation cost. Stock based
      compensation was not required to be recognized as an expense in years prior
      to
      fiscal 2006. The decline in our gross margin in fiscal 2006 was due primarily
      to
      (i) those increases in costs of revenues (ii) a change in the mix of
      collectibles and high value assets graded to a lower proportion of coins, on
      which we realize higher margins than on authentication and grading of other
      collectibles; and (iii) a decline in the average service price for coin
      authentication and grading services due to the mix of services provided in
      2006
      as compared to 2005.




The
      increase in selling and marketing costs in fiscal 2006 was primarily due to
      (i)
      costs of approximately $850,000 related to the promotion and marketing of our
      new businesses; and (ii) increased collectibles trade-show expenses and
      advertising expenses, due primarily to an increase in the number of collectibles
      trade shows in which we participated in fiscal 2006. The increase in general
      and
      administrative expenses was primarily attributable to expenses incurred in
      connection with (i) the acquisition and integration into our operations of
      newly acquired businesses, (ii) investments in infrastructure to support
      our expanded operations, (iii) audit and Sarbanes-Oxley compliance costs,
      (iv) stock-based compensation costs arising from the adoption of SFAS
      123(R) at the beginning of fiscal 2006, and (v) litigation
      costs.




See
      more
      detailed discussion of Results of Operations on pages 46 to 53.


43




**Critical
      Accounting Policies and Estimates**





*General.* In
      accordance with accounting principles generally accepted in the United States
      of
      America (“GAAP”), we record our assets at the lower of cost or fair value. In
      determining the fair value of certain of our assets, principally accounts
      receivable and inventories, we must make judgments, and estimates and
      assumptions, regarding circumstances or trends that could affect the value
      of
      those assets, such as economic conditions or trends that could impact our
      ability to fully collect our accounts receivable or realize the value of our
      inventories in future periods. Those judgments, estimates, and assumptions
      are
      based on current information available to us at that time. Many of those
      conditions, trends and circumstances, however, are outside of our control and,
      if changes were to occur in the events, trends or other or circumstances on
      which are judgments or estimates were based, or other unanticipated events
      were
      to happen that might affect our operations, we may be required under GAAP to
      adjust our earlier estimates. Changes in such estimates may require that we
      reduce the carrying value of the affected assets on our balance sheet (which
      are
      commonly referred to as “write-downs” of the assets involved).




It
      is our
      practice to establish reserves or allowances to record such downward adjustments
      or “write-downs” in the carrying value of assets such as accounts and notes
      receivable and inventory. Such write-downs are recorded as charges to income
      or
      increases in expense in our statement of operations in the periods when those
      reserves or allowances are established or increased to take account of changed
      conditions or events. As a result, our judgments, estimates and assumptions
      about future events and changes in the conditions, events or trends upon which
      those estimates and judgments were made, can and will affect not only the
      amounts at which we record such assets on our balance sheet, but also our
      results of operations.




The
      decisions as to the timing of adjustments or write-downs of this nature also
      require subjective evaluations or assessments about the effects and duration
      of
      events or changes in circumstances. For example, it is difficult to predict
      whether events, such as occurred on September 11, 2001 or increases in interest
      rates or economic slowdowns, will have short or longer term consequences for
      our
      business, and it is not uncommon for it to take some time after the occurrence
      of an event or the onset of changes in economic circumstances for the full
      effects of such events or changes to be recognized. Therefore, management makes
      such estimates based upon the information available at that time and reevaluates
      and adjusts its reserves and allowances for potential write-downs on a quarterly
      basis.




Under
      GAAP, businesses also must make estimates or judgments regarding the periods
      during which, and also regarding the amounts at which, sales are recorded.
      Those
      estimates and judgments will depend on a number of factors, including whether
      customers are granted rights to reject or adjust the payment for the services
      provided to them.




As
      is
      described above, during fiscal year 2006 we acquired certain businesses and,
      in
      accordance with GAAP, we accounted for those acquisitions using the purchase
      method of accounting. That accounting method required us to allocate the amount
      paid for those businesses over the fair value of the assets and liabilities
      acquired, and to classify the excess of the purchase price over that fair value
      as goodwill. In accordance with GAAP, we will be evaluating goodwill for
      impairments at least annually, or more frequently if we believe that goodwill
      has been impaired in the interim due to changing facts or events (see
“ *Long-Lived
      Assets* ”
below).
      Other intangible assets that are separable from goodwill and have definite
      lives
      are subject to amortization over their remaining useful lives. Indefinite-lived
      intangible assets are subject to on-going evaluation for impairment. Management
      intends to formally evaluate the carrying value of its goodwill and other
      indefinite-lived intangible assets for impairment on the anniversary date of
      each of the acquisitions that gave rise to the recording of such
      assets.




In
      making
      our estimates and assumptions, we follow GAAP in order to enable us to make
      fair
      and consistent estimates of the fair value of assets and to establish adequate
      reserves or allowances for possible write-downs in the carrying values of our
      assets.




Set
      forth
      below is a summary of the accounting policies and critical estimates that we
      believe are material to an understanding of our financial condition and results
      of operations.




*Revenue
      Recognition Policies* .
      We
      generally record revenue at the time of shipment of the authenticated and graded
      collectible or diamond to the customer. Our authentication and grading customers
      generally prepay our authentication and grading fees when they submit their
      collectible items to us for authentication and grading. We record those
      prepayments as deferred revenue until their graded collectibles are shipped
      back
      to them. At that time, we record the revenues from the authentication and
      grading services we have performed for the customer and deduct this amount
      from
      deferred revenue. For certain dealers to whom we extend open account privileges,
      we record revenue at the time of shipment of the authenticated and graded
      collectible to the dealer.






44




*Accounts
      Receivable, Notes Receivable and the Allowance for Doubtful Accounts.* In
      the
      normal course of our authentication and grading business, we extend payment
      terms to many of the larger, more creditworthy dealers who submit collectibles
      or diamonds to us for authentication and grading on a recurring basis. In
      addition, primarily in connection with our coin dealer financing programs,
      we
      make advances or extend credit under notes receivable arrangements. We regularly
      review our accounts and notes receivable, estimate the amount of, and establish
      an allowance for, uncollectible amounts in each quarterly period. The amount
      of
      that allowance is based on several factors, including the age and extent of
      significant past due amounts, and, in the case of notes receivable, the current
      value of the collateral we hold in support of the notes receivable, and known
      conditions or trends that may affect the ability of account debtors or note
      obligors to pay their accounts or notes receivable balances. Each quarter we
      review estimates of uncollectible amounts and such economic or other conditions
      or trends in order to enable us to determine whether or not to adjust the amount
      of the allowance. For example, if the financial condition of certain dealers
      or
      economic conditions were to deteriorate, adversely affecting their ability
      to
      make payments on their accounts or notes, increases in the allowance may be
      required. Since the allowance is created by recording a charge against income
      that is reflected in general and administrative expenses, an increase in the
      allowance will cause a decline in our operating results in the period when
      the
      increase is recorded.




*Inventory
      Valuation Reserve* .
      Our
      collectibles inventories are valued at the lower of cost or fair value and
      have
      been reduced by an inventory valuation allowance to provide for potential
      declines in the value of those inventories. The amount of the allowance is
      determined and is periodically adjusted on the basis of market knowledge,
      historical experience and estimates concerning future economic conditions or
      trends that may impact the sale value of the collectibles inventories.
      Additionally, due to the relative uniqueness of some of the collectibles
      included in our collectibles inventory, valuation of such collectibles often
      involves judgments that are more subjective than those that are required when
      determining the market values of more standardized products.




If
      there
      were to be **** an
      economic downturn or there were to occur **** other
      events or circumstances that are likely to make it more difficult to sell,
      or
      that would lead us to reduce the sales **** prices
      of **** those
      collectibles, it may become necessary to increase the reserve. Increases in
      this
      reserve will cause a decline in operating results, because such increases are
      recorded by charges against income.




*Grading
      Warranty Costs* .
      We
      offer a limited warranty covering the coins, sportscards, stamps and currency
      that we authenticate and grade. Under the warranty, if any collectible that
      was
      previously authenticated and graded by us is later submitted to us for
      re-grading and either (i) receives a lower grade upon that resubmittal or
      (ii) is determined not to have been authentic, we will offer to purchase
      the collectible or pay the difference in value of the item at its original
      grade
      as compared with its lower grade. However, this warranty is voided if the
      collectible, upon resubmittal to us, is not in the same tamper resistant holder
      in which it was placed at the time we last graded it. We offer a similar limited
      warranty, of one year’s duration, on the diamonds we grade. We accrue for
      estimated warranty costs based on historical trends and related experience.
      To
      date our reserves have proved to be adequate. However, if warranty claims were
      to increase in relation to historical trends and experience, we would be
      required to increase our warranty reserves and incur additional charges that
      would adversely affect our results of operations in those periods during which
      the warranty reserve is increased.




*Long-Lived
      Assets.* We
      regularly conduct reviews of property and equipment and other long-lived assets,
      including certain identifiable intangibles and goodwill, for possible
      impairment. Such reviews occur annually, or more frequently if events or changes
      in circumstances indicate the carrying amount of the asset may not be
      recoverable in full. In order to determine if the value of an asset is impaired,
      we make an estimate of the future cash flows (undiscounted and without interest
      charges) expected to result from the use of that asset and its eventual
      disposition and determine its fair value by discounting those cash flows to
      present value using a discount rate commensurate with management’s estimates of
      the business risks associated with the asset. If that estimated fair value
      is
      less than the carrying amount of the asset, an impairment loss is recognized
      to
      write down the asset to its estimated fair value. The Company does not believe
      there was any impairment of its long-lived assets as of June 30, 2006. There
      can
      be no assurance, however, that there will be no impairments of the Company’s
      long-lived assets in the future.




45


*Stock-Based
      Compensation.* Effective
      July 1, 2005, we began recognizing share-based compensation expense based on
      the
      fair value recognition provision of SFAS No. 123(R), *Share-Based
      Payment* ,
      using
      the Black-Scholes option valuation method. Under that method, assumptions are
      made with respect to the expected lives of the options granted, the expected
      volatility of the Company’s stock, dividend yield percentage and the risk-free
      interest rate at the date of grant. In addition, under SFAS No. 123(R), we
      recognize and report share-based compensation expense net of option forfeitures
      that we expect will occur over the vesting period, which we estimate on the
      basis of historical forfeiture experience or other factors that could affect
      future forfeiture. Once we determine the compensation expense of a stock option
      award, that expense is recognized in our consolidated statements of operations
      over the vesting period of the option using the straight-line attribution
      method.




*Capitalized
      Software* .
      Through
      June 30, 2006, we capitalized approximately $421,000 of software development
      costs in accordance with Statement of Position (SOP) 98-1, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use* .
      SOP
      98-1 requires that certain costs incurred, either from internal or external
      sources, be capitalized as part of intangible assets and amortized on a
      straight-line basis over the useful life of the software. Planning, training,
      support and maintenance costs incurred either prior to or following the
      implementation phase are recognized as expense in the period in which they
      occur. During fiscal 2006, approximately $11,000 was recorded as amortization
      expense. The Company evaluates the carrying values of capitalized software
      to
      determine if the carrying values are impaired, and, if necessary, an impairment
      loss is recorded in the period in which the impairment occurs.




***Results
      of Operations***





The
      following table sets forth certain financial data, expressed as a percentage
      of
      net revenues, derived from our statements of operations for the respective
      periods indicated below:





**Fiscal
                Years Ended June 30,****2006**
            
            **2005**
            
            **2004**Net
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            40.3
            %
            
            36.4
            %
            
            39.1
            %Gross
                profit
            
            
            59.7
            %
            
            63.6
            %
            
            60.9
            %Operating
                expenses:Selling
                and marketing expenses
            
            
            13.4
            %
            
            10.5
            %
            
            12.0
            %General
                & administrative expenses
            
            
            36.1
            %
            
            30.9
            %
            
            32.7
            %Settlement
                of lawsuit
            
            
            -
            
            
            1.5
            %
            
            -Total
                operating expenses
            
            
            49.4
            %
            
            42.8
            %
            
            44.7
            %Operating
                income
            
            
            10.2
            %
            
            20.7
            %
            
            16.2
            %Interest
                income, net
            
            
            6.3
            %
            
            2.7
            %
            
            0.5
            %Other
                income (expense), net
            
            
            -
            
            
            0.1
            %
            
            (0.1
            %)Income
                before provision for income taxes
            
            
            16.6
            %
            
            23.5
            %
            
            16.6
            %Provision
                (benefit) for income taxes
            
            
            7.4
            %
            
            9.3
            %
            
            6.0
            %Income
                from continuing operations
            
            
            9.2
            %
            
            14.2
            %
            
            10.6
            %Income
                (loss) from discontinued operations, net of gain on sales ofdiscontinued
                businesses
              (net of income taxes)
            
            
            0.8
            %
            
            0.1
            %
            
            (4.1
            %)Net
                income
            
            
            10.0
            %
            
            14.3
            %
            
            6.5
            %




*Net
      Revenues* .
      Net
      revenues consist primarily of fees generated from the grading and authentication
      of sportscards, coins and stamps and, to a much lesser extent, the grading
      of
      diamonds, revenues from the sale of advertising, subscription-based revenues,
      and the publication of collectibles magazines. Net revenues are determined
      net
      of discounts and allowances.




46


The
      following tables set forth certain information regarding the increases in net
      revenues and in the number of collectibles authenticated and graded in fiscal
      2006, fiscal 2005 and fiscal 2004:




**2006**
            
            **2005**
            
            **2006
                vs. 2005****Increase
                (Decrease)****%
                of Net**
            
            
            
            **%
                of Net**
            
            **Revenues**
            
            **Units
                Processed****Amount**
            
            **Revenues**
            
            **Amount**
            
            **Revenues**
            
            **Amounts**
            
            **Percent**
            
            **Number**
            
            **Percent**(Dollars
                in thousands)Coins
            
            $
            23,829
            
            
            64.6
            %
            $
            23,203
            
            
            69.0
            %
            $
            626
            
            
            2.7
            %
            
            119,000
            
            
            7.1
            %Sportscards
            
            
            8,461
            
            
            22.9
            %
            
            8,143
            
            
            24.2
            %
            
            318
            
            
            3.9
            %
            
            115,000
            
            
            10.6
            %Other(1)
            
            
            4,624
            
            
            12.5
            %
            
            2,261
            
            
            6.8
            %
            
            2,363
            
            
            104.6
            %
            
            147,000
            
            
            138.7
            %$
            36,914
            
            
            100.0
            %
            $
            33,607
            
            
            100.0
            %
            $
            3,307
            
            
            9.8
            %
            
            381,000
            
            
            13.3
            %





**2005**
            
            **2004**
            
            **2005
                vs. 2004****Increase
                (Decrease)****%
                of Net**
            
            
            
            **%
                of Net**
            
            **Revenues**
            
            **Units
                Processed****Amount**
            
            **Revenues**
            
            **Amount**
            
            **Revenues**
            
            **Amounts**
            
            **Percent**
            
            **Number**
            
            **Percent**(Dollars
                in thousands)Coins
            
            $
            23,203
            
            
            69.0
            %
            $
            17,474
            
            
            66.1
            %
            $
            5,729
            
            
            32.8
            %
            
            429,000
            
            
            34.6
            %Sportscards
            
            
            8,143
            
            
            24.2
            %
            
            7,126
            
            
            27.0
            %
            
            1,017
            
            
            14.3
            %
            
            86,000
            
            
            8.6
            %Other(1)
            
            
            2,261
            
            
            6.8
            %
            
            1,820
            
            
            6.9
            %
            
            441
            
            
            24.2
            %
            
            22,000
            
            
            26.2
            %$
            33,607
            
            
            100.0
            %
            $
            26,420
            
            
            100.0
            %
            $
            7,187
            
            
            27.2
            %
            
            537,000
            
            
            23.1
            %





(1)
            *Consists
                of autographs, stamps, currency and diamonds in fiscal 2006; autographs,
                stamps and currency in fiscal 2005; and autographs and stamps in
                fiscal
                2004.*




*Fiscal
      2006 vs 2005*





Revenues
      increased by $3,307,000 or 9.8% to $36,914,000 in fiscal year 2006, compared
      to
      $33,607,000 in fiscal year 2005. This increase was comprised of increases of
      approximately $2,300,000, or 7%, in grading and authentication revenues, and
      approximately $1,000,000, or 39%, in related services, primarily attributable
      to
      businesses we acquired in the first six months of fiscal year 2006.
      Approximately $1,600,000 of our fiscal 2006 revenues were generated by GCAL
      and
      CCE (which we acquired in the first half of fiscal 2006) and by our currency
      authentication and grading business and our dealer lending business, which
      recorded their first full year of operations following their launch in the
      latter half of 2005. As a result, revenue growth, excluding those four
      businesses, in 2006 was 5% over fiscal 2005.




The
      7%
      increase in grading and authentication revenues was driven by a 13% increase
      in
      the number of units graded and authenticated in fiscal year 2006, compared
      to
      the prior fiscal year. Coin grading revenues increased by 2%, compared to a
      7%
      increase in the number of units graded, as a result of modern coins (for which
      we earn a lower service fee) representing a higher proportion of total coins
      graded in fiscal year 2006, compared to fiscal 2005, primarily as a result
      of
      the continued success of the Company’s *First
      Strike* program
      (see below). For sportcards, the 11% increase in the number of units graded
      resulted in a 4% increase in grading revenues reflecting a decrease in the
      average service fee due to a higher proportion of units graded at special
      pricing than in the prior year. The 139% increase in units graded and
      authenticated for other collectibles resulted in a 70% increase in grading
      and
      authentication revenues, primarily reflecting a change in pricing in our
      autograph authentication services business that makes such services more
      attractive to a larger number of dealers and collectors.




The
      7%
      increase in the number of coins graded and authenticated in fiscal 2006, as
      compared to the prior year, was primarily attributable to an increase in coin
      submissions under the Company’s *First
      Strike* program
      (which has expanded in 2006 into a third and fourth quarter program, as compared
      to only a third quarter program in fiscal 2005). These increases more than
      offset a reduction in the number of units submitted from a coin dealer that
      had
      been our largest customer until the fourth quarter of fiscal 2005, when its
      owner sustained a serious illness. Revenues attributable to coin submissions
      by
      that customer declined from 9% of total revenues in fiscal 2005 to 4% of total
      revenues for fiscal 2006. Although the Company’s growth in revenues in the
      current year has been depressed by the loss of coin revenues from that customer,
      we continue to believe that general economic conditions are favorable to our
      coin grading and other businesses as evidenced by unit increases of 6% and
      31%,
      respectively, in the third and fourth quarters of fiscal 2006, compared to
      the
      corresponding periods of the prior year.






47




*Fiscal
      2005 vs. 2004* .
      The
      number of coins, sportcards and other collectibles (consisting of autographs,
      stamps and currency) authenticated or graded in 2005 increased by 34.6%, 8.6%
      and 26.2%, respectively, in 2005, as compared to 2004, resulting in a 23.1%
      increase, overall, in the number of units authenticated and graded and a 27.2%
      increase in net revenues. Also contributing to the increase in net revenues
      in
      2005 were increases in sales of advertising and collectors club memberships
      totaling approximately $920,000 (which includes an approximate $319,000 increase
      in on-line advertising) in 2005, as compared to 2004. The average of the service
      fees earned for all collectibles was approximately the same in 2005 and 2004.
      However, revenues from modern coin submissions, on which we earn a lower average
      service fee than for vintage coin submissions, accounted for a higher proportion
      of the coins authenticated and graded in 2005, than in 2004. As a result, in
      2005, the increase in the number of coins authenticated and graded was greater
      than the increase in the net revenues attributable to coin submissions.




*Gross
      Profit* .
      Gross
      profit is calculated by subtracting the cost of revenues from net revenues.
      Gross profit margin is gross profit stated as a percent of net revenues. Cost
      of
      authentication and grading revenues, primarily consist of labor to authenticate
      and grade collectibles, production costs, credit cards fees, warranty expense
      and occupancy, security and insurance costs that directly relate to providing
      authentication and grading services, and printing and other direct costs. In
      fiscal year 2006, our costs of revenues included stock-based compensation,
      earned by employees in our authentication and grading division, which was
      required to be recognized in accordance with SFAS No. 123(R), beginning in
      fiscal 2006. Stock based compensation was not required to be recognized in
      fiscal years prior to 2006.




**Fiscal
                Year Ended June 30,**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Gross
                profit
            
            $
            22,024
            
            $
            21,368
            
            $
            16,098Gross
                profit margin
            
            
            59.7
            %
            
            63.6
            %
            
            60.9
            %




The
      decline in our gross profit margin from 63.6% in 2005 to 59.7% in fiscal year
      2006, was primarily attributable to (i) a modest decline in the average service
      fees for coins due to the mix of services provided in the periods; (ii)
      increased coin grader-related compensation costs of $410,000 (which is net
      of a
      $194,000 credit for the reversal of a long-term compensation accrual for a
      former employer due to termination of his employment) in fiscal year 2006,
      as a
      result of an increase in the number of graders and the implementation of a
      more
      fixed-rate compensation plan: (iii) a change in the mix of collectibles and
      high
      value assets graded to a lower proportion of coins, on which we realize higher
      margins than on authentication and grading of other collectibles; and (iv)
      stock-based compensation expense of $302,000 for fiscal year 2006, recorded
      as
      required by SFAS No. 123(R). Coin revenues represented approximately 65% of
      total net revenues in fiscal 2006, compared to approximately 69% of total net
      revenues, in fiscal 2005.






The
      increase in the gross profit margin in 2005, as compared to 2004, was primarily
      attributable to (i) increases of 30% in coin authentication and grading
      revenues, on which we realize higher margins than on authentication and grading
      submissions of sportscards and other collectibles; (ii) the increases in
      net revenues (described above), which caused the fixed elements of our costs
      of
      revenues to represent a lower percentage of total revenues than in 2004; and
      (iii) increases, as compared to 2004, in sales of website advertising, for
      which the cost of sales were minimal.




*Selling
      and Marketing Expenses*




Selling
      and marketing expenses are comprised primarily of advertising and promotions
      costs, trade-show related expenses, customer service personnel costs and third
      party consulting costs.




**Fiscal
                Year Ended June 30,**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Selling
                and marketing expenses
            $4,918
            
            $3,534
            
            $3,165As
                a percentage of net revenues
            13.4%
            
            10.5%
            
            12.0%




The
      increase of $1,384,000 in selling and marketing expenses in fiscal year 2006,
      compared to fiscal year 2005 were primarily attributable to (i) costs of
      approximately $850,000 (of which approximately $600,000 related to our diamond
      grading business), incurred in fiscal 2006 in connection with the launch of
      the
      Company’s currency grading division and the commencement of marketing programs
      for the businesses that we acquired in the first six months of fiscal year
      2006
      and the launch of the Company’s currency grading division; (ii) increased
      collectibles trade-show expenses of approximately $330,000 incurred in fiscal
      2006 due to the Company participating in more trade shows in fiscal 2006, and
      focusing more resources on our trade show programs (at which we are able to
      generate higher average service fees due to the faster turnaround times demanded
      by dealers and collectors attending those shows); (iii) increased
      advertising and promotional expenses of approximately $220,000 incurred in
      fiscal 2006, including promotional costs associated with the Company’s *First
      Strike* program;
      and (iv) increases in personnel costs in our customer service
      departments.






48




The increase of $369,000 in selling and marketing expenses in 2005, compared
      to
      2004, was primarily attributable to increases in general marketing expenses
      (customer service personnel, advertising and trade-show related costs) in 2005.
      Notwithstanding those increases, however, as a percentage of net revenues,
      selling and marketing expenses decreased from 12.0% of net revenues in 2004
      to
      10.5% in 2005, indicating that we were able to increase authentication and
      grading revenues and sales of advertising without having to make commensurate
      increases in our selling and marketing expenses.




*General
      and Administrative Expenses.* General
      and administrative (“G&A”) expenses are comprised primarily of compensation
      paid to general and administrative personnel, including executive management,
      finance and accounting, information technology personnel, facilities management
      costs and other miscellaneous expenses. In fiscal 2006, G&A expenses also
      included stock-based compensation required to be recognized in accordance with
      SFAS No. 123 (R), effective July 1, 2005.





**Fiscal
                Year Ended June 30,**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**General
                & administrative expenses
            
            $
            13,337
            
            $
            10,367
            
            $
            8,664As
                a percentage of net revenues
            
            
            36.1
            %
            
            30.9
            %
            
            32.7.
            %




The
      increase in general and administrative expenses of $2,970,000 in fiscal 2006
      were primarily attributable to general and administrative expenses incurred
      in
      connection with the acquisition and integration in our operations of the newly
      acquired businesses, investment in infrastructure to support the growth of
      our
      businesses, litigation costs, audit and Sarbanes-Oxley compliance costs and
      stock-based compensation costs (arising from the adoption of SFAS 123(R)).
      The
      increased costs associated with the acquired businesses were approximately
      $1,000,000, which included business transition and intangible amortization
      costs
      of approximately $340,000. We also incurred approximately $290,000 in connection
      with the implementation of our business acquisition and expansion program in
      fiscal 2006. The increased infrastructure costs of approximately $630,000 in
      fiscal 2006 included investments in information technology systems and one-time
      space-related costs to support the growth of our businesses. Litigation costs
      were approximately $190,000 higher in fiscal 2006 than in fiscal 2005, primarily
      attributable to the costs of the trial in the Miller lawsuit
      that took place in the second quarter of fiscal 2006. Increased audit, Sarbanes-
      Oxley and tax compliance costs of approximately $400,000, were incurred
      primarily in the first and fourth quarters of fiscal 2006. Stock-based
      compensation costs recognized pursuant to SFAS 123(R) and included in general
      and administrative expenses for fiscal 2006 were $367,000.




Although,
      in 2005, G&A expenses increased by $1,703,000, as compared to 2004, such
      expenses did not increase at the same rate as did net revenues, due primarily
      to
      improvements in operating efficiencies and staff reductions we were able to
      make
      as a result of the disposition of our collectibles sales businesses. Therefore,
      as a percentage of net revenues, G&A expenses declined to 30.8% in 2005 from
      32.7% for 2004. In dollar terms, the larger value components of the increases
      in
      G&A expenses in 2005, compared to 2004, consisted primarily of
      (i) increases of approximately $320,000 in legal fees, including fees
      incurred on litigation matters, such as the Real Legends lawsuit (discussed
      below); (ii) approximately $185,000 of costs incurred in connection with
      the launch of our new currency grading service during 2005;
      (iii) consulting fees and audit costs of approximately $400,000 incurred in
      connection with the documentation and testing of our internal control over
      financial reporting, as required by Section 404 of the Sarbanes-Oxley Act 2002;
      (iv) new business development personnel and outside consulting costs of
      $263,000 incurred to develop and maintain our knowledge base in coins and to
      identify and analyze acquisition opportunities, and (v) general expenses
      and infrastructure costs incurred to support the increased volume of business
      that we conducted in 2005, as compared with 2004.




49




*Settlement
      of Lawsuit*




**Fiscal
                Year Ended June 30,**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Settlement
                of lawsuit
            
            $
            -
            
            $
            500
            
            $
            -As
                a percentage of net revenues
            
            
            -
            
            
            1.5
            %
            
            -




As
      previously reported, in January 2005, without any admission of wrongdoing,
      we
      settled a legal action brought by Real Legends, Inc., a seller of sports cards
      against When It Was a Game (“WIWAG”), a sports card dealer, and against us as a
      co-defendant. Pursuant to the settlement terms, all of the claims asserted
      against the Company by plaintiff were settled and plaintiff terminated the
      litigation, with prejudice, and we paid plaintiff $600,000, of which $100,000
      was reimbursed to us by one of our insurers. As a result, the net cost to us
      of
      the settlement in 2005 was $500,000, or 1.5% of our net revenues.




*Stock-Based
      Compensation*





In
      accordance with SFAS No. 123(R) - *Share-Based
      Payment* which,
      in the Company’s case, became effective as of July 1, 2005, we recognized
      stock-based compensation of $670,000 during fiscal 2006. That stock-based
      compensation was attributable to the following:




**Year
                  Ended**
                **June
                  30,****2006**Cost
                  of revenues
              
              $
              302,000Selling
                  and marketing expenses
              
              
              1,000General
                  and administrative expenses
              
              
              367,000$
              670,000
  Prior
        to
        the adoption of SFAS No 123(R), we accounted for stock-based compensation
        in accordance with the Accounting Principle Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations. As such, compensation expense was recorded at the
        date
        of grant only if the quoted market price of the underlying stock on that
        date
        exceeded the exercise price of the options. However, we had disclosed, in
        the
        notes to our financial statements, pro forma net earnings and pro forma net
        earnings per share as if the fair value of all stock options as of their
        respective grant dates were recognized as expense over the vesting periods
        of
        those options in accordance with SFAS No. 123 *Accounting
        for* ****** *Stock-Based
        Compensation.*





We
      adopted SFAS No. 123(R) using the modified prospective method. Under this
      transition method, compensation costs recognized in fiscal 2006 include:
      (i) compensation cost for all share-based awards granted prior to, but not
      yet vested as of July 1, 2005, based on their respective grant date fair values
      estimated in accordance with the original provisions of SFAS No. 123; and
      (ii) compensation cost for all share-based awards granted subsequent to
      June 30, 2005, based on their respective grant-date fair values estimated in
      accordance with the provisions of SFAS No. 123(R). In accordance with the
      modified prospective method, results for the corresponding periods of the prior
      year have not been restated and the Company will continue to disclose the pro
      forma effect of option grants on net earnings and net earnings per share for
      periods ended prior to July 1, 2005 in the footnotes to its financial
      statements. However, we became aware of an error in the determination of the
      proforma expense in years prior to adoption, as it relates to our estimate
      of
      the expected term assumption. Therefore, the fiscal year 2005 proforma expense
      has been restated as disclosed in note 2 to our consolidated financial
      statements included in Part II, Item 8 of this Annual Report.




There
      were no modifications made to outstanding stock options prior to the adoption
      of
      SFAS No. 123(R).




We
      will
      also continue to account for equity instruments issued to persons other than
      Company employees and directors (“non-employees”) in accordance with the
      provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No.
      96-18, *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling Goods or Services.* All
      transactions in which goods or services are the consideration received for
      equity instruments issued to non-employees are accounted for based on the fair
      value of the consideration received or the fair value of the equity instrument
      issued, whichever is more reliably measurable. The measurement date used to
      determine the fair value of any such equity instrument is the earliest to occur
      of (i) the date on which the third-party performance is complete, (ii) the
      date
      on which it is probable that performance will occur, or (iii) if different,
      the
      date on which the compensation has been earned by the non-employee. However,
      no
      equity instruments were issued to non-employees for goods or services during
      the
      three years ended June 30, 2006.






50




The
      Company issues stock options to employees and outside directors whose only
      condition for vesting are continued employment or service during the related
      vesting period. Typically, the vesting period is four years for employee awards
      and six months for director awards, although awards are sometimes granted with
      immediate vesting.




For
      purposes of SFAS No. 123(R), the Company calculates stock-based
      compensation by estimating the fair value of each stock option using the
      Black-Scholes option valuation model and various assumptions that are described
      in note 2 to the consolidated financial statements included in Part II, Item
      8
      of this Annual Report. Once the compensation cost of an option is determined,
      that cost is recognized on a straight-line basis over the vesting period of
      the
      option.




For
      fiscal 2006, stock-based compensation consisted of compensation costs
      attributable to options granted in prior years that were outstanding but were
      not fully vested as of July 1, 2005, the effective date of SFAS No. 123(R),
      and
      compensation costs for options that were granted during fiscal 2006, prorated
      from their respective grant dates to June 30, 2006. Compensation costs, as
      determined, were adjusted for estimated forfeitures in accordance with SFAS
      No.
      123(R). Options to purchase a total of approximately 42,000 shares of our common
      stock were granted to employees during fiscal 2006.




The
      method we employ to calculate stock-based compensation is consistent with the
      method used to compute stock-based compensation under SFAS No. 123, except
      that
      under SFAS No. 123(R), we are required to estimate forfeitures, which we were
      not required to and did not estimate under SFAS No. 123. We have estimated
      forfeitures to be 10.5% per annum.




During
      the fourth quarter of fiscal 2006, we increased the forfeiture rate from 4%
      to
      10.5% per annum based on estimates of future forfeitures over the remaining
      term
      of unvested options at June 30, 2006 and the correction of an error in our
      earlier estimate as more fully disclosed in note 2 to our consolidated financial
      statements included in Part II, Item 8 of this Annual Report.





A
      total
      of $1,691,000 of compensation expense related to unvested stock-based
      compensation awards remained unrecognized as of June 30, 2006. Based on the
      assumption that the forfeiture rate will remain at 10.5% per annum, for the
      remaining vesting periods, that amount will be recognized as compensation
      expense as follows:





**Year
                Ending June 30,**
            
            **Amount**2007
            
            $
            684,0002008
            
            
            635,0002009
            
            
            341,0002010
            
            
            31,000Total
            
            $
            1,691,000





However,
      these amounts do not include the cost of any additional stock based compensation
      awards that may be granted in future periods nor, as mentioned above, any
      changes that might occur in the Company’s compensation award forfeiture
      rate.





51


*Interest
      Income, Net*





Interest
      income is generated on cash balances that we invested, primarily in highly
      liquid money market accounts, short-term bank certificates of deposit, auction
      rate securities and commercial paper instruments.





**Fiscal
                Year Ended June 30**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Interest
                income, net
            
            $
            2,346,000
            
            $
            906,000
            
            $
            135,000Percent
                of net revenue
            
            
            6.3
            %
            
            2.7
            %
            
            0.5
            %





Interest
      income, net totaled $2,346,000 in fiscal year 2006, compared with $906,000
      in
      fiscal year 2005, which was primarily attributable to increases in our average
      cash, cash equivalents and short-term investment balances during fiscal 2006
      and, to a lesser extent, increased interest rates during fiscal 2006. The
      increase in the average cash and cash equivalent and short-term investment
      balances were attributable to (i) the sale by us of 2,195,856 shares of our
      common stock in a public offering that we completed in the third quarter of
      fiscal 2005, which generated net proceeds to us of $35,657,000; and (ii) cash
      generated from the disposition of our collectibles sales businesses; and (iii)
      cash generated by operations, reduced by cash expended for business acquisition
      in fiscal year 2006. Interest income, net was $906,000 in 2005, compared to
      $135,000 in fiscal 2004. The increase in interest income in 2005, compared
      to
      2004, resulted primarily from the same factors as indicated above.





*Provision
      for Income Taxes*





**Fiscal
                Year Ended June 30**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Provision
                for income taxes
            
            $
            2,733,000
            
            $
            3,141,000
            
            $
            1,581,000





Income
      tax expense recorded in fiscal 2006 was calculated based on our expected
      combined federal and state effective income tax rates of approximately 45%
      for
      the fiscal year 2006, compared with 40% for the fiscal year 2005. The increase
      in the effective tax rate to 45% in fiscal 2006 reflects increased permanent
      differences between the Company’s income for book purposes and for tax purposes
      due primarily to the non-deductibility of compensation costs on incentive stock
      options.




The
      provision made for income taxes in fiscal 2005 and 2004 were calculated on
      the
      basis of our expected federal and state effective income tax rates for those
      years.




*Discontinued
      Operations*





**Fiscal
                Year Ended June 30**
              (Dollars
                in thousands)**2006**
            
            **2005**
            
            **2004**Income
                (loss) from discontinued operations, net of gain on sales of discontinued
                businesses
              (net
                of
                income taxes)
            
            $
            296,000
            
            $
            60,000
            
            $
            (1,068,000
            )





As
      a
      result of our decision in fiscal 2004 to dispose of our collectibles sales
      businesses, in accordance with SFAS No. 144 the assets and related liabilities
      of those businesses have been classified as held for sale and their related
      operating results for fiscal years 2006, 2005 and 2004 have been classified
      as
      discontinued operations in the consolidated financial statements included in
      this Annual Report. The income (loss) from discontinued operations includes
      (i)
      the losses from the operations of our discontinued collectibles sales businesses
      through the respective dates on which they were disposed of in fiscal 2004;
      and
      (ii) the losses or gains recognized on the sales of those businesses and the
      disposition of those assets (consisting primarily of inventories and accounts
      receivables) that we retained; and (iii) for fiscal 2006 the results of CTP
      from
      September 2, 2005 to November 30, 2005 (the date of its disposition). Other
      than
      fiscal 2004, when the collectible sales businesses were sold, the gain on
      disposal of those businesses related to additional consideration on the sales
      of
      those businesses that became determinable in fiscal 2005 and 2006, as the terms
      of the sale of some of those businesses included provision for future
      consideration based on the performance of such businesses for a period of time
      subsequent to their sales.






52


**Quarterly
      Results of Operations and Seasonality**




The
      following tables present unaudited quarterly financial information for each
      of
      the eight quarters beginning September 30, 2004 and ending on June 30, 2006.
      The
      information has been derived from our unaudited quarterly financial statements,
      which have been prepared by us on a basis consistent with our audited financial
      statements appearing elsewhere in this Form 10-K. The consolidated financial
      information set forth below includes all adjustments, (consisting of normal
      adjustments and accruals) that management considers necessary for a fair
      presentation of the unaudited quarterly results when read in conjunction with
      the consolidated financial statements and the notes thereto appearing elsewhere
      in this Form 10-K. These operating results, which reflect the reclassification
      of our results of operations between continuing operations and discontinued
      operations as a result of the disposition of our collectibles sales businesses,
      are not necessarily indicative of results that may be expected for any
      subsequent periods.




Revenues
      in the second quarter of fiscal 2006 were 7% lower than the revenues for the
      second quarter of fiscal 2005, due primarily to lower coin submissions from
      one
      of our largest customers due to a serious illness that occurred in the fourth
      quarter of fiscal 2005, which resulted in a reduction in revenues earned from
      that customer in the second quarter and fiscal 2006.




The
      increase in revenues of 12% and 25% in the third and fourth quarters of fiscal
      2006, compared to the corresponding periods of the prior year, reflect the
      continued success of the Company’s *First
      Strike* program,
      which, in fiscal year 2006, generated revenues in both the third and fourth
      quarters, compared with primarily the third quarter of fiscal 2005. In addition,
      in fiscal 2006, the Company benefited from revenues from new businesses that
      we
      did not own or operate for the full fiscal year 2005.




With
      respect to the sales and marketing costs in our diamond grading business,
      approximately $240,000 was associated with the initial re-launch and
      re-positioning of the company at the major trade show of the year in early
      June
      2006 which we do not expect to repeat. Along with the newly acquired American
      Gemological Laboratories (AGL), an authentication and grading service in colored
      gemstones, our aggregate expenditures for sales and marketing will continue
      at
      approximately current levels associated with the jewelry division for at least
      the first three quarters of fiscal 2007 as we communicate our new services
      as
      part of our strategy to increase market share. Because of the similar
      distribution channels for GCAL and AGL, and even though AGL is adding new
      services which will require marketing expenditures, we do not anticipate
      increases above current levels since many of the expenditures are expected
      in
      the same trade publications, the same trade shows and in other related
      promotional activities. Since we expect revenues to increase at GCAL and AGL,
      we
      also expect that the percentage of revenue associated with sales and marketing
      expenses will decline.




With
      respect to the general and administrative expense incurred by our GCAL diamond
      grading business, approximately $140,000 was associated with legal and
      consulting expenses related to the initial integration, in part related to
      legal
      expenses to support some of the new proprietary services and programs introduced
      by GCAL during the term such as Source Veritas. Along with the newly acquired
      colored gemstone grading business of AGL, we expect the integration expenses
      for
      software, systems and legal expenses to continue at approximately current levels
      associated with the jewelry division for at least the first three quarters
      of
      2007 as we complete the integration of GCAL and initiate and complete the
      integration of AGL. Since we expect revenues to increase at GCAL and AGL, we
      also expect that the percentage of revenue associated with their general and
      administrative expenses will decline.




53







**Quarterly
                Reports of Operations**
            
            **Quarters
                Ended**
              **(In
                thousands, except per share data)**Sept.
                30,
              2004
            
            Dec.
                31,
              2004
            
            Mar.
                31
              2005
            
            June
                30,
              2005
            
            Sept.
                30,
              2005
            
            Dec.
                31,
              2005
            
            Mar.
                31
              2006
            
            June
                30,
              2006**(1)**Statement
                of Operations Data:Net
                revenues
            
            $
            8,195
            
            $
            7,982
            
            $
            8,955
            
            $
            8,475
            
            $
            8,825
            
            $
            7,447
            
            $
            10,022
            
            $
            10,620Cost
                of revenues
            
            
            2,826
            
            
            2,998
            
            
            3,263
            
            
            3,152
            
            
            3,372
            
            
            3,118
            
            
            4,088
            
            
            4,312Gross
                profit
            
            
            5,369
            
            
            4,984
            
            
            5,692
            
            
            5,323
            
            
            5,453
            
            
            4,329
            
            
            5,934
            
            
            6,308SG&A
                expenses
            
            
            3,244
            
            
            3,040
            
            
            3,464
            
            
            4,153
            
            
            4,310
            
            
            3,944
            
            
            4,632
            
            
            5,369Settlement
                of lawsuit
            
            
            -
            
            
            500
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                income
            
            
            2,125
            
            
            1,444
            
            
            2,228
            
            
            1,170
            
            
            1,143
            
            
            385
            
            
            1,302
            
            
            939Interest
                and other income, net
            
            
            64
            
            
            112
            
            
            225
            
            
            531
            
            
            550
            
            
            616
            
            
            596
            
            
            606Income
                before income taxes
            
            
            2,189
            
            
            1,556
            
            
            2,453
            
            
            1,701
            
            
            1,693
            
            
            1,001
            
            
            1,898
            
            
            1,545Provision
                (benefit) for income taxes
            
            
            878
            
            
            628
            
            
            981
            
            
            654
            
            
            714
            
            
            447
            
            
            804
            
            
            768Income
                from continuing operations
            
            
            1,311
            
            
            928
            
            
            1,472
            
            
            1,047
            
            
            979
            
            
            554
            
            
            1,094
            
            
            777Income
                (loss) from discontinuedoperations,
              net
                of gain
                on salesof
                discontinued businesses
              (net
                of income taxes)
            
            
            (69
            )
            
            (7
            )
            
            (3
            )
            
            139
            
            
            (12
            )
            
            181
            
            
            -
            
            
            127Net
                income
            
            $
            1,242
            
            $
            921
            
            $
            1,469
            
            $
            1,186
            
            $
            967
            
            $
            735
            
            $
            1,094
            
            $
            904Net
                income per basic share:Income
                from continuing operations
            
            $
            0.21
            
            $
            0.15
            
            $
            0.21
            
            $
            0.12
            
            $
            0.11
            
            $
            0.07
            
            $
            0.13
            
            $
            0.09Income
                (loss) from discontinuedoperations,
              net of gain on salesof
                discontinued businesses
              (net
                of income
                taxes)
            
            
            (0.01
            )
            
            -
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.02Net
                income
            
            $
            0.20
            
            $
            0.15
            
            $
            0.21
            
            $
            0.14
            
            $
            0.11
            
            $
            0.09
            
            $
            0.13
            
            $
            0.11Net
                income per diluted share:Income
                from continuing operations
            
            $
            0.20
            
            $
            0.14
            
            $
            0.19
            
            $
            0.12
            
            $
            0.11
            
            $
            0.06
            
            $
            0.12
            
            $
            0.09Income
                (loss) from discontinuedoperations,
              net
                of gain on sales ofdiscontinued
                businesses
              (net
                of income
                taxes)
            
            
            (0.01
            )
            
            -
            
            
            -
            
            
            0.01
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.01Net
                income
            
            $
            0.19
            
            $
            0.14
            
            $
            0.19
            
            $
            0.13
            
            $
            0.11
            
            $
            0.08
            
            $
            0.12
            
            $
            0.10Weighted
                average shares outstandingBasic
            
            
            6,214
            
            
            6,242
            
            
            7,113
            
            
            8,479
            
            
            8,486
            
            
            8,488
            
            
            8,485
            
            
            8,433Diluted
            
            
            6,569
            
            
            6,695
            
            
            7,571
            
            
            8,902
            
            
            8,806
            
            
            8,803
            
            
            8,822
            
            
            8,750








(1) During the fourth quarter of 2006, the Company determined that assumptions
      used in the Black-Scholes option pricing model related principally to the
      expected term of an option and the forfeiture rate used in the determination
      of
      stock-based compensation expense during fiscal 2006 were incorrect. We
      determined that the stock-based compensation expense recognized during the
      interim periods of 2006 was understated by approximately $35,000 in each of
      the
      first three quarters of 2006, or approximately $105,000 for the nine month
      period ended March 31, 2006. We also determined that the understatement of
      expense in each of the interim periods of 2006 was immaterial to each quarter,
      and, accordingly, in the fourth quarter of 2006, we recorded a correcting
      adjustment of $105,000 to stock-based compensation expense, or approximately
      $0.01 per diluted share. Accordingly, this adjustment is reflected in cost
      of
      revenues ($47,000) and selling, general and administrative expense ($58,000).
      See notes 2 and 17 to the consolidated financial statements included in Part
      II,
      Item 8 of this Annual Report.


54





**Quarters
                Ended**
              **(In
                thousands)**Sept.
                30,
              2004
            
            Dec.
                31,
              2004
            
            Mar.
                31,
              2005
            
            June
                30,
              2005
            
            Sept.
                30,
              2005
            
            Dec.
                31,
              2005
            
            Mar.
                31,
              2006
            
            June
                30,
              2006**Selected
                Operating Data:**Units
                authenticated or gradedCoins
            
            
            371
            
            
            421
            
            
            449
            
            
            429
            
            
            395
            
            
            357
            
            
            474
            
            
            563Sportscards
            
            
            265
            
            
            253
            
            
            283
            
            
            283
            
            
            283
            
            
            275
            
            
            315
            
            
            326Autographs
            
            
            22
            
            
            17
            
            
            15
            
            
            23
            
            
            55
            
            
            34
            
            
            45
            
            
            47Stamps
            
            
            5
            
            
            7
            
            
            7
            
            
            7
            
            
            9
            
            
            7
            
            
            10
            
            
            12Currency
            
            
            -
            
            
            -
            
            
            -
            
            
            3
            
            
            9
            
            
            5
            
            
            9
            
            
            6Diamonds
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            1
            
            
            3Total
            
            
            663
            
            
            698
            
            
            754
            
            
            745
            
            
            751
            
            
            679
            
            
            854
            
            
            957





**Liquidity
      and Capital Resources**




At
      June
      30, 2006, we had cash and cash equivalents of $52,110,000, as compared to
      $65,439,000 at June 30, 2005.




Historically,
      we have relied on internally-generated funds, rather than borrowings, as our
      primary source of funds to support our grading operations. Additionally, our
      authentication and grading services have, and in the future we expect that
      they
      will, provide us with relatively stable and predictable cash flows, largely
      because (i) in many instances our customers prepay for those services at
      the time they submit their collectibles to us for authentication and grading,
      and (ii) in the event of a decline in authentication and grading
      submissions, we have the ability to reduce our variable operating costs to
      offset, at least partially, the impact on our cash flows of such a
      decline.




Due
      to
      the Company having utilized its net operating losses for federal tax purposes
      by
      March 31, 2006, the Company was required to make federal tax payments on its
      estimated taxable income in the fourth quarter of fiscal 2006. The Company
      continues to have losses and tax credits available for state income tax
      purposes.




During
      fiscal 2006, operating activities of our continuing operations provided net
      cash
      of $7,593,000, compared with $7,447,000 generated in fiscal 2005.




Investing
      activities used net cash of $18,253,000 during fiscal 2006, primarily to fund
      (i) $14,582,000 used to fund the purchases of the businesses we acquired
      during the fiscal year 2006; and (ii) net advances of $2,253,000 that we
      made under our Dealer Financing Program conducted by our wholly owned
      subsidiary, Collectors Finance Corporation, and (iii) capital expenditures
      of $1,366,000, primarily for the purchase of fixed assets.




In
      fiscal
      2006, financing activities used net cash of $3,059,000, including cash of
      $2,628,000 used to repurchase the Company’s common stock under the Company’s
      Stock Buyback Program (see below) and $674,000 used to pay cash dividends to
      stockholders (see below), partially offset by proceeds of $243,000 from the
      exercise of employee stock options.




*Bank
      Line of Credit* .
      In
      fiscal 2005 we organized Collectors Finance Corporation (“CFC”), as a
      wholly-owned subsidiary, to engage in the business of making loans primarily
      to
      coin dealers. All such loans are required to be collateralized by the delivery
      to us of collectibles that have a fair market value of at least the amount
      of
      the loans. The loans are required to be repaid to us when those collectibles
      are
      returned to the dealers. To provide a source of funding for those loans, in
      June
      2005 CFC obtained a revolving bank line of credit pursuant to a loan and
      security agreement that permits CFC to borrow, at any one time, up to the lesser
      of (i) $7,000,000 or (ii) an amount equal to 85% of the aggregate
      principal amount of those of its loan receivables that meet the bank’s
      eligibility criteria. Borrowings under that credit line, which has a term of
      two
      years ending in June 2007, bear interest at rates based on the bank’s prime rate
      or LIBOR, as applicable, and are secured by the loan receivables due CFC. There
      were no borrowings outstanding under that line of credit at June 30,
      2006.




55


CFC’s
      obligations under this line of credit have been guaranteed by the Company
      pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
      of
      that Agreement require the Company to be in compliance with certain financial
      and other restrictive covenants, and require the consent of the lender
      (i) for the payment of cash dividends or repurchases of our common stock in
      an aggregate amount exceeding its annual net income in any year, and
      (ii) to consummate more than $5,000,000 of business acquisitions in any
      year. The Company was in compliance with all of these covenants at June 30,
      2006
      and received the required consents from the lender for the purchase of the
      Gemprint business, the repurchase of the Company’s common stock, and the payment
      of dividends during fiscal 2006.




*Outstanding
      Financial Obligations* .
      We had
      the following outstanding obligations under operating leases, net of sublease
      income at June 30, 2006 for years ending June 30:





2007
            
            $
            1,410,0002008
            
            
            1,594,0002009
            
            
            1,585,0002010
            
            
            840,0002011
            
            
            393,000Thereafter
            
            
            1,756,000$
            7,578,000





With
      the
      exception of these obligations, we do not have any material financial
      obligations, such as long-term debt, capital lease, or long-term purchase
      obligations. In the event that CFC incurs any borrowings under its line of
      credit, we will have an obligation to repay such borrowings; however, as noted
      above, there were no borrowings outstanding under this line of credit at June
      30, 2006.





*Stock
      Buyback Program.* In
      December 2005, the Company’s Board of Directors approved a $10 million stock
      buyback program. The program authorizes the Company to make up to $10,000,000
      of
      stock repurchases in open market or privately negotiated transactions, in
      accordance with applicable Securities Exchange Commission rules, when
      opportunities to make such repurchases, at attractive prices, become available.
      The Company is under no obligation to repurchase any shares under the stock
      buyback program and the timing, actual number and value of shares that may
      be
      repurchased under that program will depend on a number of factors, including
      the
      Company's future financial performance, the Company's available cash resources
      and competing uses for the cash that may arise in the future, prevailing market
      prices of the Company's common stock and the number of shares that become
      available for sale at prices that the Company believes are attractive. During
      fiscal year 2006, the Company repurchased a total of 181,851 shares of its
      common stock for an aggregate purchase price of approximately $2,628,000 (which
      includes transaction costs of approximately $10,000). Additional information
      regarding these share repurchases is set forth in Item 5 of Part II of this
      Annual Report.




*Dividends.* On ** May
      31,
      2006, the Board of Directors adopted a dividend policy that calls for the
      payment of an expected total annual cash dividend of $0.32 per common share,
      payable in the amount of $0.08 per share per quarter. To date, the Board of
      Directors has declared the following quarterly cash dividends under this
      policy.




**Declaration
                Date**
            
            **Record
                Date**
            
            **Dividend
                Payment Date**May
                31, 2006
            
            June
                14, 2006
            
            June
                28, 2006August
                15, 2006
            
            August
                29, 2006
            
            September
                12, 2006





The
      declaration of cash dividends in the future, pursuant to the Company’s dividend
      policy, is subject to final determination each quarter by the Board of Directors
      based on a number of factors, including the Company’s financial performance and
      its available cash resources, its cash requirements and alternative uses of
      cash
      that the Board may conclude would represent an opportunity to generate a greater
      return on investment for the Company. For these reasons, as well as others,
      there can be no assurance that the amount of the quarterly cash dividend will
      not be reduced, or that the Board of Directors will not decide to suspend or
      discontinue the payment of cash dividends, in the future.





We
      plan
      to use our cash resources to (i) expand our existing and implement new
      marketing programs; (ii) introduce new services for our customers;
      (iii) acquire or start-up other high-value collectibles or high-value asset
      authentication and grading businesses; (iv) make private and open market
      share repurchases under our stock buyback program if there are opportunities
      to
      do so at prices that we believe are attractive; (v) continue paying
      dividends to our stockholders, as determined by the Board of Directors; and
      (vi) fund working capital requirements, and for other corporate purposes.
      Although we have no current plans to do so, we also may seek borrowings, and
      we
      may issue additional shares of our stock, to finance acquisitions of additional
      authentication and grading businesses.






56




***Recent
      Accounting Pronouncements***




In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 155, *Accounting
      for Certain Hybrid Financial Instruments* (an
      amendment of FASB Statements No. 133 and 140) and SFAS No.156, *Accounting
      for Servicing of Financial Assets* (an
      amendment of FASB Statement No. 140). We do not expect the adoption of SFAS
      No.
      155 and SFAS No. 156 to have a material impact on our financial position or
      results of operation.





In
      July
      2006, the FASB issued FASB Interpretation 48, *Accounting
      for Uncertainty in Income Taxes: an interpretation of FASB Statement No.
      109.* Interpretation 48 clarifies Statement 109, *Accounting
      for Income* Taxes,
      to
      indicate a criterion that an individual tax position would have to meet for
      some
      or all of the benefit of that position to be recognized in an entity’s financial
      statements. Interpretation 48 is effective for fiscal years beginning after
      December 31, 2006. We do not expect the adoption of Interpretation 48 to have
      a
      material impact on our financial position or results of operation.





**ITEM
      7A.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in financial market prices,
      including interest rate risk, foreign currency exchange rate risk, commodity
      price risk and other relevant market rate or price risks.




Due
      to
      the cash and cash equivalent balances that we maintain, we are exposed to risk
      of changes in short-term interest rates. At June 30, 2006, we had $52,110,000
      in
      cash and cash equivalents, primarily invested in money market funds. Reductions
      in short-term interest rates could result in reductions in the amount of that
      income. However, the impact on our operating results of such changes is not
      expected to be material.




The
      Company has no activities that would expose it to foreign currency exchange
      rate
      risk or commodity price risks.







57





**ITEM
      8.****FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





Index
      to Consolidated Financial Statements





**Page**Report
                of Grant Thornton LLP, Independent Registered Public Accounting
                Firm
            59Report
                of Deloitte & Touche LLP, Independent Registered Public Accounting
                Firm
            60Consolidated
                Balance Sheets at June 30, 2006 and 2005
            61Consolidated
                Statements of Operations for the Years Ended June 30, 2006, 2005
                and
                2004
            62Consolidated
                Statements of Stockholders’ Equity For the Years Ended June 30, 2006, 2005
                and 2004
            63Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2006, 2005
                and
                2004
            64Notes
                to Consolidated Financial Statements For the Years Ended June 30,
                2006,
                2005 and 2004
            66











58


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








Board
      of
      Directors and Stockholders


Collectors
      Universe, Inc. and Subsidiaries








We
      have
      audited the accompanying consolidated balance sheets of Collectors Universe,
      Inc. and subsidiaries (the Company) as of June 30, 2006 and 2005, and the
      related consolidated statements of operations, stockholders’ equity and cash
      flows for each of the two years ended June 30, 2006. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.




We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above, present
      fairly, in all material respects, the consolidated financial position of
      Collectors Universe, Inc. and subsidiaries as of June 30, 2006 and 2005 and
      the
      results of their consolidated operations and their consolidated cash flows
      for
      each of the two years ended June 30, 2006, in conformity with accounting
      principles generally accepted in the United States of America.




As
      described in Note 2 to the consolidated financial statements, the Company
      changed its method of accounting for stock-based employee compensation as a
      result of adopting Statement of Financial Accounting Standards No. 123(R), *Share-Based
      Payment,* effective
      July 1, 2005.




Our
      audit
      was conducted for the purpose of forming an opinion on the basic consolidated
      financial statements taken as a whole. The Schedule II is presented for purposes
      of additional analysis and is not a required part of the basic consolidated
      financial statements. This schedule has been subjected to the auditing
      procedures applied in the audit of the basic consolidated financial statements
      and, in our opinion, is fairly stated in all material respects in relation
      to
      the basic consolidated financial statements taken as a whole.




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Collectors Universe,
      Inc.
      and subsidiaries’ internal control over financial reporting as of June 30, 2006,
      based on criteria established in Internal Control - Integrated Framework issued
      by the Committee of Sponsoring Organizations of the Treadway Commission and
      our
      report dated September 7, 2006, expressed an unqualified opinion
      thereon.





/s/
      GRANT
      THORNTON LLP





Irvine,
      California


September
      7, 2006








59


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**





To
      the
      Stockholders and Board of Directors of


Collectors
      Universe, Inc.





We
      have
      audited the accompanying consolidated statements of operations, stockholders’
equity and cash flows of Collectors Universe, Inc. and subsidiaries (the
      Company) for the year ended June 30, 2004. Our audit also included the financial
      statement schedule listed in the index in Part IV, Item 15(A) (2) for the year
      ended June 30, 2004. These financial statements and the financial statement
      schedule are the responsibility of the Company’s management. Our responsibility
      is to express an opinion on these financial statements and the financial
      statement schedule based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the results of operations and cash flows of Collectors
      Universe, Inc. and subsidiaries for the year ended June 30, 2004, in conformity
      with accounting principles generally accepted in the United States of America.
      Also, in our opinion, such financial statement schedule for the year ended
      June
      30, 2004, when considered in relation to the basic consolidated financial
      statements taken as a whole, presents fairly in all material respects the
      information set forth therein.








DELOITTE
      & TOUCHE LLP





Costa
      Mesa, California


September
      23, 2004





60


**COLLECTORS
      UNIVERSE, INC. AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(in
      thousands, except per share data)





**June
                30,****ASSETS**
            
            **2006**
            
            **2005**Current
                assets:Cash
                and cash equivalents
            
            $
            52,110
            
            $
            65,439Accounts
                receivable, net of allowance of $37 in 2006 and $38 in
                2005
            
            
            1,753
            
            
            1,508Inventories,
                net
            
            
            437
            
            
            436Prepaid
                expenses and other current assets
            
            
            1,010
            
            
            1,102Customer
                notes receivable, net of allowance of $16 in 2006 and $0 in
                2005
            
            
            3,797
            
            
            1,560Deferred
                income taxes
            
            
            1,414
            
            
            2,854Receivables
                from sale of net assets of discontinued operations
            
            
            196
            
            
            63Current
                assets of discontinued operations held for sale
            
            
            83
            
            
            365Total
                current assets
            
            
            60,800
            
            
            73,327Property
                and equipment, net
            
            
            1,897
            
            
            857Goodwill
            
            
            9,799
            
            
            -Intangible
                assets, net
            
            
            4,674
            
            
            79Note
                receivable from sale of discontinued operation
            
            
            321
            
            
            -Deferred
                income taxes
            
            
            342
            
            
            1,051Other
                assets
            
            
            388
            
            
            174Non-current
                assets of discontinued operations held for sale
            
            
            -
            
            
            46$
            78,221
            
            $
            75,534**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            907
            
            $
            753Accrued
                liabilities
            
            
            2,043
            
            
            1,563Accrued
                compensation and benefits
            
            
            1,075
            
            
            1,069Income
                taxes payable
            
            
            496
            
            
            -Deferred
                revenue
            
            
            1,384
            
            
            1,001Current
                liabilities of discontinued operations held for sale
            
            
            8
            
            
            27Total
                current liabilities
            
            
            5,913
            
            
            4,413Deferred
                rent
            
            
            402
            
            
            386Other
                long-term liabilities
            
            
            -
            
            
            169Commitments
                and contingencies (note 15)
            
            
            -
            
            
            -Stockholders’
                equity:Preferred
                stock, $.001 par value; 5,000 shares authorized;no
                shares issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value; 45,000 shares authorized;Shares
                issued: 8,475 in 2006 and 8,610 in 2005;Shares
                outstanding (net of treasury stock): 8,350 in 2006 and 8,485 in
                2005
            
            
            8
            
            
            9Additional
                paid-in capital
            
            
            76,909
            
            
            78,594Accumulated
                deficit
            
            
            (3,990
            )
            
            (7,016
            )Treasury
                stock, at cost (125 shares)
            
            
            (1,021
            )
            
            (1,021
            )Total
                stockholders’ equity
            
            
            71,906
            
            
            70,566$
            78,221
            
            $
            75,534





The
      accompanying notes are an integral part of these consolidated financial
      statements.


61


**COLLECTORS
      UNIVERSE, INC. AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


(in
      thousands, except per share data)


**Year
                Ended June 30,****2006**
            
            **2005**
            
            **2004**Net
                revenues:Grading,
                authentication and related services
            
            $
            36,914
            
            $
            33,607
            
            $
            26,420Cost
                of revenues:Cost
                of grading, authentication and related services
            
            
            14,890
            
            
            12,239
            
            
            10,322Gross
                profit
            
            
            22,024
            
            
            21,368
            
            
            16,098Operating
                expenses:Selling
                and marketing expenses
            
            
            4,918
            
            
            3,534
            
            
            3,165General
                and administrative expenses
            
            
            13,337
            
            
            10,367
            
            
            8,664Settlement
                of lawsuit
            
            
            -
            
            
            500
            
            
            -Total
                operating expenses
            
            
            18,255
            
            
            14,401
            
            
            11,829Operating
                income
            
            
            3,769
            
            
            6,967
            
            
            4,269Interest
                income, net
            
            
            2,346
            
            
            906
            
            
            135Other
                income (expense), net
            
            
            22
            
            
            26
            
            
            (25
            )Income
                before provision for income taxes
            
            
            6,137
            
            
            7,899
            
            
            4,379Provision
                for income taxes
            
            
            2,733
            
            
            3,141
            
            
            1,581Income
                from continuing operations
            
            
            3,404
            
            
            4,758
            
            
            2,798Income
                (loss) from discontinued operations, net of gain on sales ofdiscontinued
                businesses
              (net
                of
                income taxes)
            
            
            296
            
            
            60
            
            
            (1,068
            )Net
                income
            
            $
            3,700
            
            $
            4,818
            
            $
            1,730Net
                income per basic share:Income
                from continuing operations
            
            $
            0.40
            
            $
            0.68
            
            $
            0.45Income
                (loss) from discontinued operations, net of gain on sales of discontinued
                businesses
              (net
                of
                income taxes)
            
            
            0.04
            
            
            0.01
            
            
            (0.17
            )Net
                income
            
            $
            0.44
            
            $
            0.69
            
            $
            0.28Net
                income per diluted share:Income
                from continuing operations
            
            $
            0.39
            
            $
            0.64
            
            $
            0.44Income
                (loss) from discontinued operations, net of gain on sales of discontinued
                businesses
              (net
                of
                income taxes)
            
            
            0.03
            
            
            0.01
            
            
            (0.17
            )Net
                income
            
            $
            0.42
            
            $
            0.65
            
            $
            0.27Weighted
                average shares outstanding:Basic
            
            
            8,473
            
            
            7,013
            
            
            6,170Diluted
            
            
            8,782
            
            
            7,452
            
            
            6,463








The
      accompanying notes are an integral part of these consolidated financial
      statements.


62




**COLLECTORS
      UNIVERSE, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS'
      EQUITY**


(in
      thousands)





**Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Retained
                Earnings**
              **(Accumulated**
            
            **Treasury
                Stock****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit)**
            
            **Shares**
            
            **Amount**
            
            **Total**Balance
                at June 30, 2003
            
            
            6,255
            
            $
            6
            
            $
            40,898
            
            $
            (13,564
            )
            
            (125
            )
            $
            (1,021
            )
            $
            26,319Exercise
                of stock options
            
            
            204
            
            
            -
            
            
            883
            
            
            -
            
            
            -
            
            
            -
            
            
            883Tax
                benefit on exercise of
                stock options
            
            
            -
            
            
            -
            
            
            342
            
            
            -
            
            
            -
            
            
            -
            
            
            342Issuances
                of stock under stock purchase plan and related compensation
                expense
            
            
            12
            
            
            -
            
            
            92
            
            
            -
            
            
            -
            
            
            -
            
            
            92Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            1,730
            
            
            -
            
            
            -
            
            
            1,730Cancellation
                of stock issued toa
                former officer
            
            
            (133
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at June 30, 2004
            
            
            6,338
            
            $
            6
            
            $
            42,215
            
            $
            (11,834
            )
            
            (125
            )
            $
            (1,021
            )
            $
            29,366Issuance
                of common stock inpublic
                offering (net of expenses)
            
            
            2,196
            
            
            2
            
            
            35,655
            
            
            -
            
            
            -
            
            
            -
            
            
            35,657Exercise
                of stock options
            
            
            71
            
            
            1
            
            
            283
            
            
            -
            
            
            -
            
            
            -
            
            
            284Tax
                benefit on exercise of
                stock options
            
            
            -
            
            
            -
            
            
            338
            
            
            -
            
            
            -
            
            
            -
            
            
            338Issuances
                of stock under stock purchase plan and related
              compensation expense
            
            
            5
            
            
            -
            
            
            103
            
            
            -
            
            
            -
            
            
            -
            
            
            103Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            4,818
            
            
            -
            
            
            -
            
            
            4,818Balance
                at June 30, 2005
            
            
            8,610
            
            $
            9
            
            $
            78,594
            
            $
            (7,016
            )
            
            (125
            )
            $
            (1,021
            )
            $
            70,566Exercise
                of stock options
            
            
            47
            
            
            -
            
            
            243
            
            
            -
            
            
            -
            
            
            -
            
            
            243Stock
                compensation expenses
            
            
            -
            
            
            -
            
            
            670
            
            
            -
            
            
            -
            
            
            -
            
            
            670Tax
                benefit on exercise of
                stock options
            
            
            -
            
            
            -
            
            
            29
            
            
            -
            
            
            -
            
            
            -
            
            
            29Shares
                repurchased and cancelled under the Stock Repurchase Plan
            
            
            (182
            )
            
            (1
            )
            
            (2,627
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,628
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            3,700
            
            
            -
            
            
            -
            
            
            3,700Dividends
                paid ($0.08 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (674
            )
            
            -
            
            
            -
            
            
            (674
            )Balance
                at June 30, 2006
            
            
            8,475
            
            $
            8
            
            $
            76,909
            
            $
            (3,990
            )
            
            (125
            )
            $
            (1,021
            )
            $
            71,906








The
      accompanying notes are in integral part of these consolidated financial
      statements.


63


**COLLECTORS
      UNIVERSE, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(in
      thousands)


**Year
                ended June 30,****2006**
            
            **2005**
            
            **2004****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            3,700
            
            $
            4,818
            
            $
            1,730Adjustments
                to reconcile net income to net cash providedby
                operating activities:Depreciation
                and amortization
            
            
            919
            
            
            443
            
            
            647Stock-based
                compensation expense
            
            
            670
            
            
            33
            
            
            50Tax
                benefit from exercise of stock options
            
            
            29
            
            
            338
            
            
            342Loss
                on termination of sublease
            
            
            83
            
            
            -
            
            
            -Discontinued
                operations
            
            
            (296
            )
            
            (60
            )
            
            1,068Provision
                for bad debts and returns
            
            
            55
            
            
            38
            
            
            31Provision
                for inventory write-down
            
            
            72
            
            
            -
            
            
            53(Gain)
                loss on sale of property and equipment
            
            
            8
            
            
            (10
            )
            
            25Deferred
                income taxes
            
            
            1,853
            
            
            2,474
            
            
            1,154Changes in operating assets and liabilities:Accounts
                receivable
            
            
            (115
            )
            
            (756
            )
            
            (367
            )Inventories
            
            
            (73
            )
            
            16
            
            
            (325
            )Prepaid
                expenses and other
            
            
            (63
            )
            
            (321
            )
            
            (143
            )Refundable
                income taxes
            
            
            -
            
            
            13
            
            
            1,170Other
                assets
            
            
            (278
            )
            
            (88
            )
            
            29Accounts
                payable and accrued liabilities
            
            
            403
            
            
            510
            
            
            (350
            )Accrued
                compensation and benefits
            
            
            (164
            )
            
            133
            
            
            446Income
                taxes payable
            
            
            496
            
            
            -
            
            
            (14
            )Deferred
                revenue
            
            
            278
            
            
            (224
            )
            
            448Deferred
                rent
            
            
            16
            
            
            (15
            )
            
            10Other
                long-term liabilities
            
            
            -
            
            
            105
            
            
            64Net
                cash provided by operating activities
            
            
            7,593
            
            
            7,447
            
            
            6,068Net
                cash provided by operating activities of discontinued
                businesses
            
            
            390
            
            
            784
            
            
            8,128**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Proceeds
                from sale of property and equipment
            
            
            8
            
            
            11
            
            
            83Capital
                expenditures
            
            
            (1,366
            )
            
            (256
            )
            
            (538
            )Purchase
                of businesses, net of cash acquired
            
            
            (14,582
            )
            
            -
            
            
            -Advances
                on customer notes receivable
            
            
            (4,283
            )
            
            (6,078
            )
            
            -Proceeds
                from collection of customer notes receivable
            
            
            2,030
            
            
            4,518
            
            
            -Capitalized
                software
            
            
            (421
            )
            
            -
            
            
            -Cash
                received from sale of net assets of discontinued
                operations
            
            
            361
            
            
            1,548
            
            
            2,307Net
                cash provided by (used in) investing activities
            
            
            (18,253
            )
            
            (257
            )
            
            1,852**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                from employee stock purchase plan
            
            
            -
            
            
            70
            
            
            60Proceeds
                from sale of common stock, net
            
            
            -
            
            
            35,657
            
            
            -Proceeds
                from exercise of stock options
            
            
            243
            
            
            284
            
            
            864Payments
                for retirement of common stock
            
            
            (2,628
            )
            
            -
            
            
            -Dividends
                paid to common stockholders
            
            
            (674
            )
            
            -
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            (3,059
            )
            
            36,011
            
            
            924Net
                increase (decrease) in cash and cash equivalents
            
            
            (13,329
            )
            
            43,985
            
            
            16,972Cash
                and cash equivalents at beginning of year
            
            
            65,439
            
            
            21,454
            
            
            4,482Cash
                and cash equivalents at end of year
            
            $
            52,110
            
            $
            65,439
            
            $
            21,454





The
      accompanying notes are an integral part of these consolidated financial
      statements.


64


**COLLECTORS
      UNIVERSE, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (continued)**


(in
      thousands)




****Year
                  ended June 30,******2006**
              
              
              **2005**
              
              
              **2004****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION**Income
                  taxes paid
              
              $
              624
              
              $
              213
              
              $
              14Interest
                  paid
              
              $
              16
              
              $
              3
              
              $
              2Effective
                  July 14, 2005, the Company acquired CoinFacts.com in atransaction
                summarized as follows:Goodwill
              
              $
              515
              
              $
              -
              
              $
              -Purchase
                  price
              
              $
              515
              
              $
              -
              
              $
              -Effective
                  September 2, 2005, the Company acquired Certified Coin Exchange
                  (CCE) in
                  a
                transaction
                  summarized as follows:Fair
                  value of net liabilities assumed
              
              $
              (41
              )
              $
              -
              
              $
              -Deferred
                  taxes recognized at acquisition
              
              
              (296
              )
              
              -
              
              
              -Intangible
                  assets
              
              
              947
              
              
              -
              
              
              -Fair
                  value of computertradingpost.com, Inc., including net
                  assets
              
              
              600
              
              
              -
              
              
              -Goodwill
              
              
              1,117
              
              
              -
              
              
              -Purchase
                  price, net of $50 cash acquired
              
              $
              2,327
              
              $
              -
              
              $
              -Effective
                  November 8, 2005, the Company acquired Gem Certificationand
                  Appraisal Lab
                (GCAL) in a transaction summarized as follows:Fair
                  value of net assets acquired
              
              $
              119
              
              $
              -
              
              $
              -Intangible
                  assets
              
              
              53
              
              
              -
              
              
              -Goodwill
              
              
              3,068
              
              
              -
              
              
              -Purchase
                  price, net of $28 cash acquired
              
              $
              3,240
              
              $
              -
              
              $
              -Effective
                  December 22, 2005, the Company acquired the business ofGemprint
                  Corporation
                in a transaction summarized as follows:Fair
                  value of net assets acquired
              
              $
              40
              
              $
              -
              
              $
              -Intangible
                  assets
              
              
              3,444
              
              
              -
              
              
              -Goodwill
              
              
              5,099
              
              
              -
              
              
              -Purchase
                  price
              
              $
              8,583
              
              $
              -
              
              $
              -**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING****ACTIVITIES:**During
                  2004, in connection with the divestiture of the Company’s collectibles
                  auctions and direct sales businesses, the Company sold such businesses
                  for
                  gross proceeds of approximately $2,874,000, of which $2,307,000
                  and
                  $544,000 were received in 2004 and 2005, respectively. The balance
                  of
                  $23,000 is included as part of the receivables from the sale of
                  discontinued operations in the accompanying balance sheet at June
                  30,
                  2005.In
                  connection with the sale of CTP in November, 2005, the Company
                  received a
                  note receivable of $458,000.
                
                The
                  Company realized a gain of $104,000 in fiscal 2006 related to the
                  on-going
                  disposal of one of its collectible sales businesses, which proceeds
                  were
                  received subsequent to June 30, 2006 (see note 4).


The
      accompanying notes are an integral part of these consolidated financial
      statements.








65


**COLLECTORS
      UNIVERSE, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.**  **Company
      Organization and Nature of Business**





***Organization***




Collectors
      Universe, Inc. (“We,” “us,” the “Company” or “Collectors Universe”) is a
      Delaware corporation that was organized on February 5, 1999 for the purpose
      of
      enabling Professional Coin Grading Service, Inc. (“PCGS”) to acquire other
      businesses that, like PCGS, would provide services to the collectibles markets.
      On February 5, 1999, Collectors Universe issued 4,327,000 shares of common
      stock
      in exchange for all of the outstanding shares of PCGS. As a result of that
      exchange, the former stockholders of PCGS became stockholders of Collectors
      Universe, with each of them receiving a number of our shares based on his or
      her
      percentage ownership of the shares of PCGS. Prior to this exchange, Collectors
      Universe had no operating assets or liabilities and had not yet conducted any
      operations. The assets and liabilities acquired were recorded at the PCGS’ basis
      as the transaction represented a transfer of assets and liabilities between
      entities under common control.




Concurrently,
      with the exchange transaction with PCGS, Collectors Universe acquired the assets
      of the auction businesses of Lyn F. Knight Rare Coins, Inc. (“Lyn Knight”) and
      Kingswood Coin Auctions, LLC (“Kingswood”) and the minority ownership interests
      in Superior Sportscard Auctions, LLC (“Superior”) and Internet Universe, LLC
      (“IU”), both of which were majority-owned subsidiaries of PCGS at the time these
      acquisitions were consummated. See note 4, Discontinued Operations.




In
      fiscal
      2005, Collectors Finance Corporation (“CFC”) began operations as a 100%
      subsidiary of the Company to engage in the business of making short-term loans
      to collectibles dealers pursuant to a Dealer Financing Program. Under that
      program, CFC offers short-term loans to established collectibles dealers. The
      loans are secured by the delivery of coins or other collectibles to us. In
      March
      2005, CFC received a California Finance Lenders License.




In
      fiscal
      2006, the Company acquired the following businesses, the results of operations
      of which have been consolidated into the financial statements of the Company
      from their respective dates of acquisition:




**Business**
            **Acquisition
                Date**
            **Purchase
                Price**CoinFacts.com
            July
                14, 2005
            $0.5
                millionCertified
                Coin Exchange
            September
                2, 2005
            $2.2
                millionGem
                Certification & Appraisal Lab, LLC
            November
                8, 2005
            $3.0
                millionGemprint
                Corporation
            December
                22, 2005
            $7.5
                million





***Nature
      of the Business***




We
      are a
      collectibles company engaged in the provision of authentication, grading and
      related services for high-value collectibles and other high value assets. We
      provide authentication and grading services for rare collectibles, consisting
      of
      coins, vintage U.S. paper currency, sportscards, stamps, sports memorabilia
      and
      autographs, and for diamonds and colored gemstones. We also publish magazines
      that provide market prices and information for certain collectibles and high
      value assets, operate the CCE subscription business and sell advertising on
      our
      websites and in those magazines.




During
      the period from 1999 through the latter part of fiscal 2004, we also were
      engaged in the business of marketing and selling high-end collectible coins,
      sportscards and sports entertainment and historical memorabilia. Most of those
      sales were made at multi-venue auctions that were conducted by our collectibles
      sales divisions, which were comprised of Bowers and Merena Galleries and
      Kingswood Coin Auctions for rare coins, Superior Sportscard Auctions for vintage
      sportscards and sports memorabilia and Odyssey for entertainment and historical
      memorabilia. We also sold collectible coins by direct sales
      methods.




On
      December 4, 2003, our Board of Directors adopted a plan to focus the Company’s
      financial and management resources and collectibles expertise, on the operations
      and growth of its authentication and grading businesses, by divesting the
      collectibles auctions and direct sales businesses comprising its collectibles
      sales segment. As a result, in the accompanying consolidated financial
      statements, the assets and related liabilities of the collectibles sales segment
      have been classified as held for sale and the related operating results have
      been classified as discontinued operations in accordance with Statement of
      Financial Accounting Standards (SFAS) No. 144 (see note 4).






66


**2.**  **Summary
      of Significant Accounting Policies**




***Basis
      of Presentation***




The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of
      America.




***Principles
      of Consolidation***




The
      accompanying consolidated financial statements include the accounts of
      Collectors Universe, Inc. and its owned subsidiaries, all of which are 100%
      owned by the Company. At June 30, 2006, such operating subsidiaries were
      Professional Coin Grading Services, Inc., Collectors Finance Corporation,
      Certified Asset Exchange, Inc., and Gem Certification and Assurance Lab, Inc.
      In
      2004, the Company disposed of the businesses comprising its collectibles sales
      segment and, accordingly, the assets and liabilities of those businesses have
      been classified as held for sale and their related operating results (including
      the gains or losses recognized on the sales of those businesses) have been
      classified as discontinued operations. See note 4.




***Use
      of Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the dates
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting periods. Actual results may differ from those estimates,
      and such differences may be material to the consolidated financial
      statements.




***Cash
      and Cash Equivalents***




We
      consider all highly liquid investments with original maturities of three months
      or less at the date of purchase to be cash and cash equivalents. At June 30,
      2006, cash and cash equivalents included approximately $51,000,000 of trading
      securities, primarily comprising money market-account balances. However, such
      cash and cash equivalents may also, at times, include high quality commercial
      paper issued by U.S. or foreign companies and bank certificates of deposit,
      which were included in cash and cash equivalents at June 30, 2005. The minimum
      credit quality of the portfolio of trading securities must be rated no less
      than
      single-A long term or A1/P1 short term, and the portfolio must contain no more
      than 25% exposure to securities of issuers whose principal business activities
      are in the same industry. However, the 25% limitation does not apply to
      securities guaranteed by the U.S. government or to bank obligations, subject
      to
      U.S. banking regulations. In addition, the weighted average maturity of the
      portfolio must not exceed 90 days. Such trading securities are carried at market
      value in the accompanying consolidated balance sheet at June 30, 2006.
      Unrealized gains on such trading securities were approximately $0 and $106,000
      at June 30, 2006 and 2005.




***Concentrations***




Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk at June 30, 2006 consist primarily of cash and cash equivalents,
      accounts receivables and notes receivables.




*Financial
      Instruments and Cash Balances.* Through
      September 30, 2004, the Company had invested its excess cash in a large
      uninsured institutional money market fund. In September 2004, the Company
      adopted a policy to invest its excess cash in a portfolio of high quality U.S.
      dollar-denominated money market type or similar securities, and appointed a
      new
      portfolio manager. At June 30, 2006 and 2005, the Company’s excess funds of
      approximately $51,000,000 and $60,000,000, respectively, were primarily invested
      in certificates of deposit, in a money market fund, and in high quality
      commercial paper. In addition, at June 30, 2006, the Company had approximately
      $600,000 in a non-interest bearing bank account for general day-to-day
      operations.




67


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




*Accounts
      Receivable.* A
      substantial portion of accounts receivable is due from collectibles dealers.
      At
      June 30, 2006 and 2005, accounts receivable from two and one customers
      represented 31% and 46%, respectively, of the Company’s total gross accounts
      receivable balances. We perform an analysis of the expected collectibility
      of
      accounts receivable based on several factors, including the age and extent
      of
      significant past due accounts and economic conditions or trends that may impact
      the ability of the debtor to pay their account receivable balances. Based on
      such review, we establish an allowance for doubtful accounts, when necessary.
      The allowance for doubtful accounts receivable was $37,000 and $38,000 at June
      30, 2006 and June 30, 2005, respectively.




*Customers.* The
      authentication and grading of collectible coins accounted for approximately
      65%,
      69% and 66% of our net revenues for the years ended June 30, 2006, 2005 and
      2004, respectively.




*Customer
      Notes Receivable.* During
      the year ended June 30, 2006, we made short term advances, in an aggregate
      principal amount of $4,283,000 to collectibles dealers and collectors who are
      customers, and recorded aggregate cash collections of $2,030,000. We perform
      an
      analysis of the expected collectibility of customer notes receivable based
      on
      several factors, including the age and extent of significant past due notes
      and
      economic conditions or trends that may offset the ability of the debtor to
      pay
      their customer notes receivable balances, including the adequacy of the
      collateral received to secure such balances. At June 30, 2006, we recorded
      an
      allowance for uncollectible customer notes receivable of $16,000 reflecting
      a
      deficiency of collateral value for one customer.




*Suppliers* .
      We
      purchase injection-molded parts, holograms and printed labels for our grading
      services. There are numerous suppliers for these items and, as a result, it
      is
      possible to change suppliers without significant delay or cost to the Company.
      However, while there are numerous sources for injection-molded parts, these
      parts require a die to fabricate the part. The manufacture of high precision
      dies can be a lengthy process and requires considerable expertise in their
      fabrication. Although, we do not have back-up dies for some of our high volume
      injection-molded parts and we rely on one supplier for these requirements,
      we
      believe that this supplier maintains a large enough inventory of the
      injection-molded parts to allow time for us to have new molds manufactured
      for
      us by other suppliers.




***Fair
      Value of Financial Instruments***




The
      carrying value of cash and cash equivalents, accounts receivable, customer
      notes
      receivable, receivables from sale of net assets of discontinued operations,
      accounts payable and accrued liabilities approximate their respective fair
      values due to the short-term nature of such instruments. The carrying value
      of
      the note receivable related to the sale of a discontinued operation approximates
      fair value, as the interest rate on such note approximates an amount that would
      be extended to parties with similar credit risk and remaining
      maturities.




***Inventories***




Our
      inventories consist primarily of (i) our coin and stamp collectibles
      inventories, and (ii) consumable supplies that we use in our continuing
      authentication and grading businesses. We account for those collectibles
      inventories under the specific identification method. Inventories are valued
      at
      the lower of cost or market. Inventories are periodically reviewed to identify
      slow moving items, and the allowance for inventory loss is recognized, as
      necessary. The allowance for inventory loss was $106,000 and $34,000 at June
      30,
      2006 and 2005, respectively. It is possible that our estimates of market value
      could change in the near term due to market conditions in the various
      collectibles markets served by the Company.




***Property
      and Equipment***




Property
      and equipment are stated at cost. Depreciation and amortization are provided
      using the straight-line method over the estimated useful lives ranging from
      three to seven years. Leasehold improvements are amortized over the shorter
      of
      the estimated useful lives of the improvements or the term of the related lease.
      Repair and maintenance costs are expensed as incurred.




68


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




***Long-Lived
      Assets***




Management
      regularly reviews property and equipment and other long-lived assets, including
      certain identifiable intangibles, for possible impairment. This review occurs
      annually, or more frequently if events or changes in circumstances indicate
      the
      carrying amount of the asset may not be recoverable in full. If there is
      indication of impairment of property, equipment or amortizable intangible
      assets, then management would prepare an estimate of future cash flows
      (undiscounted and without interest charges) expected to result from the use
      of
      that asset and its eventual disposition. If these cash flows are less than
      the
      carrying amount of the asset, an impairment loss would be recognized to write
      down the asset to its estimated fair value. The fair value would be estimated
      at
      the present value of the future cash flows discounted at a rate commensurate
      with management’s estimates of the business risks. No long-lived asset
      impairments were identified at June 30, 2006 or 2005.




***Revenue
      Recognition***




Net
      revenues consist primarily of fees generated from the authentication and grading
      of coins, sportscards, autographs, currency, stamps and diamonds (which the
      Company began grading in the second quarter of 2006). Authentication and grading
      revenues are recognized when those services have been performed by us and the
      item is shipped back to the customer. Authentication and grading fees generally
      are prepaid, although we offer open account privileges to larger dealers.
      Advance payments received for grading services are deferred until the service
      is
      performed and the graded item is shipped to the customer. In the case of dealers
      to whom we have extended credit, we record revenues at the time the item is
      shipped to the customer.




***Shipping
      and Handling Costs***




Shipping
      and handling costs incurred to return to our customers their collectibles
      property are recorded as costs of revenues, net of amounts received from such
      customers.





***Cooperative
      Marketing Arrangements***





In
      accordance with EITF 01-09, *Accounting
      for Consideration Given By a Vendor to a Customer (Including a Reseller of
      the
      Vendor’s Products)* ,
      marketing allowances given to a customer have been classified as a reduction
      of
      revenues in the year ended June 30, 2006.





***Warranty
      Costs***




We
      offer
      a warranty covering most of the collectibles we authenticate and grade. Under
      the warranty, if any coin, sportscard, stamp or currency note that was
      previously graded by us is later submitted to us for re-grading and either
      (i) receives a lower grade upon that resubmittal or (ii) is determined
      not to have been authentic, we will offer to purchase the collectible or
      higher-value asset, or, in the alternative, at our option, pay the difference
      in
      value of the item at its original grade as compared with its lower grade.
      However, this warranty is voided if the collectible, upon resubmittal to us,
      is
      not in the same tamper-evident clear plastic holder in which it was placed
      at
      the time we last graded it or shows signs of tampering. We also offer a similar
      warranty, of one year’s duration and subject to certain limitations, covering
      the diamonds that we authenticate and grade. We accrue for estimated warranty
      costs based on historical trends and related experience.




***Advertising
      Costs***




Advertising
      costs are expensed as incurred and amounted to approximately $620,000, $260,000
      and $149,000 in the fiscal years ended June 30, 2006, 2005 and 2004,
      respectively.




***Income
      Taxes***




We
      account for income taxes in accordance with SFAS No. 109 *,
      Accounting for Income Taxes* .
      This
      statement requires the recognition of deferred tax assets and liabilities for
      the future consequences of events that have been recognized in the Company’s
      financial statements or tax returns. Measurement of the deferred items is based
      on enacted tax laws. In the event the future consequences of differences between
      financial reporting bases and tax bases of the Company’s assets or liabilities
      result in a deferred tax asset, SFAS No. 109 requires an




69


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




evaluation
      of the probability of being able to realize the future benefits indicated by
      such asset. A valuation allowance related to a deferred tax asset is recorded
      when it is more likely than not that some portion or all of the deferred tax
      asset will not be realized.




***Capitalized
      Software***




At
      June
      30, 2006, the Company capitalized approximately $421,000 as capitalized software
      in accordance with Statement of Position (“SOP”) 98-1, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use* .
      SOP
      98-1 requires that certain costs incurred, either from internal or external
      sources, be capitalized as part of intangible assets and amortized on a
      straight-line basis over the useful life of the software. During fiscal 2006,
      the Company recorded approximately $11,000 as amortization expense for certain
      projects that were completed. Planning, training, support and maintenance costs
      incurred either prior to or following the implementation phase are recognized
      as
      expense in the period in which they occur. The Company evaluates the carrying
      values of capitalized software to determine if the carrying values are impaired,
      and, if necessary, an impairment loss is recorded in the period in which the
      impairment occurs.




***Stock-Based
      Compensation***




At
      June
      30, 2006, the Company had three stock-based compensation plans. Prior to July
      1,
      2005, the Company accounted for these plans under the recognition and
      measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations, as permitted by SFAS No. 123, *Accounting
      for Stock Based Compensation* .
      No
      stock-based employee compensation cost was recognized in the statements of
      operations for fiscal years prior to June 30, 2006, as all options granted
      under
      these plans had an exercise price equal to the market value of the underlying
      common stock on the date of grant.





Effective
      July 1, 2005, on the first day of the Company’s fiscal year 2006, the Company
      adopted the fair value recognition provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      using
      the modified-prospective transition method. Under this transition method,
      compensation cost recognized in the fiscal year ended June 30, 2006 and in
      subsequent fiscal years includes: (a) compensation cost for all share-based
      payments granted and not yet vested prior to July 1, 2005, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      No.
      123, and (b) compensation cost for all share-based payments granted subsequent
      to June 30, 2005 based on the grant-date fair value estimated in accordance
      with
      the provisions of SFAS No. 123(R). Results for prior periods have not been
      restated. However, we became aware of an error in the determination of the
      proforma expense in years prior to adoption, as it relates to our estimate
      of
      the expected term of the outstanding options. Therefore, the fiscal year 2005
      proforma expense has been restated as disclosed in note 2 below.





Since
      stock-based compensation expense recognized in the statement of operations
      for
      the fiscal year ended June 30, 2006 is based on awards expected to vest, the
      compensation expense has been reduced for estimated forfeitures. SFAS No. 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. At June 30, 2006, the annual forfeiture rate is estimated to be
      10.5%.





The
      Company calculates stock-based compensation by estimating the fair value of
      each
      option using the Black-Scholes option pricing model. The Company’s determination
      of the fair value of share-based payment awards is made as of their respective
      dates of grant using that option pricing model and that determination is
      affected by the Company’s stock price as well as assumptions regarding a number
      of subjective variables. These variables include, but are not limited to, the
      Company’s expected stock price volatility over the term of the awards, the
      expected term of the option, the dividend yield and actual and projected
      employee stock option exercise behavior. The Black-Scholes option pricing model
      was developed for use in estimating the value of traded options that have no
      vesting or hedging restrictions and are fully transferable. Because the
      Company’s employee stock options have certain characteristics that are
      significantly different from traded options, the existing valuation models
      may
      not provide an accurate measure of the fair value of the Company’s employee
      stock options. Although the fair value of employee stock options is determined
      in accordance with SFAS No. 123(R) using an option-pricing model, that value
      also may not be indicative of the fair value observed in a willing buyer/willing
      seller market transaction.


70


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





The
      calculated compensation cost, net of estimated forfeitures, is recognized on
      a
      straight-line basis over the remaining vesting period of the option as of the
      adoption date of July 1, 2005.





The
      Company issues stock options to employees and outside directors whose only
      condition for vesting are continued employment or service during the related
      vesting period. Typically, the vesting period is four years for employee awards
      and six months for director awards, although awards are sometimes granted with
      immediate vesting.





The
      weighted-average grant date fair value of employee stock options granted during
      the fiscal year ended June 30, 2006 was $6.57, using the Black-Scholes model
      with the following weighted-average assumptions:





**2006**
            
            **2005**
            
            **2004**Dividend
                yield
            
            
            2.3
            %
            
            -
            
            
            -Expected
                volatility
            
            
            58
            %
            
            62
            %
            
            68
            %Risk-free
                interest rate
            
            
            4.7
            %
            
            3.5
            %
            
            3.65
            %Expected
                lives
            
            
            5.1
                years
            
            
            4.1
                years
            
            
            5.5
                years





As
      a
      result of adopting SFAS No. 123(R) on July 1, 2005, the Company’s net income
      before income taxes for the fiscal year ended June 30, 2006 was $670,000 lower
      than if it had continued to account for share-based compensation under APB
      Opinion No. 25. Of the $670,000 of such compensation expense that was recognized
      in the accompanying consolidated statement of operations for the year ended
      June
      30, 2006, $302,000 was recorded as a cost of revenues, $1,000 as selling and
      marketing expenses, and $367,000 as general and administrative expenses. Basic
      and diluted net income per share for the fiscal year ended June 30, 2006 would
      have been $0.51 and $0.49, respectively, if the Company had not adopted SFAS
      No.
      123 (R), compared to reported basic and diluted net income per share of $0.44
      and $0.42, respectively.





During
      the fourth quarter of 2006, the Company reviewed its assumptions, both current
      and historical, regarding the assumptions that are input into the Black-Scholes
      option model. The expected option term and the resultant volatility percentage
      and the resultant risk-free rate assumptions were modified, which resulted
      in a
      correcting adjustment of compensation expense in the fourth quarter of fiscal
      2006 of approximately $105,000, including the effect of the increase in the
      estimated forfeiture rate from 4% to 10.5%, which we believe was erroneously
      determined by us. The Company increased the expected term of options to a
      weighted average of approximately 5.0 years from a previous weighted average
      estimate of 2.0 years, which we believe was erroneously determined by us. After
      carefully assessing the effect of the $105,000 on each of the quarters in the
      nine months ended March 31, 2006, under the provisions of Statement of Financial
      Accounting Standards No. 154, *“Accounting
      Changes and Error Corrections* ”,
      a
      replacement of APB Opinion No. 20, and FASB Statement No.3, we determined that
      the prorata portion of such $105,000 was not material to those quarters and,
      accordingly, we have recorded the amount of $105,000 in the fourth quarter
      of
      fiscal 2006. The annual volatility percentage was reduced from approximately
      75%
      to a range of 58% to 68%, depending on the estimated expected term of the
      option.





Because
      the Company paid its first quarterly dividend of $0.08 per common share
      beginning in the fourth quarter of 2006, the Company incorporated a dividend
      yield percentage assumption of 2.3% for stock option grants issued in 2006,
      based on an annualized dividend of $0.32 per share of common stock.





The
      total
      amount of compensation expense related to unvested awards not yet recognized
      at
      June 30, 2006 was $1,691,000 and, assuming no change in forfeiture rates, that
      amount will be recognized as compensation expense as follows:





Fiscal
                Year Ending June 30
            
            Amount2007
            
            
            684,0002008
            
            
            635,0002009
            
            
            341,0002010
            
            
            31,000Total
            
            $
            1,691,000





71


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




However,
      such amounts do not include the cost of new option awards that may be granted
      in
      future periods nor any changes in the Company’s forfeiture
      percentage.





Prior
      to
      the adoption of SFAS No. 123(R), the Company classified all tax benefits
      resulting from the exercise of stock options as operating cash flows in the
      statements of cash flows. SFAS No. 123(R) requires the cash flows from the
      tax
      benefits resulting from tax deductions in excess of the compensation cost
      recognized for those options (excess tax benefits) to be classified as financing
      cash flows. There were no such excess tax benefits resulting from the exercise
      of stock options for the fiscal year ended June 30, 2006.





SFAS
      No.
      123(R) requires the Company to continue to provide the pro forma disclosures
      in
      accordance with SFAS No. 123, as amended, for all prior periods presented in
      which share-based payments to employees are accounted for under APB Opinion
      No.
      25.





The
      following table illustrates the effect on net income and net income per share
      for the fiscal years ended June 30, 2005 and 2004 if the Company had applied
      the
      fair value recognition provisions of SFAS No. 123(R) to share-based employee
      compensation.





(in
                thousands,
              except
              per
                share data)
            
            (in
                thousands,
              except
              per
                share data)**2005**
              **(Restated)**
            
            **2004**Net
                income, as reported
            
            $
            4,818
            
            $
            1,730Add:
                Stock-based compensation included in reported net income, netof
                tax effects
            
            
            20
            
            
            50Deduct:
                Total stock-based compensation expense determined underfair
                value based method for awards,
              net
                of
                related tax effects (restated)
            
            
            (1,068
            )
            
            (435
            )Pro
                forma net income (restated)
            
            $
            3,770
            
            $
            1,345Net
                income per common share - basic:As
                reported
            
            $
            0.69
            
            $
            0.28Pro
                forma (restated)
            
            $
            0.54
            
            $
            0.22Net
                income per common share - diluted:As
                reported
            
            $
            0.65
            
            $
            0.27Pro
                forma (restated)
            
            $
            0.51
            
            $
            0.21





In
      connection with our adoption of SFAS No. 123(R), we re-examined our
      Black-Scholes assumptions and determined the expected option term assumption
      was
      erroneously used in years prior to adoption.  The tabular presentation
      above includes corrections to the expected option term, from weighted average
      2.0 years to 4.1 years, and the resulting change in volatility percentage and
      risk-free rate, from 75% to 62% and 3.6% to 3.5%, respectively, for the fiscal
      year ended June 30, 2005. These assumption corrections increased the pro-forma
      compensation expense for the fiscal year ended June 30, 2005 by $277,000 and
      decreased basic and diluted net income per share by $0.04 and $0.03,
      respectively from the previously reported amounts of $791,000, $0.58 (basic)
      and
      $0.54 (diluted) per share, respectively. We determined that there was no
      material impact on fiscal 2004 as a result of our correction to the prior year
      Black-Scholes assumptions.





***Net
      Income Per Share***




We
      compute net income per share in accordance with SFAS No. 128, *Earnings
      Per Share.* SFAS
      No. 128 requires the presentation of basic and diluted earnings per share.
      Basic net income per share is computed by dividing net income attributable
      to
      common stockholders by the weighted-average number of common shares outstanding
      during the periods presented. Diluted net income per share is computed by
      dividing net income attributable to common stockholders by the weighted-average
      number of common and common equivalent shares outstanding during the periods
      presented assuming the exercise of all outstanding stock options and other
      dilutive securities. However, options with exercise prices that exceed the
      average market price of the Company’s shares for the period for which the
      calculation of diluted net income per share is made are disregarded, because
      they are non-dilutive in their effect.




72


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




The
      following table sets forth the computation of basic and diluted net income
      per
      common share (in thousands except per share data):




**2006**
            
            **2005**
            
            **2004**Income
                from continuing operations
            
            $
            3,404
            
            $
            4,758
            
            $
            2,798Income
                (loss) from discontinued operations, net of gain on sales ofdiscontinued
                businesses
              (net of income taxes)
            
            
            296
            
            
            60
            
            
            (1,068
            )Net
                income
            
            $
            3,700
            
            $
            4,818
            
            $
            1,730Net
                income per basic share:From
                continuing operations
            
            $
            0.40
            
            $
            0.68
            
            $
            0.45Income
                (loss) from discontinued operations, net of gain on sales ofdiscontinued
                businesses
              (net
                of
                income taxes)
            
            
            0.04
            
            
            0.01
            
            
            (0.17
            )Net
                income
            
            $
            0.44
            
            $
            0.69
            
            $
            0.28Net
                income per diluted share:From
                continuing operations
            
            $
            0.39
            
            $
            0.64
            
            $
            0.44Income
                (loss) from discontinued operations, net of gain on sales
                ofdiscontinued
                businesses
              (net
                of
                income taxes)
            
            
            0.03
            
            
            0.01
            
            
            (0.17
            )Net
                income
            
            $
            0.42
            
            $
            0.65
            
            $
            0.27Weighted-average
                shares outstanding:Basic
            
            
            8,473
            
            
            7,013
            
            
            6,170Effect
                of dilutive shares
            
            
            309
            
            
            439
            
            
            293Diluted
            
            
            8,782
            
            
            7,452
            
            
            6,463




Options
      and warrants to purchase approximately 689,000, 406,000 and 624,000 shares
      of
      common stock for the years ended June 30, 2006, 2005 and 2004, respectively,
      at
      exercise prices up to $24.00 per share, were not included in the computation
      of
      diluted earnings per share because the respective exercise prices of those
      options and warrants were greater than the average market price for the
      respective period.




***Comprehensive
      Income***




The
      Company does not have any items of other comprehensive income requiring separate
      disclosure.




***Goodwill
      and Other Intangible Assets***




In
      accordance with SFAS No. 142, *Goodwill
      and Other Intangible Assets,* the
      Company is required to evaluate the carrying value of its goodwill and certain
      indefinite-lived intangible assets at least annually for impairment, or more
      frequently if facts and circumstances indicate that an impairment has occurred.
      Management intends to formally evaluate the carrying value of its goodwill
      and
      other indefinite-lived intangible assets for impairment on the anniversary
      date
      of each of the acquisitions that gave rise to the recording of such assets.
      Intangible assets acquired through acquisition, which have definite lives,
      are
      subject to amortization over their remaining useful lives. During fiscal year
      2006, the Company completed a number of business acquisitions which resulted
      in
      the acquisition of goodwill and intangible assets with indefinite lives,
      totaling $9,799,000 and $472,000, respectively. The Company also acquired
      $3,972,000 of intangible assets through acquisition with definite lives and
      capitalized $421,000 of certain software development costs, both of which are
      subject to amortization over their remaining useful lives (see also related
      discussion in note 3).




73


SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)




The
      following table sets forth, by “reporting unit” as defined by SFAS No. 142, the
      amounts classified as goodwill and intangible assets, net on the balance sheets
      as of June 30, 2005 and 2006 in thousands of dollars:





**Coins**
            
            **Diamonds**
            
            **Exchange
                and Other**
            
            **Total****Goodwill:**Balance
                at June 30, 2005
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Acquired
                during FY2006:GCAL
                acquisition
            
            
            -
            
            
            3,068
            
            
            -
            
            
            3,068Gemprint
                acquisition
            
            
            -
            
            
            5,099
            
            
            -
            
            
            5,099CCE
                acquisition
            
            
            -
            
            
            -
            
            
            1,117
            
            
            1,117CoinFacts
                acquisition
            
            
            515
            
            
            -
            
            
            -
            
            
            515Balance
                at June 30, 2006
            
            $
            515
            
            $
            8,167
            
            $
            1,117
            
            $
            9,799**Intangible
                Assets, Net**Balance
                at June 30, 2005
            
            $
            79
            
            $
            -
            
            $
            -
            
            $
            79Acquired
                during FY2006 with indefinite lives:GCAL
                acquisition
            
            
            -
            
            
            53
            
            
            -
            
            
            53Gemprint
                acquisition
            
            
            -
            
            
            380
            
            
            -
            
            
            380CCE
                acquisition
            
            
            -
            
            
            -
            
            
            39
            
            
            39Acquired
                during FY2006 with definite lives:Gemprint
                acquisition
            
            
            -
            
            
            3,064
            
            
            -
            
            
            3,064CCE
                acquisition
            
            
            -
            
            
            -
            
            
            908
            
            
            908Capitalized
                software costs
            
            
            -
            
            
            -
            
            
            421
            
            
            421Less:
                amortization for FY2006
            
            
            (50
            )
            
            (132
            )
            
            (88
            )
            
            (270
            )Balance
                at June 30, 2006
            
            $
            29
            
            $
            3,365
            
            $
            1,280
            
            $
            4,674





During
      fiscal 2005 and 2004, $21,000 and $0 were recognized as amortization expense
      related to intangible assets.





***Recent
      Accounting Pronouncements***




In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 155, *Accounting
      for Certain Hybrid Financial Instruments* (an
      amendment of FASB Statements No. 133 and 140) and SFAS No.156, *Accounting
      for Servicing of Financial Assets* (an
      amendment of FASB Statement No. 140). We do not expect the adoption of SFAS
      No.
      155 and SFAS No. 156 to have a material impact on our financial position or
      results of operation.





In
      July
      2006, the FASB issued FASB Interpretation 48, *Accounting
      for Uncertainty in Income Taxes: an interpretation of FASB Statement No.
      109.* Interpretation 48 clarifies Statement 109, *Accounting
      for Income* Taxes,
      to
      indicate a criterion that an individual tax position would have to meet for
      some
      or all of the benefit of that position to be recognized in an entity’s financial
      statements. Interpretation 48 is effective for fiscal years beginning after
      December 31, 2006. We do not expect the adoption of Interpretation 48 to have
      a
      material impact on our financial position or results of operation.




***Reclassifications***
  Certain
        reclassifications have been made to the fiscal 2004 and 2005 financial
        statements to conform to the fiscal 2006 presentation.





74




**3**  **Business
      Acquisitions**





On
      July
      14, 2005, the Company acquired substantially all the assets of CoinFacts.com
      (“CoinFacts”) for $500,000 in cash. CoinFacts.com operates an Internet website
      on which it publishes detailed proprietary information and history on U.S.
      Coins. The results of CoinFacts have been consolidated into our financial
      statements from the date of its acquisition.




On
      September 2, 2005, the Company acquired all of the common stock of Certified
      Coin Exchange (“CCE”) and all of the common stock of an affiliated business,
      computertradingpost.com, Inc. (“CTP”), for an aggregate purchase price of
      $2,180,000. In addition, there was a provision for a working capital adjustment
      that was determined to be $37,000. CCE is a subscription-based dealer-to-dealer
      Internet bid-ask market for third-party certified coins. CCE’s operating results
      have been consolidated into our operating results from the date of its
      acquisition.





The
      Company was required to purchase CTP as a condition to its acquisition of CCE.
      At the time it consummated the CCE acquisition, the Company intended to dispose
      of CTP, and, effective November 30, 2005, disposed of CTP. In accordance with
      SFAS No. 144, the results of operations of CTP from the date of acquisition
      through November 30, 2005, which included revenue of approximately $120,000
      and
      operating income of $38,000, were consolidated as part of income from
      discontinued operations in the accompanying consolidated statement of operations
      for the fiscal year ended June 30, 2006, and the loss on the sale of CTP is
      included in the gain on the sale of discontinued operations for the fiscal
      year
      ended June 30, 2006 (see note 4 below).





On
      November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
      (“GCAL”), a forensic gemological certification and grading laboratory. As part
      of that transaction, the Company also acquired all of the common stock of
      Diamond Profile Laboratory, Inc. (“DPL”), a scientific diamond light performance
      analysis laboratory, and all publishing and other rights to “Palmieri’s Market
      Monitor,” an educational and informative industry publication currently
      published by the Gemological Appraisal Association, Inc. (“GAA”). The Company
      paid an aggregate acquisition price of $3,000,000 in cash for GCAL, DPL and
      the
      publishing and other rights to “Palmieri’s Market Monitor,” plus the assumption
      of $50,000 of certain transaction-related costs.





On
      December 22, 2005, the Company acquired the business and substantially all
      of
      the assets of Gemprint Corporation (“Gemprint”). These assets consist primarily
      of a patented technology for non-invasive diamond identification which Gemprint
      used to digitally capture the unique refractive light pattern (or “Gemprint”) of
      each diamond that is processed with that technology. The acquisition was
      consummated pursuant to an asset purchase agreement. Under that agreement,
      the
      Company paid a purchase price consisting of $7,500,000 in cash, and assumed
      certain pre-acquisition liabilities and a lease commitment at closing, and
      agreed to pay $1 for each diamond that the Company registers using the Gemprint
      process in excess of 100,000 registrations during any year in the five-year
      period ending December 22, 2010.





GCAL
      has
      incorporated the Gemprint process into its GCAL business process, so that each
      GCAL authenticated and graded diamond can also carry a Gemprint image stored
      in
      GCAL’s registered database; thereby enabling GCAL to provide an additional
      measure of protection by enabling it to detect misrepresentations of diamond
      quality that can occur by, for example, switching a diamond grading certificate
      issued for a higher quality diamond to a lower quality diamond.




The
      Company has performed its purchase price allocation with respect to each of
      these acquisitions **** in
      accordance with the purchase method of accounting for business combinations.
      The
      purchase method of accounting allocates the amount paid for an acquisition
      over
      the fair value of the assets and liabilities acquired, and measures the excess
      of the purchase price over the fair value as goodwill.





75


BUSINESS
      ACQUISITIONS (CONT’D)




The
      following table sets forth the Company’s purchase price allocation with respect
      to each of these acquisitions:





**(in
                thousands)****CCE**
            
            **Coin**
              **Facts**
            
            **GCAL**
            
            **Gemprint**
            
            **Total**Cost
                of Investment:Purchase
                price
            
            $
            2,217
            
            $
            500
            
            $
            3,000
            
            $
            7,500
            
            $
            13,217Liabilities
                assumed
            
            
            -
            
            
            -
            
            
            50
            
            
            125
            
            
            175Direct
                costs
            
            
            160
            
            
            15
            
            
            218
            
            
            453
            
            
            846Investment
                banking fees
            
            
            -
            
            
            -
            
            
            -
            
            
            417
            
            
            417Lease
                obligation assumed
            
            
            -
            
            
            -
            
            
            -
            
            
            88
            
            
            882,377
            
            
            515
            
            
            3,268
            
            
            8,583
            
            
            14,743Value
                Assigned to Assets and Liabilities:Current
                assets
            
            
            93
            
            
            -
            
            
            44
            
            
            110
            
            
            247Fixed
                assets
            
            
            -
            
            
            -
            
            
            125
            
            
            50
            
            
            175Current
                liabilities
            
            
            (38
            )
            
            -
            
            
            (22
            )
            
            (120
            )
            
            (180
            )Deferred
                revenue
            
            
            (73
            )
            
            -
            
            
            -
            
            
            -
            
            
            (73
            )Assets
                Sold: CTP
            
            
            600
            
            
            -
            
            
            -
            
            
            -
            
            
            600Deferred
                taxes
            
            
            (296
            )
            
            -
            
            
            -
            
            
            -
            
            
            (296
            )Transition
                services
            
            
            27
            
            
            -
            
            
            -
            
            
            -
            
            
            27Intangible
                Assets with Finite Lives:Customer
                list
            
            
            676
            
            
            -
            
            
            -
            
            
            -
            
            
            676Software/Technology
            
            
            207
            
            
            -
            
            
            -
            
            
            1,199
            
            
            1,406Covenants
                not to compete
            
            
            25
            
            
            -
            
            
            -
            
            
            -
            
            
            25Patents
            
            
            -
            
            
            -
            
            
            -
            
            
            1,865
            
            
            1,865Intangible
                Assets with Indefinite Lives:Trade
                name and marks
            
            
            39
            
            
            -
            
            
            53
            
            
            131
            
            
            223Database
            
            
            -
            
            
            -
            
            
            -
            
            
            249
            
            
            249Excess
                of purchase price over fair valueof
                net assets acquired (goodwill)
            
            $
            1,117
            
            $
            515
            
            $
            3,068
            
            $
            5,099
            
            $
            9,799





Intangible
      assets with finite lives in the amount of $3,972,000 are being amortized over
      their estimated useful lives, as follows:





**CCE**
            
            **Gemprint**Customer
                List
            
            
            15
                years
            
            
            -Software/Technology
            
            
            2
                years
            
            
            7
                yearsCovenant
                not to compete
            
            
            5
                years
            
            
            -Patent
            
            
            -
            
            
            20
                years





Based
      on
      these useful lives, annual amortization expense for each of the next five years
      will be approximately $265,000 for Gemprint. Amortization expense for CCE will
      be approximately $219,000, $50,000, $50,000, $50,000 and $46,000 for fiscal
      years 2007 - 2011, respectively.





76


BUSINESS
      ACQUISITIONS (CONT’D)




The
      following pro forma financial data presents the unaudited pro-forma consolidated
      statements of income for the Company for the fiscal years ended June 30, 2006
      and 2005 based on the assumption that the Coinfacts, CCE, GCAL and Gemprint
      acquisitions had been consummated on July 1, 2004, rather than on the actual
      dates of their acquisition. These pro forma unaudited statements of operations
      do not purport to represent what the Company’s actual results of operations
      would have been had these acquisitions been consummated on July 1, 2004 and
      are
      not necessarily indicative of the Company’s results of operations for any
      subsequent fiscal year.





**Unaudited****Fiscal
                Year Ended June 30,**(In
                thousands,
              except
                per share data)**2006**
            
            **2005**Revenue
            
            $
            37,308
            
            $
            35,358Operating
                income
            
            
            3,681
            
            
            6,995Interest
                income, net
            
            
            2,346
            
            
            906Other
                income (expense), net
            
            
            22
            
            
            26Income
                before provision for income taxes
            
            
            6,049
            
            
            7,927Provision
                for income taxes
            
            
            (2,693
            )
            
            (3,152
            )Income
                from continuing operations
            
            
            3,356
            
            
            4,775Income
                from discontinued operations
            
            
            309
            
            
            116Net
                income
            
            $
            3,665
            
            $
            4,891Net
                income per diluted share:Income
                from continuing operations
            
            $
            0.38
            
            $
            0.64Income
                from discontinued operations
            
            $
            0.04
            
            $
            0.02Net
                income
            
            $
            0.42
            
            $
            0.66





**4.** **Discontinued
      Operations**




On
      December 4, 2003, the Company’s Board of Directors authorized management to
      implement a plan to focus the Company’s financial and management resources, and
      collectibles expertise, on the operations and growth of its grading and
      authentication businesses, and to divest the Company’s collectibles auctions and
      direct sales businesses.




Accordingly,
      in accordance with SFAS No. 144, the assets and related liabilities of the
      collectibles sales businesses, which included the Bowers and Merena, Superior
      Sports Auctions, Kingswood Coin Auctions, Odyssey Publications, Lyn Knight
      Currency Auctions, DHRC and computertradingpost.com, Inc.(“CTP”), have been
      classified as held for sale in the accompanying consolidated balance sheets
      at
      June 30, 2005 and 2006; and the related operating results have been classified
      as discontinued operations in the accompanying consolidated statements of
      operations for the fiscal years ended June 30, 2006, 2005 and 2004.




On
      February 19, 2004 we sold the businesses and certain assets of our Bowers &
Merena Auction, Kingswood Coin Auction and Superior Sports Auction divisions
      (collectively the “BK&S Divisions”) to Spectrum Numismatics International,
      Inc. (“Spectrum”), a subsidiary of Greg Manning Auctions, Inc. We retained
      ownership of the collectibles inventories and the then outstanding accounts
      receivables of the BK&S Divisions and Spectrum assumed certain outstanding
      contractual obligations of those businesses.




The
      consideration for the sale of those businesses was $2,500,000 in cash. We also
      were entitled to receive additional consideration in an amount to be determined
      on the basis of the sales revenues of the BK&S Divisions over the two-year
      period following February 19, 2004. We recorded a pre-tax gain of $1,872,000
      on
      the sale of the BK&S Divisions in the year ended June 30, 2004. We were
      entitled to recognize any additional consideration in future periods as and
      to
      the extent the amounts became determinable. However, there were no additional
      amounts received and determinable in fiscal 2005 or 2006.




77


DISCONTINUED
      OPERATIONS (CONT’D)




In
      furtherance of our strategy to focus our business on the provision of value
      added collectibles services and to dispose of the collectibles sales businesses,
      in March 2003 we discontinued the business of selling coins, at retail, under
      the name “David Hall Rare Coins” (or “DHRC”). In connection with the operation
      of that business, we had utilized certain intangible assets and trade secrets
      obtained under a license agreement from an affiliate of David Hall and Van
      Simmons, two of the Company’s largest stockholders and also two of its
      directors. In connection with the discontinuance of the DHRC business, and
      with
      the approval of the disinterested members of our Board of Directors, we
      terminated that license agreement. We retained the operating inventory,
      receivables and liabilities of DHRC at the time of the termination of the
      license and discontinuance of that business. By June 30, 2005, we had disposed
      of the remaining net assets and liabilities of this business.





In
      the
      fourth quarter of 2004, we disposed of our Odyssey related auction and
      publications businesses for $190,000 cash, of which $130,000 was paid at the
      time of sale and the remaining $60,000 was payable in eight (8) equal quarterly
      installments, all of which have been received by June 30, 2006. We also accrued
      for Odyssey’s share of the commissions it generated in a fourth quarter 2004
      auction. In addition, we retained certain assets and liabilities of these
      businesses and we are in the process of liquidating these assets and paying
      down
      those liabilities.




On
      September 17, 2003, we sold certain assets of our currency auction business,
      operated by a wholly-owned subsidiary, Lyn Knight Currency Auctions, Inc.,
      to
      Collectible Properties, Inc., a private company owned by Lyn F. Knight who,
      until that sale, had been president of that subsidiary and had managed that
      business for the Company. We retained ownership of the inventory of collectible
      currencies and the then outstanding accounts receivable, and Collectible
      Properties, Inc. assumed certain outstanding contractual obligations, of this
      business. The consideration received from that sale was equal to the net book
      value of the assets sold plus an additional amount which will be determined
      on
      the basis of the future sales revenue of Collectible Properties, Inc. Through
      June 30, 2006, we recognized approximately $424,000 in fiscal 2006, $248,000
      in
      fiscal 2005, and $127,000 in fiscal 2004, respectively, of additional
      consideration based on the revenues of Collectible Properties, Inc. If we
      receive any additional consideration, it will be recorded at the time the amount
      of that additional consideration becomes determinable.




In
      connection with and as a condition of our acquisition of CCE in September 2005,
      we were required to purchase the common stock of CTP, an entity affiliated
      with
      the owner of CCE. Our intent at the date of acquisition was to dispose of CTP,
      and we disposed of CTP in November 2005. The operating results of CTP are
      classified as part of discontinued operations from the date of its acquisition
      through the date of its disposal, and we recognized a loss of $16,000 on the
      disposal of CTP. As part of the consideration for the sale of CTP, we recorded
      a
      note receivable of $458,000, bearing interest at 10% per annum and payable
      over
      five years. We have a security interest in the assets of CTP and certain
      personal assets of the purchaser. At June 30, 2006, the carrying value of the
      note was $413,000, of which the current portion, approximately $92,000, is
      included as part of the current portion of receivables from sale of net assets
      of discontinued operations.




The
      operating results of the discontinued collectible sales businesses and CTP
      are
      included in the accompanying consolidated statements of operations, are as
      follows (in thousands):




**Years
                Ended June 30,****2006**
            
            **2005**
            
            **2004**Net
                revenues
            
            $
            480
            
            $
            472
            
            $
            27,101Income
                (loss) from operations
            
            
            161
            
            
            (277
            )
            
            (3,468
            )Gain
                on sale of discontinued businesses
            
            
            408
            
            
            202
            
            
            2,245569
            
            
            (75
            )
            
            (1,223
            )Income
                tax expense (benefit)
            
            
            273
            
            
            (135
            )
            
            (155
            )Income
                (loss) from discontinued operations
            
            $
            296
            
            $
            60
            
            $
            (1,068
            )









78


DISCONTINUED
      OPERATIONS (CONT’D)




The
      following table contains summary balance sheet information (in thousands) with
      respect to the net assets and liabilities of the collectible sales businesses
      held for sale that are included in the accompanying consolidated balance sheets:




**June
                30,****2006**
            
            **2005**Current
                assets:Accounts
                receivable
            
            $
            10
            
            $
            58Inventories
            
            
            37
            
            
            189Consignment
                advances
            
            
            -
            
            
            30Notes
                receivable
            
            
            36
            
            
            88$
            83
            
            $
            365Non-current
                assets:Notes
                receivable, net of current portion
            
            
            -
            
            
            46$
            -
            
            $
            46Current
                liabilities:Consignors
                payable
            
            $
            1
            
            $
            1Other
                current liabilities
            
            
            7
            
            
            26$
            8
            
            $
            27




**5.**
            **Inventories**




Inventories
      consist of the following at June 30:


(in
                thousands)**2006**
            
            **2005**Coins
            
            $
            346
            
            $
            276Other
                collectibles
            
            
            37
            
            
            37Grading
                raw materials consumable inventory
            
            
            160
            
            
            157543
            
            
            470Less
                inventory reserve
            
            
            (106
            )
            
            (34
            )$
            437
            
            $
            436




The
      inventory reserve represents a valuation allowance on certain items of our
      coins
      and other collectibles inventories based upon our review of the current market
      value of such coins and collectibles.






**6.**
            **Customer
                Notes Receivable**




During
      the fourth quarter of 2005, our wholly-owned subsidiary, Collectors Finance
      Corporation, implemented a Dealer Financing Program, pursuant to which it offers
      short term loans to collectibles dealers and customers with established credit
      histories that are willing to collateralize the loans with coins or other
      collectibles that have been authenticated and graded by us in the past or will
      be graded as collateral. The customers are required to repay the loan at
      maturity or, if sooner, on return of the coins or collectibles to them (see
      note
      10, Line of Credit). During 2005, we made short-term cash advances to two of
      our
      largest customers, secured by certain collectible coins that the customers
      had
      submitted to us for authentication and grading. Principal reduction payments
      are
      required at the time the Company returns the authenticated and graded coins
      to
      the customer. Current advances bear interest at a rate based on the Prime Rate.
      The total principal amount of advances and short term loans made to customers
      in
      2005 was $6,078,000, of which $4,518,000 had been repaid by June 30, 2005,
      which
      left a remaining unpaid balance as of that date of $1,560,000, all of which
      was
      repaid in fiscal year 2006.




During
      fiscal year 2006, the total principal amount of advances and short-term loans
      made to customers was $4,283,000 of which $470,000 was repaid by June 30, 2006,
      leaving a remaining unpaid balance as of that date of $3,813,000. At June 30,
      2006, we provided for a $16,000 reserve for customer notes receivable reflecting
      a deficiency in collateral value provided by one customer, resulting in a net
      balance on customer notes receivable of $3,797,000 at June 30, 2006.




79






**7.**
            **Property
                and Equipment**




Property
      and equipment consist of the following at June 30:




(in
                thousands)**2006**
            
            **2005**Coins
                and stamp grading reference sets
            
            $
            62
            
            $
            62Computer
                hardware and equipment
            
            
            1,271
            
            
            988Computer
                software
            
            
            972
            
            
            900Equipment
            
            
            2,020
            
            
            1,330Furniture
                and office equipment
            
            
            793
            
            
            689Leasehold
                improvements
            
            
            607
            
            
            438Trading
                card reference library
            
            
            52
            
            
            525,777
            
            
            4,459Less
                accumulated depreciation and amortization
            
            
            (3,880
            )
            
            (3,602
            )Property
                and equipment, net
            
            $
            1,897
            
            $
            857




Depreciation
      and amortization expense relating to property and equipment for fiscal 2006,
      2005 and 2004 was $486,000, $443,000 and $647,000, respectively.




**8.**
            **Accrued
                Liabilities**




Accrued
      liabilities consisted of the following at June 30:




(in
                thousands)**2006**
            
            **2005**Warranty
                reserve
            
            $
            710
            
            $
            609Professional
                fees
            
            
            189
            
            
            211Other
            
            
            1,144
            
            
            743$
            2,043
            
            $
            1,563





Warranty
      reserve activity and balances related to fiscal years 2006, 2005 and 2004,
      were
      as follows (in
      thousands):




Warranty
                reserve, June 30, 2003
            
            $
            304Charged
                to cost of revenues
            
            
            646Payments
            
            
            (458
            )Warranty
                reserve June 30, 2004
            
            
            492Charged
                to cost of revenues
            
            
            530Payments
            
            
            (413
            )Warranty
                reserve at June 30, 2005
            
            
            609Charged
                to cost of revenues
            
            
            492Payments
            
            
            (391
            )Warranty
                reserve at June 30, 2006
            
            $
            710






80






**9.**
            **Income
                Taxes**




Set
      forth
      below are the provision (benefit) for income taxes for the years ended June
      30:




(in
                thousands)**2006**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            2,360
            
            $
            2,738
            
            $
            1,595State
            
            
            9
            
            
            63
            
            
            622,369
            
            
            2,801
            
            
            1,657Deferred:Federal
            
            
            (172
            )
            
            (117
            )
            
            (216
            )State
            
            
            536
            
            
            457
            
            
            140364
            
            
            340
            
            
            (76
            )Total
                provision for income taxes
            
            $
            2,733
            
            $
            3,141
            
            $
            1,581




The
      reconciliation of the provision (benefit) for income taxes computed at federal
      statutory rates to the provision (benefit) for income taxes for the years ended
      June 30, was as follows:




(in
                thousands)**2006**
            
            **2005**
            
            **2004**Provision
                at federal statutory rates
            
            $
            2,087
            
            $
            2,685
            
            $
            1,542State
                income taxes, net
            
            
            356
            
            
            340
            
            
            132Other,
                net
            
            
            290
            
            
            116
            
            
            (93
            )$
            2,733
            
            $
            3,141
            
            $
            1,581







Deferred
      income taxes reflect the net tax effect of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of deferred
      taxes as of June 30, 2006 and 2005, were as follows:




(in
                thousands)**2006**
            
            **2005**Deferred
                tax assets:Supplier
                compensation costs
            
            $
            510
            
            $
            553Reserves
            
            
            1,077
            
            
            816Goodwill
                and intangibles
            
            
            -
            
            
            136Net
                operating loss carryforward
            
            
            -
            
            
            1,504State
                credits
            
            
            661
            
            
            919Other
            
            
            21
            
            
            63Total
                deferred tax assets
            
            
            2,269
            
            
            3,991Deferred
                tax liabilities:Goodwill
                and intangibles
            
            
            (408
            )
            
            -Property
                and equipment
            
            
            (32
            )
            
            (34
            )Other
            
            
            (73
            )
            
            (52
            )Total
                deferred tax liabilities
            
            
            (513
            )
            
            (86
            )Net
                deferred tax assets
            
            
            1,756
            
            
            3,905Less:
                Current portion
            
            
            (1,414
            )
            
            (2,854
            )$
            342
            
            $
            1,051




At
      June
      30, 2006, the Company had $1,001,000 related to California Enterprise Zone
      Credits. These credits have no expiration dates.




81






**10.**
            **Line
                of Credit**




To
      provide a source of funds for its Dealer Financing Program, in June 2005 CFC
      entered into a two-year revolving bank line of credit agreement, that permits
      CFC to borrow, at any one time, up to the lesser of (i) $7,000,000 or (ii)
      an
      amount equal to 85% of the aggregate principal amount of customer receivables
      that meet the bank’s eligibility criteria. Borrowings under this credit line
      bear interest at rates based on the bank’s Prime Rate or LIBOR, as applicable,
      and are secured by substantially all the assets of CFC (including customer
      receivables and CFC’s security interests in customer owned loan collateral).




Costs
      of
      approximately $340,000 (comprising a loan agreement fee, bank fees and legal
      fees) were incurred in connection with this line of credit. At June 30, 2005,
      these costs were capitalized and the unamortized balance of approximately
      $170,000 was included in prepaid expenses and other current assets in the
      accompanying consolidated balance sheet at June 30, 2006. These debt issue
      costs
      are amortized to interest expense using the effective interest method over
      the
      term of the revolving bank line of credit agreement, which is two years, ending
      in June 2007. On a quarterly basis, CFC incurs an unused line fee at a rate
      of
      0.25% per annum, based on the average daily unused portion of the total facility
      during the quarter.




CFC’s
      obligations under this line of credit have been guaranteed by the Company
      pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
      of
      that Agreement require the Company to be in compliance with certain financial
      and other restrictive covenants, and require the consent of the lender
      (i) for the Company to pay cash dividends or repurchase shares of its
      common stock in amounts exceeding its annual net income in any year, and
      (ii) to consummate more than $5,000,000 of business acquisitions in any
      year. The Company was in compliance with all covenants at June 30, 2006 and
      received the required consents from the lender for the purchase of the Gemprint
      business, repurchases of the Company’s stock under the Stock Buyback Program,
      and the payment of dividends during 2006.




**11.** **Employee
      Benefit Plans**




We
      established an employee benefit plan, effective July 1992, that features a
      401(k) salary reduction provision covering all employees who meet the
      eligibility requirements of the plan. Eligible employees are able to defer
      up to
      the lesser of 15% of their base compensation or the statutorily prescribed
      annual limit.




On
      July
      5, 2000, the Company implemented the 2000 Employee Stock Purchase Plan (the
      “Plan”) covering all employees who met certain eligibility requirements. The
      Plan, which was approved by our stockholders, permitted employees to elect,
      at
      the beginning of each six-month period (each, a “purchase period”), to authorize
      withholdings from payroll of up to 15% of their compensation that would be
      used
      to purchase shares of the Company’s common stock at the end of the six-month
      period. The Plan provided that the purchase price would be 85% of the closing
      price of the Company’s shares on NASDAQ on (i) the first day of the
      six-month period, or (ii) the last day of the six-month period, whichever
      price was lower. Participating employees were entitled to revoke their elections
      to participate in the purchase of shares at any time prior to the end of a
      purchase period, in which event the amounts withheld to the date of such
      revocation were paid to the employee, without interest. This Plan was terminated
      effective as of July 1, 2005.




During
      fiscal 2005 and 2004, we issued 5,000 and 12,000 shares of common stock,
      respectively, under this Plan at an average purchase price of $12.80 and $7.94,
      respectively.




82


**12.**  **Stockholders’
      Equity**




***Equity
      Offering***




In
      March
      2005, the Company completed a public offering of a total of 3,450,000 shares
      of
      its common stock, of which a total of 2,195,856 shares were sold by the Company,
      and the remaining shares were sold by David G. Hall and Van D. Simmons, at
      a
      public offering price of $17.50 per share. Messrs. Hall and Simmons, who founded
      the Company in 1986, are directors of the Company, and Mr. Hall also is the
      Company’s President and Chief Operating Officer. The proceeds to the Company,
      net of the underwriting discount and offering expenses of approximately
      $650,000, were approximately $35,657,000. The Company did not receive any of
      the
      proceeds from the sale of shares by Messrs. Hall and Simmons.




***Dividends***




On
      May
      31, 2006, the Company announced that its Board of Directors had adopted a
      dividend policy that calls for the payment of an expected total annual cash
      dividend of $0.32 per common share, payable in the amount of $0.08 per share
      per
      quarter. At the same time, the Board of Directors declared the first of the
      quarterly cash dividends under this policy of $0.08 per share, which was paid
      on
      June 28, 2006 in the aggregate amount of $674,000 to stockholders of record
      on
      June 14, 2006.




The
      declaration of cash dividends in the future, pursuant to the Company’s new
      dividend policy, is subject to final determination each quarter by the Board
      of
      Directors based on a number of factors, including the Company’s financial
      performance and its available cash resources, its cash requirements and
      alternative uses of cash that the Board may conclude would represent an
      opportunity to generate a greater return on investment for the Company. For
      these reasons, as well as others, there can be no assurance that the amount
      of
      the quarterly cash dividends will not be reduced or that the Board of Directors
      will not decide to suspend or discontinue the payment of cash dividends in the
      future (see also note 18, Subsequent Events).




***Stock
      Buyback Program***




On
      December 6, 2005, the Company announced that its Board of Directors had approved
      a $10 million Stock Buyback Program. The program authorizes the Company to
      make
      up to $10,000,000 of stock purchases in the open market or private transactions,
      in accordance with applicable SEC rules. The Company is under no obligation
      to
      repurchase any shares under this program, and the timing, actual number and
      value of shares that may be repurchased under this program will depend on a
      number of factors, including the Company’s future financial performance, the
      Company’s available cash resources and competing uses for the cash that may
      arise in the future, prevailing market prices of the Company’s common stock and
      the number of shares that become available for sale at prices that the Company
      believes are attractive. During the year ended June 30, 2006, the Company
      repurchased and retired 182,000 shares of its common stock pursuant to this
      program for an aggregate purchase price totaling approximately $2,628,000
      (including transaction costs). Common stock at par value and additional paid-in
      capital were reduced by the $2,628,000.




***Treasury
      Stock***




Pursuant
      to a program approved by the Board of Directors in 2000, the Company had
      purchased 125,000 of its shares at an average price of $8.16 per share during
      the period from September 25, 2000 to December 28, 2000 at an aggregate cost
      of
      $1,021,000.





***Consulting
      Agreement*** ****




In
      July
      1997, we granted options to an individual to purchase 133,000 shares of our
      common stock at an exercise price of $1.32 per share as consideration for a
      five-year consulting agreement that commenced on July 1, 1997. The options
      vested in five annual installments of 20% of the shares beginning on December
      31, 1997 and continuing through December 31, 2001. The options will terminate
      if
      not exercised by June 30, 2007, and all of the options are outstanding at June
      30, 2006.




83


STOCKHOLDERS’
      EQUITY (CONT’D)




***Supplier
      Compensation Cost***




During
      fiscal 1999, the Company granted warrants to purchase up to an aggregate of
      150,000 shares of common stock, at an exercise price of $20.00 per share, to
      collectible experts providing content for our websites. These warrants vested
      immediately and are exercisable over a ten-year term. The fair value of these
      warrants was expensed in fiscal 1999, and all of these warrants are outstanding
      at June 30, 2006.




**13.**
            **Stock
                Option Plans**




In
      January 1999, we adopted the PCGS 1999 Stock Incentive Plan (the “PCGS Plan”).
      The PCGS Plan, which was assumed by the Company at the time of its acquisition
      of PCGS, covers an aggregate of 269,250 shares of our common stock. In February
      1999, we adopted the 1999 Stock Incentive Plan (the “1999 Plan”), which provides
      for grants of incentive stock options, nonstatutory stock options, and
      restricted stock grants to directors, officers, employees and consultants of
      Collectors Universe who provide valuable services to Collectors Universe,
      entitling them to purchase up to 437,250 shares of our common stock. On December
      5, 2000, the stockholders, at the Company’s Annual Meeting, approved an
      amendment to the 1999 Plan to increase the authorized number of shares of our
      common stock that are issuable under this Plan from 437,250 to 749,750 shares.




The
      Company’s stockholders also have approved a 2003 Incentive Plan (the “2003
      Plan”) and a 2005 Incentive Plan (the “2005” Plan), which authorize the grant of
      options, and the issuance of restricted rights, to purchase up to an aggregate
      of 500,000 shares and 230,000 shares, respectively, of the Company’s common
      stock to officers and other employees, non-employee directors and service
      providers of the Company and its subsidiaries.




The
      PCGS
      Plan and the 1999 Plan provide that the option exercise price per share may
      not
      be less than 100% of the fair market value of a share of common stock on the
      grant date, as determined by the Board of Directors, for incentive stock options
      and 85% of fair market value for nonstatutory stock options. The 2003 and 2005
      Plan provides that the exercise price of all options (whether incentive or
      non-statutory), and the purchase price of shares issued pursuant to restricted
      stock purchase rights, may not be less than 100% of the fair market value of
      the
      shares subject to such options or rights (as the case may be) on the date of
      grant. However, the exercise price of incentive stock options granted under
      any
      of the Plans to any individual possessing 10% or more of the voting power of
      all
      classes of our stock may not be less than 110% of the fair market value of
      a
      share of common stock on the grant date. The timing of exercise for individual
      option grants is at the discretion of the Board of Directors, and the options
      expire no later than ten years after the grant date (five years in the case
      of
      incentive stock options granted to individuals possessing 10% or more of the
      voting power of all classes of our stock). In the event of a change in control
      of the Company, an option or award of shares under these Plans will become
      fully
      exercisable if an agreement is not reached that provides for the surviving
      corporation to assume such options or awards or to substitute comparable options
      or awards for the options and awards granted under these Plans.




84


STOCK
      OPTION PLANS (CONT’D)





The
      following is a summary of stock option activity for fiscal 2006, 2005 and 2004
      under the PCGS Plan, the 1999 Plan, the 2003 Plan and the 2005 Plan. No rights
      to purchase restricted shares have been granted to date.




(In
                thousands, except per share data)**Number
                of Shares**
            
            **Exercise**
              **Price
                Per Share**
            
            **Weighted
                Average Exercise Price Per Share**Options
                outstanding at June 30, 2003
            
            
            702
            
            $
            2.55
            
            
            -
            
            $
            30.52
            
            $
            8.27Granted
            
            
            405
            
            
            3.79
            
            
            -
            
            
            13.73
            
            
            11.14Cancelled
            
            
            (81
            )
            
            2.79
            
            
            -
            
            
            30.52
            
            
            8.16Exercised
            
            
            (204
            )
            
            2.55
            
            
            -
            
            
            8.00
            
            
            4.25Options
                outstanding at June 30, 2004
            
            
            822
            
            
            2.55
            
            
            -
            
            
            30.52
            
            
            10.56Granted
            
            
            295
            
            
            11.58
            
            
            -
            
            
            20.10
            
            
            17.09Cancelled
            
            
            (70
            )
            
            3.08
            
            
            -
            
            
            30.52
            
            
            17.70Exercised
            
            
            (71
            )
            
            2.55
            
            
            -
            
            
            12.00
            
            
            3.99Options
                outstanding as June 30, 2005
            
            
            976
            
            
            2.55
            
            
            -
            
            
            24.00
            
            
            12.49Granted
            
            
            42
            
            
            12.90
            
            
            -
            
            
            14.00
            
            
            13.73Cancelled
            
            
            (82
            )
            
            3.08
            
            
            -
            
            
            20.00
            
            
            15.52Exercised
            
            
            (47
            )
            
            2.55
            
            
            -
            
            
            13.73
            
            
            5.20Options
                outstanding at June 30, 2006
            
            
            889
            
            $
            3.08
            
            
            -
            
            $
            24.00
            
            $
            12.65





The
      total
      pre-tax intrinsic value of options exercised during fiscal years 2006, 2005
      and 2004 were $462,000, $956,000 and $796,000, respectively. Total fair
      value of options vested during 2006, 2005 and 2004 were $671,000,
      $1,372,000 and $883,000, respectively.





The
      following table summarizes information about stock options outstanding at June
      30, 2006:





Outstanding
                Options
            
            Exercisable
                OptionsRange
                of Exercise Price
            
            Number
                of Shares Outstanding
            
            Weighted
              Average
              Remaining
              Contractual
              Life
                (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            ($000’s)
              Aggregate
              Intrinsic
              Value
            
            Number
                of Shares Exercisable
            
            Weighted
                Average Exercise Price
            
            ($000’s)
              Aggregate
                Intrinsic Value$3.08
            
            $
            3.80
            
            
            154
            
            
            6.50
            
            $
            3.36
            
            $
            1,633
            
            
            129
            
            $
            3.37
            
            $
            1,366$5.28
            
            $
            7.60
            
            
            64
            
            
            7.32
            
            $
            7.48
            
            
            417
            
            
            64
            
            $
            7.48
            
            
            417$8.00
            
            $
            12.00
            
            
            182
            
            
            6.99
            
            $
            10.40
            
            
            651
            
            
            105
            
            $
            10.01
            
            
            417$13.24
            
            $
            19.60
            
            
            389
            
            
            8.48
            
            $
            16.05
            
            
            47
            
            
            178
            
            $
            17.33
            
            
            6$20.00
            
            $
            20.00
            
            
            61
            
            
            2.78
            
            $
            20.00
            
            
            -
            
            
            61
            
            $
            20.00
            
            
            -$20.10
            
            $
            24.00
            
            
            39
            
            
            4.68
            
            $
            22.99
            
            
            -
            
            
            31
            
            $
            23.69
            
            
            -889
            
            
            7.19
            
            
            
            
            $
            2,748
            
            
            568
            
            
            
            
            $
            2,206







At
      June
      30, 2006, there were stock options outstanding to purchase a total of 889,000
      shares of our common stock at a weighted average exercise price of $12.65,
      of
      which options to purchase 568,000 shares were exercisable at a weighted average
      price of $12.34. The aggregate intrinsic values set forth in the above table
      represent the total pre-tax intrinsic values, based on our closing stock price
      of $13.98 as of June 30, 2006, and assuming all the optionees had exercised
      their options as of that date. Also, at June 30, 2006, approximately 324,000
      of
      the 568,000 exercisable options were “in-the-money-options” based on the closing
      price as of that date. By comparison, at June 30, 2005, exercisable options
      to
      purchase a total of 527,000 shares were outstanding at a weighted-average
      exercise price of $11.93 per share; and at June 30, 2004, exercisable options
      to
      purchase a total of 385,000 shares were outstanding at a weighted average
      exercise price of $10.17 per share. The weighted average remaining contractual
      life of those options exercisable at June 30, 2006 was 6.63 years.




85


STOCK
      OPTION PLANS (CONT’D)





At
      July
      1, 2005, approximately 448,000 stock options were unvested with a weighted
      average fair value of $8.31 per option. At June 30, 2006, approximately 320,000
      stock options were unvested with a weighted average fair value of $8.15. During
      the fiscal year ended June 30, 2006, approximately 42,000 stock options were
      granted with a weighted average fair value of $6.57, approximately 73,000
      options were forfeited prior to vesting with a weighted average of $9.77 and
      approximately 97,000 options were vested with a weighted average of
      $6.97.





At
      June
      30, 2006, the unvested stock option total of approximately 320,000 had a
      weighted average contractual remaining life and exercise price of 8.18 years
      and
      $13.21, respectively. As of the same date, the aggregate intrinsic value of
      the
      unvested options was approximately $542,000. At June 30, 2006, and based upon
      the estimated forfeiture rate of 10.5% per annum and the remaining vesting
      terms
      of these options, the expected number of options to vest over their remaining
      vesting terms was approximately 245,000 options.




The
      weighted-average fair values of stock options granted during fiscal 2006, 2005
      (restated) and 2004 were $6.57, $8.55 and $7.10 per option share,
      respectively.




**14.**
            **Related-Party
                Transactions**




A
      member
      of the Board of Directors is also a partner in a professional services firm
      providing service to the Company. For each of the years ended June 30, 2006,
      2005 and 2004, the member was paid $37,500, $31,250 and $35,000, respectively,
      as Board fees; and the professional services firm was paid $189,000, $588,000,
      and $390,000, respectively, for services rendered. At June 30, 2006, amounts
      payable to this firm were approximately $41,000.




In
      May
      2003, the Company entered into a license agreement with DHRCC, Inc., which
      is
      wholly owned by David Hall and Van Simmons who are two of the Company’s
      stockholders and two of the directors of the Company. Pursuant to that
      Agreement, the Company obtained (i) an exclusive license to use, for up to
      a
      four year period ending May 31, 2007, a customer list owned and compiled by
      DHRCC, and certain other intangible assets owned by DHRCC, and (ii) a
      non-exclusive license to use, in perpetuity, a coin inventory control software
      program owned by DHRCC, both for use by the Company’s David Hall Rare Coins
      (“DHRC”) Division, which was engaged in the business of selling collectible
      coins at retail. Under that agreement, the Company agreed to pay DHRCC, for
      the
      use of the DHRCC customer list, a royalty equal to one and one half percent
      (1.5%) of the net revenues of the Company’s David Hall Rare Coins (“DHRC”)
      Division, on a quarterly basis, but in no event to exceed (i) twenty percent
      (20%) of the quarterly pre-tax profits of that division, or (ii) an aggregate
      of
      $500,000 per year, whichever was less. The Company also paid DHRCC a one-time
      fee of $5,000 for use of the other intangible assets licensed by the Company,
      including the coin inventory software program. The license agreement was
      terminable by either party at any time, without cause, on 30 days prior written
      notice to the other. The license agreement was terminated by the Company as
      a
      result of its decision, made in fiscal 2004, to discontinue its collectibles
      sales businesses. See note 4.




DHRCC
      had
      been engaged in the business of selling collectible coins at retail until June
      2000. As a result of the Company’s decision to discontinue that business, DHRCC
      elected to resume selling collectible coins at retail and in connection
      therewith DHRCC purchased certain fixed assets, that had been used by the
      Company’s DHRCC division, for a purchase price of $13,000, which was equal to
      the net book value of those assets on the Company’s books at March 31, 2003.
      DHRCC also has subleased from the Company, through November 6, 2009,
      approximately 2,200 square feet of office space, located at the Company’s
      offices in Santa Ana, California, at a rent equal to between $1.50 and $1.75
      per
      square foot per month. That rent, per square foot, is equal to the rent that
      was
      being paid to the Company by a prior unaffiliated subtenant for comparable
      space
      in the same building under a sublease entered into by the Company in March
      2004.
      Rent received under the DHRCC sublease, which commenced on March 1, 2004,
      totaled $41,059 in fiscal 2006, $40,000 in fiscal 2005 and $13,000 in fiscal
      2004.




In
      connection with its discontinuance of its retail coin sales business, effective
      March 1, 2004 the Company engaged DHRCC to sell the Company’s remaining
      inventory of collectible coins that had been held for sale at retail by the
      Company’s DHRC division. Sales of collectible coins by DHRCC pursuant to this
      engagement totaled $0, $11,000 and $840,000, respectively, for the periods
      ended
      June 30, 2006, 2005 and 2004, and the Company paid DHRCC commissions of $0,
      $1,000 and $84,000, respectively, in connection with those sales.




86


RELATED-PARTY
      TRANSACTIONS (CONT’D)




All
      of
      the above-described transactions with DHRCC were approved by the disinterested
      members of the Company’s Board of Directors.




During
      2005, the Company charged DHRCC approximately $29,000 for advertising fees,
      and
      approximately $26,000 for grading and authentication fees, which were comparable
      to the fees charged by the Company in the ordinary course of its business to
      unaffiliated customers for similar services. During 2005, the Company also
      reimbursed DHRCC for warranty claims of approximately $11,000 in accordance
      with
      its standard authentication and grading warranty, and paid DHRCC approximately
      $9,000 for the purchase of certain coin inventory.




During
      2006, the Company charged DHRCC approximately $29,000 for advertising fees,
      approximately $3,000 for grading and authentication fees, approximately $53,000
      in warranty claims and paid $0 for the purchase of certain coin
      inventory.





As
      part
      of the acquisition of GCAL in November 2005, the Company acquired certain assets
      from Gemological Appraisal Association (“GAA”), a business owned and managed by
      the current President of GCAL. As part of the acquisition agreement, GAA entered
      into a sublease agreement with GCAL, which expires in May 2008, to sublease
      50%
      of the leased premises of GCAL and also reimburse GCAL for 50% of other
      occupancy costs. From the date of acquisition to June 30, 2006, GAA paid
      approximately $25,000 under the sub-lease agreement, and approximately $6,000
      for reimbursable occupancy expenses.





**15.**
            **Commitments
                and Contingencies**





***Leases***




The
      Company has various operating lease commitments for facilities and equipment
      that expire through December 2015. During fiscal 2006, the Company subleased
      office space that was in excess of its current requirements to an unaffiliated
      third party and also to two related parties (see note 14). Such lease for office
      space contains escalations over the term of the lease. In accordance with SFAS
      No. 13, rent expense is recognized on a straight-line basis over the lease
      period. Total rent expense, net of sublease income, was approximately
      $1,629,000, $1,349,000 and $1,462,000, respectively, for the years ended June
      30, 2006, 2005 and 2004. At June 30, 2006, deferred rent (representing the
      cumulative difference between rent paid and the rent expense recognized) was
      $402,000. On October 1, 2005, the sublease to the unaffiliated third party
      was
      cancelled. Future minimum lease payments under these agreements are as
      follows:




(In
                thousands)Company’s
              Gross
              Payment
            
            Sublease
              Income
            
            Net2007
            
            $
            1,491
            
            $
            81
            
            $
            1,4102008
            
            
            1,674
            
            
            80
            
            
            1,5942009
            
            
            1,630
            
            
            45
            
            
            1,5852010
            
            
            855
            
            
            15
            
            
            8402011
            
            
            393
            
            
            -
            
            
            393Thereafter
            
            
            1,756
            
            
            -
            
            
            1,756$
            7,799
            
            $
            221
            
            $
            7,578




Upon
      acquisition of GCAL, the Company assumed obligations under a property lease
      that
      expires on May 31, 2008. Such lease provides for minimum annual payments of
      approximately $76,000, of which 50% of this space is subleased to a company
      affiliated with the current president of GCAL. On July 1, 2006, GCAL leased
      and
      occupied additional space in the same building. Under the terms of the new
      lease
      agreement, GCAL will lease the facility from July 1, 2006 to December 1, 2015.
      Minimum lease payments for the new space, which are included in the commitments
      table for fiscal years 2007 to 2011, are expected to be $170,000, $329,000,
      $339,000, $349,000 and $360,000, respectively. In addition, the Company has
      initiated construction within this facility for the purpose of leasehold
      improvements for which it expects to incur costs of approximately $773,000
      during the three months ending September 30, 2006.




87


COMMITMENTS
      AND CONTINGENCIES (CONT’D)




***Employment
      Agreements***




The
      Company has entered into employment agreements with certain executive officers
      and other key employees. The employment agreements provide for minimum salary
      levels, incentive compensation and severance benefits, among other
      items.




***Guarantees***




As
      discussed in note 10, the Company has guaranteed the obligations of CFC under
      its line of credit. However, since CFC is a wholly-owned, consolidated
      subsidiary of the Company, its line of credit borrowings, which the Company
      has
      guaranteed, are required to be set forth on our consolidated balance sheet.
      There were no such borrowings outstanding at June 30, 2006.




***Indemnification
      Obligations***




The
      Company from time to time
      enters into certain types of contracts that contingently require the Company
      to
      indemnify parties against third-party claims. These contracts primarily relate
      to (i) agreements pursuant to which the Company has sold its discontinued
      collectibles sales businesses and which require the Company to indemnify the
      purchasers from certain contingent liabilities that might arise from the
      operation of those businesses prior to their sale by the Company, which is
      customary in business sale transactions such as these; (ii) certain real
      estate leases under which the Company may be required to indemnify property
      owners for environmental or other liabilities and other claims arising from
      the
      Company’s use of the applicable premises; and (iii) certain agreements with
      the Company’s officers and directors, under which the Company may be required to
      indemnify such persons for liabilities arising out of their relationships as
      officers or directors of the Company. The terms of such indemnification
      obligations vary by contract and in most instances a specific or maximum dollar
      amount is not explicitly stated therein. Historically, the Company has not
      been
      obligated to make significant payments under, and no liabilities have been
      recorded in the accompanying consolidated balance sheets for, these
      indemnification obligations.




***Legal
      Settlement***




As
      previously reported, the Company was named as a co-defendant in a lawsuit
      brought by Real Legends Inc, (“Plaintiff”), against When It Was a Game
      (“WIWAG”), a sports card dealer. In the lawsuit, Plaintiff was seeking alleged
      damages to its business of $4 million, alleged to have arisen out of actions
      taken by WIWAG, together with punitive damages. Plaintiff also alleged that
      the
      Company was liable for those damages, because a Company employee had introduced
      WIWAG to Plaintiff.




On
      January 26, 2005, the Company and Plaintiff settled that lawsuit. Pursuant
      to
      the settlement, all claims against the Company were released by Plaintiff and
      the Company paid Plaintiff the sum of $600,000 on or about February 23, 2005.
      The cost of the settlement to the Company, net of $100,000 insurance
      reimbursement, was $500,000, which was recorded as part of operating expenses
      in
      the Company’s consolidated statements of operations for the year ended June 30,
      2005.




***Other
      Legal Matter***




Bill
      Miller v. Collectors Universe, Inc .
      As
      previously reported, the Company was a defendant in this legal action, which
      was
      brought in the Superior Court of California, County of Orange, by Bill Miller,
      a
      former employee of the Company, who was president of one of the Company’s
      collectibles sales businesses that was sold in 2004 and an expert in the
      authentication of autographs and memorabilia. Miller alleged that the Company
      had issued authentication certificates bearing his name without his consent,
      in
      violation of a California statute prohibiting unauthorized appropriation of
      a
      person’s name, signature or likeness. The statute provides that a person whose
      name, signature or likeness has been misappropriated, in violation of the
      statute, is entitled to recover the greater of $750 or the actual damages
      suffered as a result of the unauthorized use, and any profits from that were
      attributable to that unauthorized use that are not taken into account in
      computing the actual damages. The Company denied Miller’s allegations and
      asserted that he was not entitled to any recovery under the statute in excess
      of
      his actual damages and that he had not suffered any actual damages as a result
      of the issuance of the certificates.




88


COMMITMENTS
      AND CONTINGENCIES (CONT’D)




As
      also
      previously reported, at the conclusion of the trial, which took place in October
      2005, (i) the jury found that the Company had used Miller’s name without
      his consent on 14,060 authentication certificates, but that Miller had sustained
      actual damages from that use totaling $14,060; and (ii) the parties entered
      into a stipulated judgment in the case, which, among other things, provides
      that
      Miller’s statutory damages arising from the actions of the Company were zero.
      The court left unresolved and for future determination the issue of which party,
      if any, was the prevailing party in the lawsuit, which would determine which
      party, if any, is entitled to recover its attorney’s fees from the other
      party.




In
      December 2005, Miller filed a Notice of Appeal seeking an appellate court
      review, a reversal of the judgment entered by the trial court and a finding,
      that as a matter of law, he is entitled to statutory damages equal to $750
      for
      each use of his name by the Company, or more than $10 million in total. Miller
      filed an opening brief in August 2006, and we expect that various responsive
      briefs will be filed through February 2007. The Company has been informed by
      its
      trial counsel that, in California, it sometimes takes as long as two years,
      from
      the filing of an appeal of a damage award, before the appeal is actually heard
      by an appellate court.




The
      Company continues to believe that it will not incur any material liability
      to
      Miller in this case. However, there is little interpretive history with respect
      to the measure of damages in a case such as the Miller case, creating a number
      of relatively novel legal issues. As a result, it is not possible to predict,
      with certainty, how an appellate court will ultimately rule on the issue of
      damages.





Other
      Legal Actions





The
      Company is named from time to time, as a defendant in lawsuits that arise in
      the
      ordinary course of business. Management of the Company believes that none of
      those lawsuits currently pending against it is likely to have a material adverse
      effect on the Company.





**16.**
            **Segment,
                Geographic and Major Customer
                Information**




Operating
      segments are defined as components of an enterprise about which separate
      financial information is available that is evaluated regularly by the Company’s
      chief operating decision maker, or decision making group, in deciding how to
      allocate resources and in assessing performance. The Company’s chief operating
      decision maker is its Chief Executive Officer. The operating segments of the
      Company are organized based on the services it offers. Similar operating
      segments have been aggregated to reportable operating segments based on having
      similar products or services, types of customers, and other criteria under
      SFAS
      No. 131, *Disclosures
      About Segments of an Enterprise and Related Information.*




For
      our
      continuing operations, we operate principally in four service segments: coins,
      sportscards, diamonds and other high-value collectibles. Services provided
      by
      these segments include authentication, grading, publication, advertising and
      subscription-based revenues. The other collectibles segment includes autographs,
      stamps, currency and the CCE subscription businesses, none of which meet the
      quantitative thresholds to qualify as a separate segment, as defined in SFAS
      No.
      131.




We
      allocate operating expenses to each service segment based upon activity levels.
      Stock-based compensation is recognized by segment for those employees of the
      reported segment. We do not allocate specific assets to those service segments.
      All of our sales and identifiable assets are located in the United States.
      No
      individual customer accounted for 10% or more of revenue in any of the years
      ended June 30, 2006, 2005 and 2004.




89


SEGMENT,
      GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION (CONT’D)







**Year
                Ended June 30**
              (in
                thousands)**2006**
            
            **2005**
            
            **2004**Net
                revenues from external customersCoins
            
            $
            23,829
            
            $
            23,203
            
            $
            17,474Sportscards
            
            
            8,461
            
            
            8,143
            
            
            7,126Diamonds
            
            
            373
            
            
            -
            
            
            -Other
            
            
            4,251
            
            
            2,261
            
            
            1,820Total
                revenue
            
            
            36,914
            
            
            33,607
            
            
            26,420Operating
                income before unallocated expensesCoins
            
            
            11,542
            
            
            12,183
            
            
            8,837Sportscards
            
            
            1,153
            
            
            1,344
            
            
            968Diamonds
            
            
            (1,459
            )
            
            -
            
            
            -Other
            
            
            6
            
            
            (704
            )
            
            (117
            )Total
            
            
            11,242
            
            
            12,823
            
            
            9,688Unallocated
                operating expenses
            
            
            (7,473
            )
            
            (5,356
            )
            
            (5,419
            )Settlement
                of lawsuit
            
            
            -
            
            
            (500
            )
            
            -Consolidated
                operating income
            
            $
            3,769
            
            $
            6,967
            
            $
            4,269









90




**17.** **Quarterly
      Reports of Operations (Unaudited)**





The
      following table presents quarterly unaudited consolidated financial information
      for the eight quarters in the period ended June 30, 2006. Such information
      is
      presented on the same basis as the annual information presented in the
      accompanying consolidated financial statements. In management’s opinion, this
      information reflects all adjustments that are necessary for a fair presentation
      of the results for these periods.





**Quarters
                Ended**
              **(In
                thousands, except per share data)**Sept.
                30,
              2004
            
            Dec.
                31,
              2004
            
            Mar.
                31
              2005
            
            June
                30,
              2005
            
            Sept.
                30,
              2005
            
            Dec.
                31,
              2005
            
            Mar.
                31
              2006
            
            June
                30,
              2006******(1**)Statement
                of Operations Data:Net
                revenues
            
            $
            8,195
            
            $
            7,982
            
            $
            8,955
            
            $
            8,475
            
            $
            8,825
            
            $
            7,447
            
            $
            10,022
            
            $
            10,620Cost
                of revenues
            
            
            2,826
            
            
            2,998
            
            
            3,263
            
            
            3,152
            
            
            3,372
            
            
            3,118
            
            
            4,088
            
            
            4,312Gross
                profit
            
            
            5,369
            
            
            4,984
            
            
            5,692
            
            
            5,323
            
            
            5,453
            
            
            4,329
            
            
            5,934
            
            
            6,308SG&A
                expenses
            
            
            3,244
            
            
            3,040
            
            
            3,464
            
            
            4,153
            
            
            4,310
            
            
            3,944
            
            
            4,632
            
            
            5,369Settlement
                of lawsuit
            
            
            -
            
            
            500
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                income
            
            
            2,125
            
            
            1,444
            
            
            2,228
            
            
            1,170
            
            
            1,143
            
            
            385
            
            
            1,302
            
            
            939Interest
                and other income, net
            
            
            64
            
            
            112
            
            
            225
            
            
            531
            
            
            550
            
            
            616
            
            
            596
            
            
            606Income
                before income taxes
            
            
            2,189
            
            
            1,556
            
            
            2,453
            
            
            1,701
            
            
            1,693
            
            
            1,001
            
            
            1,898
            
            
            1,545Provision
                for income taxes
            
            
            878
            
            
            628
            
            
            981
            
            
            654
            
            
            714
            
            
            447
            
            
            804
            
            
            768Income
                from continuing operations
            
            
            1,311
            
            
            928
            
            
            1,472
            
            
            1,047
            
            
            979
            
            
            554
            
            
            1,094
            
            
            777Income
                (loss) from discontinuedoperations,
              net of gain on salesof
                discontinued businesses
              (net
                of income taxes)
            
            
            (69
            )
            
            (7
            )
            
            (3
            )
            
            139
            
            
            (12
            )
            
            181
            
            
            -
            
            
            127Net
                income
            
            $
            1,242
            
            $
            921
            
            $
            1,469
            
            $
            1,186
            
            $
            967
            
            $
            735
            
            $
            1,094
            
            $
            904Net
                income per basic share:Income
                from continuing operations
            
            $
            0.21
            
            $
            0.15
            
            $
            0.21
            
            $
            0.12
            
            $
            0.11
            
            $
            0.07
            
            $
            0.13
            
            $
            0.09Income
                (loss) from discontinuedoperations,
              net of gain on salesof
                discontinued businesses
              (net of income taxes)
            
            
            (0.01
            )
            
            -
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.02Net
                income
            
            $
            0.20
            
            $
            0.15
            
            $
            0.21
            
            $
            0.14
            
            $
            0.11
            
            $
            0.09
            
            $
            0.13
            
            $
            0.11Net
                income per diluted share:Income
                from continuing operations
            
            $
            0.20
            
            $
            0.14
            
            $
            0.19
            
            $
            0.12
            
            $
            0.11
            
            $
            0.06
            
            $
            0.12
            
            $
            0.09Income
                (loss) from discontinuedoperations,
              net of gain on sales ofdiscontinued
                businesses
              (net
                of income taxes)
            
            
            (0.01
            )
            
            -
            
            
            -
            
            
            0.01
            
            
            -
            
            
            0.02
            
            
            -
            
            
            0.01Net
                income
            
            $
            0.19
            
            $
            0.14
            
            $
            0.19
            
            $
            0.13
            
            $
            0.11
            
            $
            0.08
            
            $
            0.12
            
            $
            0.10Weighted
                average shares outstandingBasic
            
            
            6,214
            
            
            6,242
            
            
            7,113
            
            
            8,479
            
            
            8,486
            
            
            8,488
            
            
            8,485
            
            
            8,433Diluted
            
            
            6,569
            
            
            6,695
            
            
            7,571
            
            
            8,902
            
            
            8,806
            
            
            8,803
            
            
            8,822
            
            
            8,750







(1) During
      the fourth quarter of 2006, the Company determined that assumptions used in
      the
      Black-Scholes option pricing model related principally to the expected term
      of
      an option and the forfeiture rate used in the determination of stock-based
      compensation expense (see related discussion in note 2) during fiscal 2006
      were
      incorrect. We determined that the stock-based compensation expense recognized
      during the interim periods of 2006 was understated by approximately $35,000
      in
      each of the first three quarters of 2006, or approximately $105,000 for the
      nine
      month period ended March 31, 2006. We also determined that the understatement
      of
      expense in each of the interim periods of 2006 was immaterial to each quarter,
      and, accordingly, in the fourth quarter of 2006, we recorded a correcting
      adjustment of $105,000 to stock-based compensation expense, or approximately
      $0.01 per diluted share. Accordingly, this adjustment is reflected in cost
      of
      revenues ($47,000) and selling, general and administrative expense
      ($58,000).





91




**18.**  **Subsequent
      Events**





On
      July
      11, 2006, the Company acquired all of the outstanding membership units of Expos
      Unlimited LLC (“Expos”), a California limited liability company, for $2,400,000
      in cash, of which $2,370,000 was paid to the former members on or about July
      12,
      2006. Depending on the future financial performance of Expos, the Company may
      become obligated to make contingent payments to the former members up to an
      aggregate of $750,000 over the next five years. Expos owns and operates the
      Long
      Beach Coin, Stamp & Collectibles Expo (“Long Beach”) and the Santa Clara
      Coin, Stamp & Collectibles Expo (“Santa Clara”), which comprise, in total,
      of five trade shows held annually. At both the Long Beach and Santa Clara expos,
      leading numismatic, philatelic and collectibles dealers offer rare and valuable
      collectibles to the public, while auctions of coins and currency are conducted
      alongside exhibitions of major numismatic and collectible interest.





On
      August
      15, 2006, the Board of Directors declared a regular quarterly dividend of $0.08
      per common share, which was paid on September 12, 2006 to stockholders of record
      on August 29, 2006. The aggregate amount of such dividend was approximately
      $670,000.





On
      August
      18, 2006, the Company acquired American Gemological Laboratories (AGL), an
      international forensic colored gemstone certification and grading laboratory.
      AGL is one of the leading third party authentication and grading services for
      colored gemstones, including colored gemstones that are sold at auction through
      Sotheby’s and Christies and by jewelry retailers such as Cartier and Fred
      Leighton. The Company paid an aggregate acquisition price of $3.5 million in
      cash for AGL, and,
      depending on the future financial performance of AGL; the Company may become
      obligated to make payments of up to an aggregate of an additional $3.5 million
      over the next five years.








**Schedule
      II**


**Valuation
      and Qualifying Accounts**


**Description**
            
            **Balance
                at Beginning****of
                Period**
            
            **Charged
                to Operating Expenses**
            
            **Charged
                to Cost of Revenues**
            
            **Net**
              **Deductions**
            
            **Balance**
              **at
                End**
              **of
                Period**Allowance
                for doubtful accounts
            
            $
            29,000
            
            $
            31,000
            
            $
            -
            
            $
            (30,000
            )
            $
            30,000Inventory
                reserve
            
            
            -
            
            
            -
            
            
            53,000
            
            
            -
            
            
            53,000Total
                at June 30, 2004
            
            $
            29,000
            
            $
            31,000
            
            $
            53,000
            
            $
            (30,000
            )
            $
            83,000Allowance
                for doubtful accounts
            
            $
            30,000
            
            $
            17,000
            
            $
            -
            
            $
            (9,000
            )
            $
            38,000Inventory
                reserve
            
            
            53,000
            
            
            -
            
            
            26,000
            
            
            (45,000
            )
            
            34,000Total
                at June 30, 2005
            
            $
            83,000
            
            $
            17,000
            
            $
            26,000
            
            $
            (54,000
            )
            $
            72,000Allowance
                for doubtful accounts
            
            $
            38,000
            
            $
            23,000
            
            $
            -
            
            $
            (24,000
            )
            $
            37,000Allowance
                for customer notes receivable
            
            
            -
            
            
            16,000
            
            
            -
            
            
            -
            
            
            16,000Inventory
                reserve
            
            
            34,000
            
            
            -
            
            
            72,000
            
            
            -
            
            
            106,000Total
                at June 30, 2006
            
            $
            72,000
            
            $
            39,000
            
            $
            72,000
            
            $
            (24,000
            )
            $
            159,000













92







**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING **AND
                FINANCIAL
                DISCLOSURE****




As **** previously
      reported in a Current Report on Form 8-K dated January 26, 2005, on that date
      we
      were informed by Deloitte & Touche LLP (“D&T”) that it had decided to
      resign as the Company’s independent registered public accounting firm upon the
      completion of D&T’s review of the Company’s interim financial information to
      be included in its Quarterly Report on Form 10-Q for our second quarter that
      ended on December 31, 2004. We were informed by D&T that its decision to
      resign was not the result of any disagreements between us and D&T on matters
      of accounting principles or practices, financial statement disclosure or
      auditing scope or procedures.




The
      audit
      reports of D&T on our financial statements for fiscal year ended June 30,
      2004 contained no adverse opinion or disclaimer of opinion, and were not
      qualified or modified as to uncertainty, audit scope or accounting
      principles.




During
      the period from July 1, 2003, the beginning of fiscal 2004, to January 26,
      2005,
      there were no disagreements between us and D&T on any matter of accounting
      principles or practices, financial statement disclosure or auditing scope or
      procedures which, if not resolved to D&T’s satisfaction, would have caused
      it to make reference to the subject matter of the disagreement in connection
      with its reports.




During
      the period from July 1, 2003 to January 26, 2005 there were no reportable events
      as defined in Item 304(a)(1)(v) of Regulation S-K.




We
      provided D&T with a copy of the disclosure we included in our Current Report
      on Form 8-K reporting its resignation and, at our request D&T furnished us
      with a letter addressed to the Securities and Exchange Commission stating
      whether D&T agreed with the statements that we have made in that Current
      Report. A copy of D&T’s letter was attached to that Report as Exhibit
      16.1.




As
      also
      previously reported, in a Current Report on Form 8-K dated February 8, 2005,
      that we had filed with the Securities and Exchange Commission, the Audit
      Committee of the Company’s Board of Directors approved the appointment and
      engagement of Grant Thornton LLP (“Grant Thornton”) as the Company’s independent
      registered public accounting firm.




During
      the period from July 1, 2003 to February 8, 2005 (the date Grant Thornton was
      engaged), neither the Company, nor anyone acting on its behalf, consulted with
      Grant Thornton regarding (i) the application of accounting principles to any
      specified transaction, either completed or proposed, or the type of audit
      opinion that might be rendered on the Company's financial statements, or (ii)
      any of the matters or events set forth in Item 304(a)(2)(ii) of Regulation
      S−K.




**ITEM
      9A.****CONTROLS
      AND PROCEDURES**




*Disclosure
      Controls and Procedures*




Our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934, as amended) are designed to provide
      reasonable assurance that information required to be disclosed in our reports
      filed under that Act (the Exchange Act), such as this Annual Report on Form
      10-K, is recorded, processed, summarized and reported within the time periods
      specified in the rules of the Securities and Exchange Commission. Our disclosure
      controls and procedures also are designed to ensure that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosures.




Our
      management, under the supervision and with the participation of our Chief
      Executive Officer and the Chief Financial Officer, evaluated the effectiveness
      of our disclosure controls and procedures in effect as of June 30, 2006. Based
      on that evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that, as of June 30, 2006, our disclosure controls and procedures
      were
      effective to provide reasonable assurance that material information, relating
      to
      the Company and its consolidated subsidiaries, required to be included in our
      Exchange Act reports, including this Annual Report on Form 10-K, is made known
      to management, including the Chief Executive Officer and Chief Financial
      Officer, on a timely basis.




93


*Changes
      in Internal Control Over Financial Reporting*




There
      have been no changes in our internal control over financial reporting that
      occurred during our fourth fiscal quarter ended June 30, 2006 that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.




*Management’s
      Report on Internal Control Over Financial Reporting*




Management
      of Collectors Universe, Inc. is responsible for establishing and maintaining
      adequate internal control over financial reporting as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act. Our internal control over financial
      reporting is a process designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with accounting principles generally
      accepted in the United States of America. Internal control over financial
      reporting includes those written policies and procedures that:




•
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our assets;




•
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with accounting
                principles generally accepted in the United States of America;




•
            provide
                reasonable assurance that our receipts and expenditures are being
                made
                only in accordance with authorization of our management and directors;
                and




•
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of assets that could
                have a
                material effect on our consolidated financial statements.




Internal
      control over financial reporting includes the controls themselves, monitoring
      and internal auditing practices and actions taken to correct deficiencies as
      identified.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risks that controls may
      become inadequate because of changes in conditions or because the degree of
      compliance with the policies or procedures may deteriorate.




*Management’s
      Assessment and Determination*




Our
      management assessed the effectiveness of Collectors Universe’s internal control
      over financial reporting as of June 30, 2006, based on criteria for effective
      internal control over financial reporting described in “Internal Control -
      Integrated Framework” issued by the Committee of Sponsoring Organizations of the
      Treadway Commission. Management’s assessment included an evaluation of the
      design and the testing of the operational effectiveness of Collectors Universe’s
      internal control over financial reporting. Management reviewed the results
      of
      its assessment with the Audit Committee of our Board of Directors.




Based
      on
      that assessment, management determined that, as of June 30, 2006, Collectors
      Universe, Inc. maintained effective internal control over financial reporting.




Grant
      Thornton LLP, independent registered public accounting firm, which audited
      and
      reported on our consolidated financial statements for the fiscal year ended
      June
      30, 2006 which are included in this Annual Report on Form 10-K, has issued
      an
      attestation report on management’s assessment of internal control over financial
      reporting, which is set forth below.




94


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**


**ON
      INTERNAL CONTROL OVER FINANCIAL REPORTING**




Board
      of
      Directors and Stockholders


Collectors
      Universe, Inc. and Subsidiaries:




We
      have
      audited management’s assessment, included in the accompanying Collectors
      Universe, Inc. and subsidiaries Management’s Report on Internal Control Over
      Financial Reporting, that Collectors Universe, Inc. and subsidiaries maintained
      effective internal control over financial reporting as of June 30, 2006, based
      on criteria established in Internal Control—Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Collectors Universe, Inc. and subsidiaries’ management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design of the operating effectiveness of internal control, and performing
      such other procedures as we considered necessary in the circumstances. We
      believe that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, management’s assessment that Collectors Universe, Inc. and subsidiaries
      maintained effective internal control over financial reporting as of June 30,
      2006, is fairly stated, in all material respects, based on criteria established
      in Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission. Also in our opinion, Collectors
      Universe, Inc. and subsidiaries maintained, in all material respects, effective
      internal control over financial reporting as of June 30, 2006, based on criteria
      established in Internal Control—Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission.




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of Collectors
      Universe, Inc. and subsidiaries as of June 30, 2006 and 2005, and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      the years then ended and our report dated September 7, 2006 expressed an
      unqualified opinion thereon.




/s/
      GRANT
      THORNTON LLP




Irvine,
      California


September
      7, 2006




95


**ITEM
      9B.****OTHER
      INFORMATION**





None








**PART
      III**








**ITEM
      10.****DIRECTORS
      AND EXECUTIVE OFFICERS**




Except
      for information concerning the Company's executive officers, which is included
      in Part I of this Annual Report, the information required by Item 10 is
      incorporated by reference from the Company's definitive proxy statement,
      expected to be filed with the Commission on or before October 28,
      2006, for the
      Company’s 2006 annual stockholders' meeting.




**ITEM
      11.****EXECUTIVE
      COMPENSATION**




The
      information required by Item 11 is incorporated herein by reference from the
      Company's definitive proxy statement, expected to be filed with the Commission
      on or before October 28, 2006, for the Company’s 2006 annual stockholders'
      meeting.




**ITEM
      12.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




Except
      for the information below regarding our equity compensation plans, the
      information required by Item 12 is incorporated herein by reference from
      the Company's definitive proxy statement, expected to be filed with the
      Commission on or before October 28, 2006, for the Company’s 2006 annual
      stockholders' meeting.




The
      following table provides information relating to our equity compensation plans
      as of June 30, 2006




**Column
                A**
            
            **Column
                B**
            
            **Column
                C**Number
                of Securities to be Issued Upon Exercise of Outstanding Options and
                Warrants
            
            Weighted-Average
                Exercise Price of Outstanding Options and Warrants
            
            Number
                of Securities Remaining Available for Future Issuance under Equity
                Compensation Plans(Excluding
                Securities Reflected in Column A)Equity
                compensation plansapproved
                by shareholders
            
            
            876,000
            
            $
            12.69
            
            
            437,000Equity
                compensation not approvedby
                shareholders(1)
            
            
            295,000
            
            
            11.18
            
            
            -Total
            
            
            1,171,000
            
            $
            12.31
            
            
            437,000









(1)
            Warrants
                to purchase common stock granted to non-employee service providers
                in the
                fiscal years ended June 30, 1997 and 1999.




**ITEM
      13.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      information required by Item 13 is incorporated herein by reference from the
      Company's definitive proxy statement, expected to be filed with the Commission
      on or before October 28, 2006, for the Company’s 2006 annual stockholders’
meeting.




**ITEM
      14.****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




The
      information required by Item 14 is incorporated herein by reference from the
      Company's definitive proxy statement, expected to be filed with the Commission
      on or before October 28, 2006, for the Company’s 2006 annual stockholders’
meeting.




96


**PART
      IV**





**ITEM
      15****EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**




(a)(1)
            Financial
                Statements




The
      following financial statements are included in Item 8 of Form 10-K:




Report
                of Grant Thornton LLP, Independent Registered Public Accounting
                FirmReport
                of Deloitte & Touche, LLP, Independent Registered Public Accounting
                FirmConsolidated
                Balance Sheets as of June 30, 2006 and 2005Consolidated
                Statements of Operations for the years ended June 30, 2006, 2005
                and
                2004Consolidated
                Statements of Stockholders’ Equity for the years ended June 30, 2006, 2005
                and 2004Consolidated
                Statements of Cash Flows for the years ended June 30, 2006, 2005
                and
                2004Notes
                to the Consolidated Financial
                Statements




(a)(2)
            Financial
                Statement Schedule




Schedule
                II Valuation and Qualifying Accounts


The
      other
      schedules are omitted because the required information is either inapplicable
      or
      has been disclosed in the consolidated financial statements and notes
      thereto.




(a)(3) Exhibits




See
      Index to Exhibits
      immediately following the Signature Page of this Annual Report for a list of
      the
      Exhibits required, pursuant to Item 601 of Regulation S-K, to be filed with
      this
      Annual Report.








97


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
      registrant has duly caused this Annual Report to be signed on its behalf by
      the
      undersigned thereunto duly authorized.











**COLLECTORS
                UNIVERSE, INC**Date:September
                13, 2006
            By:/s/
                JOSEPH J. WALLACEJoseph
                J. Wallace, Chief Financial Officer











**POWER
      OF ATTORNEY**





Each
      person whose signature to this Annual Report appears below hereby appoints
      Michael R. Haynes, Joseph J. Wallace and Michael J. Lewis, and any of them,
      individually, to act severally as attorneys-in-fact and agents, with power
      of
      substitution and resubstitution, for each of them, to sign on his behalf,
      individually and in the capacities stated below, and to file, any and all
      amendments to this Annual Report, which amendment or amendments may make changes
      and additions as such attorneys-in-fact may deem necessary or
      appropriate.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Annual Report
      has been signed by the following persons on behalf of the Registrant and in
      the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                A. CLINTON ALLEN
              A.
                Clinton Allen
            
            Chairman
                of the Board and Director
            
            September
                13, 2006/s/
                MICHAEL R. HAYNES
              Michael
                R. Haynes
            
            Chief
                Executive Officer and Director
              (Principal
                Executive Officer)
            
            September
                13, 2006/s/
                DAVID HALL
              David
                G. Hall
            
            President
                and Director
            
            September
                13, 2006/s/
                JOSEPH J. WALLACE
              Joseph
                J. Wallace
            
            Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)
            
            September
                13, 2006/s/
                BEN A. FRYDMAN
              Ben
                A. Frydman
            
            Director
            
            September
                13, 2006/s/
                VAN D. SIMMONS
              Van
                D. Simmons
            
            Director
            
            September
                13, 2006/s/
                A. J. BERT MOYER
              A.
                J. Bert Moyer
            
            Director
            
            September
                13, 2006/s/
                DEBORAH A. FARRINGTON
              Deborah
                A. Farrington
            
            Director
            
            September
                13, 2006











S-1


**INDEX
      TO EXHIBITS**




**Exhibit
                No.**
            
            **Description**1.1
            
            Form
                of Underwriting Agreement.*1.2
            
            Form
                of Underwriting Agreement between Collectors Universe and Thomas
                Weisel
                Partners LLC, Needham & Company, Inc. and Roth Capital Partners LLC.
                Incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the
                Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
                on February 14, 2005.3.2
            
            Amended
                and Restated Certificate of Incorporation of Collectors Universe.
                Incorporated by reference to Exhibit 3.2 to the Company’s Registration
                Statement on Form S-3 (File No. 333-122129), filed on January 19,
                2005.3.2.1
            
            Certificate
                of Amendment to Amended and Restated Certificate of Incorporation
                of
                Collectors Universe. Incorporated by reference to Exhibit 3.2.1 to
                the
                Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
                on January 19, 2005.3.3
            
            Amended
                and Restated Bylaws of Collectors Universe, as adopted September
                1,
                1999.*4.1
            
            Registration
                Rights Agreement.*4.2
            
            Form
                of Registration Rights Agreement for Stockholders pursuant to private
                placement.*5.1
            
            Opinion
                of Stradling Yocca Carlson & Rauth, a Professional
                Corporation.*10.1
            
            Collectors
                Universe 1999 Stock Incentive Plan.*10.2
            
            Form
                of Stock Option Agreement for the Collectors Universe 1999
                Plan.*10.4
            
            PCGS
                1999 Stock Incentive Plan.*10.5
            
            Form
                of Stock Option Agreement for the PCGS 1999 Plan.*10.6
            
            Employee
                Stock Purchase Plan.*10.7
            
            Form
                of indemnification Agreement.*10.8
            
            Asset
                Acquisition Agreement dated January 25, 1999 between Professional
                Coin
                Grading Service, Inc.,
              Info
                Exchange, Inc. and Brent Gutenkunst.*10.9
            
            Collectors
                Universe/eBay Mutual Services Term Sheet dated February 10, 1999,
                between
                the Company and eBay, Inc.*10.10
            
            Net
                Lease between Orix Searls Santa Ana Venture and Collectors Universe,
                dated
                June, 1999.*10.11
            
            Agreement
                for the Sale of Goods and Services dated March 31,1999, between the
                Company and DNA Technologies, *10.12
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company
                and
                Hugh Sconyers.*10.13
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company
                and
                BJ Searls.*10.14
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company
                and
                Greg Bussineau.*10.15
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company
                and
                Lyn F. Knight Rare Coins*10.16
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company,
              Kingswood
                Coin Auction, LLC and the Members of Kingswood.*10.17
            
            Contribution
                and Acquisition Agreement dated February 3, 1999, between the Company
              and
                Professional Coin Grading Service, Inc.*10.18
            
            Employment
                Agreement dated March 1999, between Superior Sportscard Auctions,
                LLC and
                Greg Bussineau.*10.19
            
            Employment
                Agreement dated March 5, 1999, between Lyn F. Knight, Lyn Knight
                Currency
                Auctions, Inc.
              and
                Collectors Universe.*10.24
            
            Asset
                Purchase Agreements between Collectors Universe, Inc. and Auctions
                by
                Bowers and Merena, Inc., Bowers and Merena Galleries, Inc. and Bowers
                and
                Merena Research, Inc. (Incorporated by reference to Exhibit 10.1
                to
                Registrant’s Current Report on Form 8-K, dated March 21, 2000).*10.25
            
            Asset
                Purchase Agreements dated February 19, 2004 between Collectors Universe,
                Inc. and Spectrum Numismatics, Inc. (Incorporated by reference to
                Exhibit
                10.1 to Registrant’s Current Report on Form 8-K, dated February 19,
                2004).







E-1


**INDEX
      TO EXHIBITS**


(Continued)




**Exhibit
                No.**
            
            **Description**10.26
            
            Non-Competition
                Agreement dated February 19, 2004 between Collectors Universe, Inc.
                and
                Spectrum Numismatics, Inc. (Incorporated by reference to Exhibit
                10.2 to
                Registrant’s Current Report on Form 8-K, dated February 19,
                2004).10.27
            
            Collectors
                Universe 2003 Stock Incentive Plan. Incorporated by reference to
                Exhibit
                10.1 to the Company’s Registration Statement on Form S-8 (File No.
                333-121035), filed on December 6, 2004.10.28
            
            Form
                of Stock Option Agreement for 2003 Stock Incentive Plan. Incorporated
                by
                reference to Exhibit 10.2 to the Company’s Registration Statement on Form
                S-8 (File No. 333-121035), filed on December 6, 2004.10.29
            
            Form
                of Restricted Stock Purchase Agreement for 2003 Stock Incentive Plan.
                Incorporated by reference to Exhibit 10.3 to the Company’s Registration
                Statement on Form S-8 (File No. 333-121035), filed on December 6,
                2004.10.30
            
            Employment
                Agreement, dated January 1, 2003, between the Company and Michael
                Haynes.
                Incorporated by reference to Exhibit 10.30 to the Company’s Registration
                Statement on Form S-3 (File No. 333-122129), filed on January 19,
                2005.10.30.1
            
            First
                Amendment to Employment Agreement, dated October 1, 2003, between
                the
                Company and Michael Haynes. Incorporated by reference to Exhibit
                10.30.1
                to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
                filed on January 19, 2005.10.30.2
            
            Second
                Amendment to Employment Agreement, dated November 1, 2004, between
                the
                Company and Michael Haynes. Incorporated by reference to Exhibit
                10.30.2
                to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
                filed on January 19, 2005.10.31
            
            2005
                Management Bonus Plan. Incorporated by reference to Exhibit 10.99
                to the
                Company’s Quarterly Report on
              Form
                10-Q for the quarter ended December 31, 2004, filed with the Commission
                on
                February 14, 200510.32
            
            Loan
                and Security Agreement between Collectors Finance Corporation and
                California Bank & Trust
              dated
                as of June 30, 2005.10.33
            
            Continuing
                Guaranty issued as of June 30, 2005 by Collectors Universe, Inc.
                to
                California Bank & Trust.10.34
            
            Asset
                Purchase Agreement among Collectors universe, inc., Gemprint Corporation,
                CVF Technologies Corporation, Heptagon Investments Ltd. and 1456733
                Ontario, Inc., dated November 25, 2005, providing for the Company’s
                acquisition of the assets of Gemprint Corporation. Incorporated by
                reference to Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended December 31, 2005, filed with the Commission
                on
                February 9, 2006.10.35
            
            Employment
                Agreement Extension between Collectors Universe, Inc. and Michael
                R.
                Haynes. Incorporated by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K dated March 17, 2006 and filed with the Commission
                on
                March 23, 2006.10.36
            
            2006
                Management Bonus Plans. Incorporated by reference to Exhibit 10.1
                to the
                Company’s Current Report on Form 8-K dated March 17, 2006 and filed with
                the Commission on March 23, 2006.21.1
            
            Subsidiaries
                of the Registrant.23.1
            
            Consent
                of Grant Thornton LLP, Independent Registered Public Accounting
                Firm23.2
            
            Consent
                of Deloitte & Touche LLP, Independent Registered Public Accounting
                Firm31.1
            
            Certifications
                of CEO Under Section 302 Of The Sarbanes-Oxley Act.31.2
            
            Certifications
                of CFO Under Section 302 Of The Sarbanes-Oxley Act.32.1
            
            CEO
                Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
                Act.32.2
            
            CFO
                Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
                Act.




*
              Incorporated
                  by reference to the same numbered exhibit to the Company’s Registration
                  Statement (No. 333-86449) on Form S-1 filed with the Commission
                  on
                  September 2, 1999.
 
 
 E-2