##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


FOR ANNUAL AND TRANSITION REPORTS


PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 000-51161


Odimo Incorporated


(Exact Name of Registrant as Specified in its Charter)


|                                                                                   |  |                                         
|---------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                           |  | 22-3607813                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                 |  | (I.R.S. Employer
    Identification No.)
|                                                                                  
|14051 NW 14th Street,
    Sunrise, Florida(Address of Principal Executive Offices) |  | 33323(Zip Code)                         

(954) 835-2233


(Registrants Telephone Number, Including Area Code)


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


Securities registered pursuant to Section 12(g) of the
Act: Common Stock, par value $0.001 per share


o x




o x


x o


o




|                           |  |                      |  |                         
|-------------------------- |  | -------------------- |  | ------------------------
|Large accelerated filer  o |  | Accelerated filer  o |  | Non-accelerated filer  x

o x






DOCUMENTS INCORPORATED BY REFERENCE












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##### 










ODIMO INCORPORATED


FORM
10-K ANNUAL
REPORT


For the Fiscal Year Ended December 31, 2005


Table of Contents


|                                             |  |                                                                                                                      |    |      |    | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                             |  |                                                                                                                      |    | Page |   
|                                             |  |                                                                                                                      |    |      |   
|PART I                                      
|Forward-Looking Statements                   |  |                                                                                                                      | 1  |     
|Item 1                                       |  | Business                                                                                                             |    |      | 1  | 
|Item 1A.                                     |  | Risk Factors                                                                                                         |    |      | 10 | 
|Item 1B.                                     |  | Unresolved Staff Comments                                                                                            |    |      | 22 | 
|Item 2.                                      |  | Properties                                                                                                           |    |      | 22 | 
|Item 3.                                      |  | Legal Proceedings                                                                                                    |    |      | 22 | 
|Item 4.                                      |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 23 | 
|                                            
|PART II                                     
|Item 5.                                      |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 23 | 
|Item 6.                                      |  | Selected Financial Data                                                                                              |    |      | 25 | 
|Item 7.                                      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 27 | 
|Item 7A.                                     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 38 | 
|Item 8.                                      |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 39 | 
|Item 9.                                      |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosures                            |    |      | 39 | 
|Item 9A.                                     |  | Controls and Procedures                                                                                              |    |      | 39 | 
|Item 9B.                                     |  | Other Information                                                                                                    |    |      | 39 | 
|                                            
|PART III                                    
|Item 10.                                     |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 40 | 
|Item 11.                                     |  | Executive Compensation                                                                                               |    |      | 40 | 
|Item 12.                                     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 40 | 
|Item 13.                                     |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 40 | 
|Item 14.                                     |  | Principal Accounting Fees and Services                                                                               |    |      | 40 | 
|                                            
|PART IV                                     
|Item 15.                                     |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 41 | 
|Signatures                                   |  |                                                                                                                      | 44 |     
|Termination Agreement                       
|Third Amendment to Loan & Security Agreement
|Consent of Deloitte & Touche LLP            
|Consent of Rachlin Cohen & Holtz LLP        
|Section 302 Certification of CEO            
|Section 302 Certification of CFO            
|Section 906 Certification of CEO            
|Section 906 Certification of CFO            





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##### Table of Contents






PART I


Forward-Looking Statements


This report contains various forward-looking statements
regarding our business, financial condition, results of
operations and future plans and projects. Forward-looking
statements discuss matters that are not historical facts and can
be identified by the use of words such as believes,
expects, anticipates,
intends, estimates,
projects, can, could,
may, will, would or similar
expressions. In this report, for example, we make
forward-looking statements regarding, among other things, our
expectations about our ability to continue as a going concern,
the rate of revenue growth in specific business segments and the
reasons for that growth and our profitability.


Although these forward-looking statements reflect the good
faith judgment of our management, such statements can only be
based upon facts and factors currently known to us.
Forward-looking statements are inherently subject to risks and
uncertainties, many of which are beyond our control. As a
result, our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those set forth below under the
caption Risk Factors. For these statements, we claim
the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of
1995. You should not unduly rely on these forward-looking
statements, which speak only as of the date on which they were
made. They give our expectations regarding the future but are
not guarantees. We undertake no obligation to update publicly or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise, unless required by
law.







Item 1.  Business


Overview












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##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | www.diamond.comfeatures independently certified
    diamonds, fine jewelry and brand name watches, and accounted for
    approximately 45% and 39% of our net sales during the years
    ended December 31, 2005 and 2004, respectively.                                                                                                    
|
| |  | www.ashford.comfeatures brand name luxury products,
    including watches, fine jewelry, designer handbags and
    accessories, home accents, fragrances, sunglasses and fine
    writing instruments, and accounted for approximately 32% and 39%
    of our net sales during the years ended December 31, 2005
    and 2004, respectively.
|
| |  | www.worldofwatches.comfeatures a large selection of
    brand name watches, and accounted for approximately 23% and 22%
    of our net sales during the years ended December 31, 2005
    and 2004, respectively.                                                                                                                           

Our Websites




www.diamond.com


www.diamond.com www.diamond.com www.diamond.com, www.diamond.com


www.ashford.com


www.ashford.com ® www.ashford.com www.ashford.com


www.worldofwatches.com


www.worldofwatches.com


2



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##### Table of Contents



www.worldofwatches.com


Supplier Relationships


Diamonds and Fine
Jewelry










Brand Name Watches and Other
Luxury Goods


Parallel Market.


3



---



##### Table of Contents









Our Policies and Procedures.






4



---



##### Table of Contents





Marketing




www.diamond.com www.ashford.com www.worldofwatches.com




Portal and Targeted Website Advertising.


Affiliate Program.


Direct Marketing.


Customer Service and Sales Support




5



---



##### Table of Contents









Fulfillment Operations








Technology and Systems






| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | accept and validate customer orders;                                                                                          
|
| |  | enable customer service representatives to engage in real-time,
    online interaction with multiple customers simultaneously;
|
| |  | organize, place and manage orders with suppliers;                                                                             
|
| |  | receive product and assign it to customer orders;                                                                             
|
| |  | manage product shipments to customers based on various ordering
    criteria; and                                             
|
| |  | manage inventory for stock replenishment.                                                                                     

6



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##### Table of Contents





Seasonality




Competition






| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | independent and chain stores that sell jewelry, watches or other
    luxury goods, such as Tiffany & Co., Zales and Signet
    PLCs Kay Jewelers;
|
| |  | other online retailers that sell brand name watches and luxury
    goods, diamonds and fine jewelry, such as Amazon.com and Blue
    Nile;        
|
| |  | department stores;                                                                                                                                
|
| |  | boutiques and websites operated by brand owners;                                                                                                  
|
| |  | mass retailers that sell jewelry, watches and other luxury goods;                                                                                 
|
| |  | catalog and television shopping retailers; and                                                                                                    
|
| |  | online auction houses and closeout retailers.                                                                                                     





| |   |                                    
| | - | -----------------------------------
| |  | product selection and availability;
|
| |  | price;                             
|
| |  | convenience;                       
|
| |  | website recognition;               
|
| |  | site features and content;         
|
| |  | functionality and ease of use;     
|
| |  | order delivery performance; and    
|
| |  | customer service.                  



7



---



##### Table of Contents







Intellectual Property


www.diamond.com, www.ashford.com, www.worldofwatches.com,
www.odimo.com, www.diamonddepot.com.




Government Regulation


Internet and
E-Commerce




8



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Anti-Money Laundering
Program




Decoded Watches






9



---



##### Table of Contents







Employees




Available Information


www.odimo.com





Item 1A.  Risk Factors


Some of the statements in this report and in particular,
statements found in Managements Discussion and Analysis of
Financial Condition and Results of Operations, that are not
historical in nature may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are often identified by the words
will, should, anticipate,
believe, expect, intend,
estimate, hope, or similar expressions.
These statements reflect managements current views with
respect to future events and are subject to risks and
uncertainties. There are important factors that could cause
actual results to differ materially from those in
forward-looking statements, many of which are beyond our
control. These factors, risks and uncertainties include, but are
not limited to, the factors described below.


10



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##### Table of Contents



Our actual results, performance or achievement could differ
materially from those expressed in, or implied by, these
forward-looking statements, and accordingly, we can give no
assurances that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do so, what impact they will have on our results of
operations or financial condition. In view of these
uncertainties, investors are cautioned not to place undue
reliance on these forward-looking statements. We expressly
disclaim any obligation to publicly revise any forward-looking
statements that have been made to reflect the occurrence of
events after the date hereof.


You should carefully consider the risks and uncertainties
described below, together with all other information included in
this report, including the consolidated financial statements and
the related notes herein, as well as in our other public
filings, before making any investment decision regarding our
stock. If any of the following risks actually occurs, our
business, financial condition, results of operations and future
prospects would likely be materially and adversely affected. In
that event, the market price of our stock could decline and you
could lose all or part of your investment.


Risks Related to Our Business and Industry




| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is substantial doubt about our ability to continue
    as a going concern due to our cash requirements which means that
    we may not be able to continue operations unless we obtain
    additional funding.





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have incurred operating losses since our inception and
    anticipate incurring operating losses at least through 2006. We
    need additional capital to meet our future cash requirements and
    execute our business strategy.





| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | marketing, advertising and other promotional activities;                                                                                                
|
| |  | the expansion of our fulfillment operations, which includes
    supply procurement, inventory management, order receipt,
    packaging and shipment; and
|
| |  | the continued development of our websites and our computer
    network.                                                                                 





11



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| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | In order to decrease our losses, we must attract customers
    in a cost-effective manner.





| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we do not have a predictable or guaranteed supply
    of merchandise, we may lose customers and sales if we are unable
    to meet our customers demand for particular
    products.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We acquire most of the brand name watches and luxury goods
    we sell through the parallel market, or grey market as it is
    also called, which increases the risk that we may inadvertently
    sell counterfeit or stolen goods or merchandise which is
    physically materially different from merchandise acquired from
    channels authorized by the brand owners, which could expose us
    to liability for intellectual property infringement claims and
    damage our reputation.





12



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| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If brand owners take action to limit or prevent us from
    acquiring their products in the parallel market, we may not be
    able to find alternative sources of supply for such products at
    satisfactory prices or at all, which would result in reduced
    sales.







| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If it is determined that our sales of decoded watches
    violate state laws, we would be subject to claims for damages,
    fines or other penalties or be unable to sell decoded watches in
    such states.





13



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| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to identify and rapidly respond to fashion
    trends, we may be forced to absorb excess inventory or lower the
    sales prices for our goods.





| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our net sales and operating results are volatile and
    difficult to predict, which may adversely affect the trading
    price of our common stock.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Competition from traditional and online retail companies
    with greater brand recognition and resources may adversely
    affect our sales.





| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | independent and chain stores that sell jewelry, watches or other
    luxury products, such as Tiffany & Co., Zales and Signet
    PLCs Kay Jewelers;
|
| |  | other online retailers that sell diamonds, fine jewelry, brand
    name watches and/or luxury products, such as Amazon.com and Blue
    Nile;        
|
| |  | department stores;                                                                                                                                   
|
| |  | boutiques and websites operated by brand owners;                                                                                                     
|
| |  | mass retailers and warehouse clubs that sell jewelry, watches or
    other luxury products;                                                          
|
| |  | catalog and television shopping retailers; and                                                                                                       
|
| |  | online auction houses and closeout retailers.                                                                                                        



14



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| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our advertising relationships with Internet portals and
    other websites fail to create consumer awareness of our websites
    and product offerings, our sales may suffer.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | If online advertising rates continue to rise, we may
    purchase less advertising and our sales could decrease.





| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we carry almost all of our brand name watches,
    jewelry and luxury goods in inventory, if we are unable to
    accurately predict and plan for changes in consumer demand, our
    net sales and gross margins may decrease.





| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results are subject to seasonal
    fluctuations, and adverse results in our fourth quarter will
    have a disproportionate impact on our results of operations for
    the year.



15



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| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on Alan Lipton, our Chief Executive
    Officer and President, and other members of our management team.
    The loss of any of them could harm our business.





| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to increase capacity or respond to
    rapid technological changes in a timely manner or without
    service interruptions, which may cause customer
    dissatisfaction.







| |                                                              
| | -------------------------------------------------------------
| | Our costs have increased because we are a public
    company.





16



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| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our operations are located at our Sunrise, Florida
    facility, and disruptions at this facility could prevent us from
    receiving orders or fulfilling orders for our customers in a
    timely manner.





| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The availability and price of diamonds are significantly
    influenced by a small number of diamond mining firms as well as
    the political situation in diamond-producing countries. A
    decrease in the availability or an increase in the price of
    diamonds may make it difficult for us to procure enough diamonds
    at competitive prices to supply our customers.





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increases in the cost of precious metals and precious and
    semi-precious stones would increase the cost of our jewelry
    products, which could result in reduced margins or increased
    prices and reduced sales of such products.



17



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| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increased product returns and the failure to accurately
    predict product returns could reduce our gross margins and
    result in excess inventory.





| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | If we attain specified levels of financial performance, we
    are obligated to make earn-out payments to one of our
    stockholders.





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other online retailers may use domain names that are
    similar to ours. If customers associate these websites with us,
    our brands may be harmed and we may lose sales.

www.diamonds.com www.diamonds-usa.com.




| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not intend to pay dividends on our common stock,
    and, consequently, your only opportunity to achieve a return on
    your investment is if the price of our common stock
    appreciates.





| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Legal claims against us could be costly and result in
    substantial liabilities or the loss of significant
    rights.



18



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Risks Relating to Doing Business on the Internet




| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are required to collect sales and use taxes on the
    products we sell in jurisdictions outside of Florida, we may be
    subject to liability for past sales and our future sales may
    decrease.





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Various legal rules and regulations related to privacy and
    the collection, dissemination and security of personal
    information may adversely affect our marketing efforts.





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consumers may prefer to purchase brand name watches and
    luxury goods, diamonds and fine jewelry from traditional
    retailers, which would adversely affect our sales.





| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | concerns about buying expensive products without a physical
    storefront, face-to-face interaction with sales personnel and
    the ability to physically handle and examine products;
|
| |  | concerns over counterfeit or substandard goods;                                                                                                                                         
|
| |  | delivery times associated with Internet orders;                                                                                                                                         
|
| |  | product offerings that do not reflect consumer tastes and
    preferences;                                                                                                              
|
| |  | pricing that does not meet consumer expectations;                                                                                                                                       
|
| |  | concerns about the security of online transactions and the
    privacy of personal information;                                                                                         
|
| |  | delayed shipments, theft or shipments of incorrect or damaged
    products; and                                                                                                         
|
| |  | inconvenience associated with returning or exchanging purchased
    items.                                                                                                              

19



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| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | If the Internet infrastructure fails to grow or
    deteriorates, our ability to grow our business will be
    impaired.



Risks Related to the Securities Markets and Ownership of Our
Common Stock




| |                                                              
| | -------------------------------------------------------------
| | Our stock price has been and may continue to be
    volatile.





| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated fluctuations in our results of operations;                                                                                                          
|
| |  | variance in our financial performance from the expectations of
    market analysts;                                                                                       
|
| |  | developments with respect to intellectual property rights;                                                                                                                
|
| |  | announcements by us or our competitors of new product and
    service offerings, significant contracts, acquisitions or
    strategic relationships;                      
|
| |  | our involvement in litigation;                                                                                                                                            
|
| |  | our sale of common stock or other securities in the future;                                                                                                               
|
| |  | market conditions in our industry;                                                                                                                                        
|
| |  | recruitment or departure of key personnel;                                                                                                                                
|
| |  | changes in market valuation or earnings of our competitors;                                                                                                               
|
| |  | the trading volume of our common stock;                                                                                                                                   
|
| |  | changes in the estimation of the future size and growth rate of
    our markets; and                                                                                      
|
| |  | general economic or market conditions and other factors,
    including factors unrelated to our operating performance or the
    operating performance of our competitors.



| |                                                                           
| | --------------------------------------------------------------------------
| | Future sales of our common stock may cause our stock price
    to decline.





20



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| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our common stock has been publicly traded for a short time
    and an active trading market may not be sustained.





| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our organizational documents
    and Delaware law may discourage or prevent a change in control,
    even if an acquisition would be beneficial to our stockholders,
    which could affect our stock price adversely and prevent
    attempts by our stockholders to replace or remove our current
    management.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our board of directors has the exclusive right to elect
    directors to fill a vacancy created by the expansion of the
    board of directors or the resignation, death or removal of a
    director, which prevents stockholders from being able to fill
    vacancies on our board of directors.                                                                                                                      
|
| |  | Our stockholders may not act by written consent. As a result, a
    holder or holders controlling a majority of our capital stock
    would be able to take certain actions only at a
    stockholders meeting.                                                                                                                                                                                                         
|
| |  | No stockholder may call a special meeting of stockholders. This
    may make it more difficult for stockholders to take certain
    actions.                                                                                                                                                                                                                                                                             
|
| |  | Our stockholders may not remove a director without cause, and
    our certificate of incorporation provides for a classified board
    of directors with staggered, three-year terms. As a result, it
    could take up to three years for stockholders to replace the
    entire board.                                                                                                                                 
|
| |  | Our certificate of incorporation does not provide for cumulative
    voting in the election of directors. This limits the ability of
    minority stockholders to elect director candidates.                                                                                                                                                                                                                             
|
| |  | Stockholders must provide advance notice to nominate individuals
    for election to the board of directors or to propose matters
    that can be acted upon at a stockholders meeting. These
    provisions may discourage or deter a potential acquirer from
    conducting a solicitation of proxies to elect the
    acquirers own slate of directors or otherwise attempting
    to obtain control of our company.
|
| |  | Our board of directors may issue, without stockholder approval,
    shares of undesignated preferred stock. The ability to authorize
    undesignated preferred stock makes it possible for our board of
    directors to issue preferred stock with voting or other rights
    or preferences that could impede the success of any attempt to
    acquire us.                                                           



21



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| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our officers, directors and principal stockholders
    choose to act together, they may be able to control our
    management and operations, acting in their best interests and
    not in the best interests of other stockholders.






Item 1B.  Unresolved Staff Comments







Item 2.  Properties







Item 3.  Legal Proceedings








22



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Item 4.  Submission of Matters to a Vote of
Security Holders







PART II







|         |                                                                                                                     
|-------- | --------------------------------------------------------------------------------------------------------------------
|Item  5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Information




|                                            |  |      |      |  |     |  |      | 
|------------------------------------------- |  | ---- | ---- |  | --- |  | ---- | 
|                                            |  | High |      |  | Low | 
|                                            |  |      |      |  |     | 
|First Quarter 2005 (from February 15, 2005) |  |      | 8.96 |  |     |  | 6.10 | 
|Second Quarter 2005                         |  |      | 6.75 |  |     |  | 3.76 | 
|Third Quarter 2005                          |  |      | 5.50 |  |     |  | 1.45 | 
|Fourth Quarter 2005                         |  |      | 2.18 |  |     |  | 1.26 | 
|First Quarter 2006 (through March 24, 2006) |  |      | 2.05 |  |     |  | 1.25 | 



Dividend Policy




Equity Compensation Plan




2005 Equity Compensation Plan Information


|                                                           |  |                   |         |  |                   |            |                     |                      |  |  |         | 
|---------------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | ---------- | ------------------- | -------------------- |  |  | ------- | 
|                                                           |  | (a)               |         |  | (b)               |            |                     | (c)                  | 
|                                                           |  |                   |         |  |                   |            |                     |                      | 
|                                                           |  |                   |         |  |                   | Number of  |                    
|                                                           |  |                   |         |  |                   | Securities |                    
|                                                           |  | Number of         |         |  |                   |            | Remaining Available |                     
|                                                           |  | Securities to be  |         |  |                   |            | for Future Issuance |                     
|                                                           |  | Issued Upon       |         |  | Weighted-Average  |            |                     | Under Equity         | 
|                                                           |  | Exercise of       |         |  | Exercise Price of |            |                     | Compensation Plan    | 
|                                                           |  | Outstanding       |         |  | Outstanding       |            |                     | (Excluding           | 
|                                                           |  | Options, Warrants |         |  | Options, Warrants |            |                     | Securities Reflected | 
|Plan Category                                              |  | and Rights        |         |  | and Rights        |            |                     | in Column(a))        | 
|                                                           |  |                   |         |  |                   |            |                     |                      | 
|Equity compensation plans approved by security holders     |  |                   | 404,391 |  |                   | $          | 9.90                |                      |  |  | 155,000 | 
|Equity compensation plans not approved by security holders |  |                   |        |  |                   |            |                    |                      |  |  |        | 
|Total                                                      |  |                   | 404,391 |  |                   |            |                     |                      |  |  | 155,000 | 

23



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Recent Sales of Unregistered Securities


















Use of Proceeds






24



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##### Table of Contents



Repurchases of Equity Securities




Executive Officers of the Registrant




Alan Lipton,


Jeff Kornblum,


Amerisa Kornblum,


George Grous,





Item 6. Selected Financial Data.




25



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|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |       |        |  
|------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------- | ------- | ------ | ----- | - | ------- | ------ | ------ | - | ------- | ----- | ------ | ---- | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                |                               | Year Ended December 31,               |        
|                                                                                |                               |                                       |        
|Consolidated Statement of Operations Data:                                      |                               | 2005                                  |         |        | 2004  |   |         | 2003   |        |   | 2002    |       |        | 2001 |        
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|                                                                                |                               | (In thousands, except per share data) |        
|Net sales                                                                       |                               | $                                     | 51,841  |        |       | $ | 52,244  |        |        | $ | 41,694  |       |        | $    | 27,520  |       |        | $ | 24,207  |      
|Cost of sales                                                                   |                               |                                       | 39,310  |        |       |   | 37,141  |        |        |   | 29,945  |       |        |      | 19,932  |       |        |   | 18,440  |      
|Gross profit                                                                    |                               |                                       | 12,531  |        |       |   | 15,103  |        |        |   | 11,749  |       |        |      | 7,588   |       |        |   | 5,767   |      
|Operating expenses:                                                             |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |      
|                                                                                | Fulfillment                   |                                       |         | 3,620  |       |   |         | 3,516  |        |   |         | 2,589 |        |      |         | 1,830 |        |   |         | 1,155 |       
|                                                                                | Marketing                     |                                       |         | 7,625  |       |   |         | 6,629  |        |   |         | 3,709 |        |      |         | 2,179 |        |   |         | 4,269 |       
|                                                                                | General and administrative(1) |                                       |         | 11,343 |       |   |         | 14,140 |        |   |         | 8,463 |        |      |         | 7,240 |        |   |         | 9,758 |       
|                                                                                | Depreciation and amortization |                                       |         | 3,576  |       |   |         | 2,749  |        |   |         | 3,024 |        |      |         | 2,529 |        |   |         | 4,753 |       
|                                                                                | Goodwill impairment charge    |                                       |         | 9,792  |       |   |         |       |        |   |         |      |        |      |         |      |        |   |         |      |       
|                                                                                | Termination expense           |                                       |         |       |       |   |         |       |        |   |         |      |        |      |         |      |        |   |         | 2,264 |       
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|Total operating expenses                                                        |                               |                                       | 35,956  |        |       |   | 27,034  |        |        |   | 17,785  |       |        |      | 13,778  |       |        |   | 22,199  |      
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|Loss from operations                                                            |                               |                                       | (23,425 | )      |       |   | (11,931 | )      |        |   | (6,036  | )     |        |      | (6,190  | )     |        |   | (16,432 | )    
|Interest (expense) income, net                                                  |                               |                                       | (66     | )      |       |   | (585    | )      |        |   | (1,107  | )     |        |      | 1       |       |        |   | 347     |      
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|Net loss                                                                        |                               |                                       | (23,491 | )      |       |   | (12,516 | )      |        |   | (7,143  | )     |        |      | (6,189  | )     |        |   | (16,085 | )    
|Dividends to preferred stockholders(2)                                          |                               |                                       | (832    | )      |       |   | (15,378 | )      |        |   | (4,519  | )     |        |      | (4,047  | )     |        |   | (4,025  | )    
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|Net loss attributable to common stockholders                                    |                               | $                                     | (24,323 | )      |       | $ | (27,894 | )      |        | $ | (11,662 | )     |        | $    | (10,236 | )     |        | $ | (20,110 | )    
|                                                                                |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |        
|Net loss per common share:                                                      |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |      
|                                                                                |                               | Basic and diluted                     |         | $      | (3.86 | ) |         | $      | (44.35 | ) |         | $     | (18.54 | )    |         | $     | (16.30 | ) |         | $     | (32.18 | )
|Weighted average common shares outstanding:                                     |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |      
|                                                                                |                               | Basic and diluted                     |         |        | 6,302 |   |         |        | 629    |   |         |       | 629    |      |         |       | 628    |   |         |       | 625    |  
|Pro forma net loss per common share attributable to common
    stockholders(3): |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |      
|                                                                                |                               | Basic and diluted                     |         |        |       |   |         | $      | (5.50  | ) |         |       |        |      |         |       |        |   |         |       |        |  
|Pro forma weighted average common shares outstanding(3):                        |                               |                                       |         |        |       |   |         |        |        |   |         |       |        |      |         |       |        |   |         |      
|                                                                                |                               | Basic and diluted                     |         |        |       |   |         |        | 4,037  |   |         |       |        |      |         |       |        |   |         |       |        |  

|                                                 |  |                    |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|------------------------------------------------ |  | ------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                                 |  | As of December 31, |       
|                                                 |  |                    |       
|Consolidated Balance Sheet Data:                 |  | 2005               |        |  | 2004 |   |        | 2003 |  |   | 2002   |  |  | 2001 |       
|                                                 |  |                    |        |  |      |   |        |      |  |   |        |  |  |      |       
|                                                 |  | (In thousands)     |       
|Cash and cash equivalents                        |  | $                  | 3,831  |  |      | $ | 1,663  |      |  | $ | 5,135  |  |  | $    | 6,501  |  |  | $ | 8,180  | 
|Total assets                                     |  |                    | 24,730 |  |      |   | 40,510 |      |  |   | 30,631 |  |  |      | 30,966 |  |  |   | 28,990 | 
|Bank credit facility                             |  |                    |       |  |      |   | 9,282  |      |  |   |       |  |  |      |       |  |  |   |       | 
|Stockholder notes (including current maturities) |  |                    |       |  |      |   |       |      |  |   | 5,426  |  |  |      | 6,154  |  |  |   |       | 
|Total liabilities                                |  |                    | 13,382 |  |      |   | 29,305 |      |  |   | 17,723 |  |  |      | 11,853 |  |  |   | 6,823  | 
|Total stockholders equity                       |  |                    | 11,348 |  |      |   | 11,205 |      |  |   | 12,908 |  |  |      | 19,113 |  |  |   | 22,167 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock-based compensation of $0,
    $4.7 million, $2,000, $39,000 and $41,000 during the years
    ended December 31, 2005, 2004, 2003, 2002 and 2001,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | For the years ended December 31, 2005, 2004, 2003, 2002 and
    2001 dividends to preferred stockholders includes approximately
    $832,000, $5.7 million, $4.5 million,
    $4.0 million and $4.0 million of cumulative but
    undeclared dividends on our convertible preferred stock. During
    the year ended December 31, 2004, dividends to preferred
    stockholders also included approximately $9.7 million of
    deemed dividends related to the issuance of Series C
    preferred stock to existing stockholders. This amount represents
    the excess of the estimated fair value of the Series C
    preferred stock over the consideration received by the Company.
|   
|(3) | The pro forma net loss per share assumes that all shares of
    convertible preferred stock outstanding as of December 31,
    2004 were converted into approximately 3,154,000 shares of
    common stock on January 1, 2004 and all warrants to
    purchase shares of convertible preferred stock outstanding as of                                                                                                                                                                                                                                                                                                                                                                  

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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | December 31, 2004 were exercised and converted into
    approximately 254,000 shares of common stock as of
    January 1, 2004.




Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.


The following discussion contains forward-looking statements,
which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those set forth previously under the caption
Risk Factors. This Managements Discussion and
Analysis of Financial Condition and Results of Operations should
be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this
report.


Overview




www.diamonddepot.com www.diamond.com www.worldofwatches.com www.ashford.com www.ashford.com www.ashford.com www.diamond.com






27



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Key Business Metrics




Number of Orders




Average Order Value




Product Mix




|                    |              |                         |         |      |      |   |         |      |   |   |         |      |  
|------------------- | ------------ | ----------------------- | ------- | ---- | ---- | - | ------- | ---- | - | - | ------- | ---- | -
|                    |              | Year Ended December 31, |        
|                    |              |                         |        
|Measure             |              | 2005                    |         |      | 2004 |   |         | 2003 |  
|                    |              |                         |         |      |      |   |         |      |  
|Number of orders    |              |                         | 151,700 |      |      |   | 155,840 |      |   |   | 116,440 |     
|Average order value |              | $                       | 387     |      |      | $ | 374     |      |   | $ | 402     |     
|Product Mix:        |              |                         |         |      |      |   |         |      |   |   |         |     
|                    | Watches      |                         |         | 38.0 | %    |   |         | 40.5 | % |   |         | 50.1 | %
|                    | Diamonds     |                         |         | 30.8 |      |   |         | 26.7 |   |   |         | 25.4 |  
|                    | Jewelry      |                         |         | 19.9 |      |   |         | 16.7 |   |   |         | 15.7 |  
|                    | Luxury goods |                         |         | 11.3 |      |   |         | 16.1 |   |   |         | 8.8  |  
|                    |              |                         |         |      |      |   |         |      |  
|Total               |              |                         | 100.0   | %    |      |   | 100.0   | %    |   |   | 100.0   | %   
|                    |              |                         |         |      |      |   |         |      |  



Basis of Presentation










28



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Results of Operations




|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |   |        |       |  |  |       |      | 
|------------------------------ | ----------------------------- | -------------------------------------- | ------- | -------- | ----- |  | ----- | ---- | -------- | - | ------- | ------ |  | -------- | ----- | ---- | ----- | - | ------ | ----- |  |  | ----- | ---- | 
|                               |                               | Year Ended December 31,                |        
|                               |                               |                                        |        
|                               |                               |                                        |         | % of Net |       |  |       |      | % of Net |   |         |        |  | % of Net |      
|                               |                               | 2005                                   |         |          | Sales |  |       | 2004 |          |   | Sales   |        |  | 2003     |       |      | Sales |  
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|                               |                               | (In thousands, except percentage data) |        
|Net sales                      |                               | $                                      | 51,841  |          |       |  | 100.0 | %    |          | $ | 52,244  |        |  |          | 100.0 | %    |       | $ | 41,694 |       |  |  | 100.0 | %   
|Cost of sales                  |                               |                                        | 39,310  |          |       |  | 75.8  |      |          |   | 37,141  |        |  |          | 71.1  |      |       |   | 29,945 |       |  |  | 71.8  |     
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|Gross profit                   |                               |                                        | 12,531  |          |       |  | 24.2  |      |          |   | 15,103  |        |  |          | 28.9  |      |       |   | 11,749 |       |  |  | 28.2  |     
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|Operating expenses:            |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |   |        |       |  |  |       |     
|                               | Fulfillment                   |                                        |         | 3,620    |       |  |       | 7.0  |          |   |         | 3,516  |  |          |       | 6.7  |       |   |        | 2,589 |  |  |       | 6.2  | 
|                               | Marketing                     |                                        |         | 7,625    |       |  |       | 14.7 |          |   |         | 6,629  |  |          |       | 12.7 |       |   |        | 3,709 |  |  |       | 8.9  | 
|                               | General and administrative(1) |                                        |         | 11,343   |       |  |       | 21.8 |          |   |         | 14,140 |  |          |       | 27.1 |       |   |        | 8,463 |  |  |       | 20.3 | 
|                               | Depreciation and amortization |                                        |         | 3,576    |       |  |       | 6.9  |          |   |         | 2,749  |  |          |       | 5.3  |       |   |        | 3,024 |  |  |       | 7.3  | 
|                               | Goodwill impairment charge    |                                        |         | 9,792    |       |  |       | 18.9 |          |   |         |       |  |          |       |     |       |   |        |      |  |  |       |     | 
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|Total operating expenses       |                               |                                        | 35,956  |          |       |  | 69.3  |      |          |   | 27,034  |        |  |          | 52.3  |      |       |   | 17,785 |       |  |  | 42.7  |     
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|Loss from operations           |                               |                                        | (23,425 | )        |       |  | (45.2 | )    |          |   | (11,931 | )      |  |          | (22.8 | )    |       |   | (6,036 | )     |  |  | (14.5 | )   
|Interest income (expense), net |                               |                                        | (66     | )        |       |  | (0.1  | )    |          |   | (585    | )      |  |          | (1.1  | )    |       |   | (1,107 | )     |  |  | (2.7  | )   
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  
|Net loss                       |                               | $                                      | (23,491 | )        |       |  | (45.3 | )%   |          | $ | (12,516 | )      |  |          | (24.0 | )%   |       | $ | (7,143 | )     |  |  | (17.1 | )%  
|                               |                               |                                        |         |          |       |  |       |      |          |   |         |        |  |          |       |      |       |  






|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock-based compensation of $0,
    $4.7 million and $2,000 during the years ended
    December 31, 2005, 2004 and 2003, respectively.

Comparison of Year Ended
December 31, 2005 to Year Ended December 31,
2004


Net Sales.






Gross Profit.


29



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www.ashford.com.


Fulfillment.


Marketing.


General and Administrative.




Depreciation and Amortization.


Goodwill Impairment.


Interest Expense, Net.


Net Loss.


Comparison of Year Ended
December 31, 2004 to Year Ended December 31,
2003


Net Sales.


30



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Gross Profit.


Fulfillment.


Marketing.


General and Administrative.


Depreciation and Amortization.


Interest Expense, Net.


31



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Net Loss.


Quarterly Operations
Data






|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |       |  |   |        |       |  |   |        |       | 
|------------------------------ | ----------------------------- | ------------------ | ------- | ----- | ------- | - | ------ | ------- |  | - | ------- | ----- |  | ------- | ------ | ----- | ------- | - | ------ | ------- |  | - | ------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                               |                               | Three Months Ended |        
|                               |                               |                    |        
|                               |                               | Dec 31,            |         |       | Sep 30, |   |        | Jun 30, |  |   | Mar 31, |       |  | Dec 31, |        |       | Sep 30, |   |        | Jun 30, |  |   | Mar 31, |      
|                               |                               | 2005               |         |       | 2005    |   |        | 2005    |  |   | 2005    |       |  | 2004    |        |       | 2004    |   |        | 2004    |  |   | 2004    |      
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|                               |                               | (in thousands)     |        
|                               |                               | (unaudited)        |        
|Net sales                      |                               | $                  | 18,474  |       |         | $ | 9,132  |         |  | $ | 11,451  |       |  | $       | 12,784 |       |         | $ | 21,504 |         |  | $ | 10,006  |       |  | $ | 10,290 |       |  | $ | 10,444 |      
|Cost of sales                  |                               |                    | 14,050  |       |         |   | 7,091  |         |  |   | 8,638   |       |  |         | 9,532  |       |         |   | 15,131 |         |  |   | 7,208   |       |  |   | 7,426  |       |  |   | 7,376  |      
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Gross profit                   |                               |                    | 4,424   |       |         |   | 2,041  |         |  |   | 2,813   |       |  |         | 3,252  |       |         |   | 6,373  |         |  |   | 2,798   |       |  |   | 2,864  |       |  |   | 3,068  |      
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Operating expenses:            |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |       |  |   |        |       |  |   |        |      
|                               | Fulfillment                   |                    |         | 1,347 |         |   |        | 580     |  |   |         | 805   |  |         |        | 888   |         |   |        | 1,512   |  |   |         | 660   |  |   |        | 675   |  |   |        | 669   | 
|                               | Marketing                     |                    |         | 2,968 |         |   |        | 1,092   |  |   |         | 1,847 |  |         |        | 1,718 |         |   |        | 2,845   |  |   |         | 1,356 |  |   |        | 1,315 |  |   |        | 1,113 | 
|                               | General and administrative(1) |                    |         | 3,336 |         |   |        | 2,954   |  |   |         | 2,586 |  |         |        | 2,467 |         |   |        | 2,962   |  |   |         | 2,508 |  |   |        | 2,003 |  |   |        | 6,667 | 
|                               | Depreciation and amortization |                    |         | 910   |         |   |        | 956     |  |   |         | 858   |  |         |        | 852   |         |   |        | 764     |  |   |         | 575   |  |   |        | 661   |  |   |        | 749   | 
|                               | Goodwill Impairment Charge    |                    |         | 9,792 |         |   |        |        |  |   |         |      |  |         |        |      |         |   |        |        |  |   |         |      |  |   |        |      |  |   |        |      | 
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Total operating expenses       |                               |                    | 18,353  |       |         |   | 5,582  |         |  |   | 6,096   |       |  |         | 5,925  |       |         |   | 8,083  |         |  |   | 5,099   |       |  |   | 4,654  |       |  |   | 9,198  |      
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Loss from operations           |                               |                    | (13,929 | )     |         |   | (3,541 | )       |  |   | (3,283  | )     |  |         | (2,673 | )     |         |   | (1,710 | )       |  |   | (2,301  | )     |  |   | (1,790 | )     |  |   | (6,130 | )    
|Interest income (expense), net |                               |                    | (24     | )     |         |   | 10     |         |  |   | 25      |       |  |         | (76    | )     |         |   | (162   | )       |  |   | (105    | )     |  |   | (65    | )     |  |   | (253   | )    
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      
|Net loss                       |                               | $                  | (13,953 | )     |         | $ | (3,531 | )       |  | $ | (3,258  | )     |  | $       | (2,749 | )     |         | $ | (1,872 | )       |  | $ | (2,406  | )     |  | $ | (1,855 | )     |  | $ | (6,383 | )    
|                               |                               |                    |         |       |         |   |        |         |  |   |         |       |  |         |        |       |         |   |        |         |  |   |         |      

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|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |      |  |  |        |      |  |  |        |        |  
|------------------------------ | ----------------------------- | ------------------ | ------ | ---- | ------- |  | ------ | ------- |  |  | ------- | ---- |  | ------- | ------ | ---- | ------- |  | ------ | ------- |  |  | ------- | ---- |  |  | ------ | ---- |  |  | ------ | ------ | -
|                               |                               | Three Months Ended |       
|                               |                               |                    |       
|                               |                               | Dec 31,            |        |      | Sep 30, |  |        | Jun 30, |  |  | Mar 31, |      |  | Dec 31, |        |      | Sep 30, |  |        | Jun 30, |  |  | Mar 31, |     
|                               |                               | 2005               |        |      | 2005    |  |        | 2005    |  |  | 2005    |      |  | 2004    |        |      | 2004    |  |        | 2004    |  |  | 2004    |     
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|                               |                               | (unaudited)        |       
|Net sales                      |                               |                    | 100.0% |      |         |  | 100.0% |         |  |  | 100.0%  |      |  |         | 100.0% |      |         |  | 100.0% |         |  |  | 100.0%  |      |  |  | 100.0% |      |  |  | 100.0% |       
|Cost of sales                  |                               |                    | 76.1   |      |         |  | 77.7   |         |  |  | 75.4    |      |  |         | 74.6   |      |         |  | 70.4   |         |  |  | 72.0    |      |  |  | 72.2   |      |  |  | 70.6   |       
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|Gross profit                   |                               |                    | 23.9   |      |         |  | 22.3   |         |  |  | 24.6    |      |  |         | 25.4   |      |         |  | 29.6   |         |  |  | 28.0    |      |  |  | 27.8   |      |  |  | 29.4   |       
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|Operating expenses:            |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |      |  |  |        |      |  |  |        |       
|                               | Fulfillment                   |                    |        | 7.3  |         |  |        | 6.4     |  |  |         | 7.0  |  |         |        | 6.9  |         |  |        | 7.0     |  |  |         | 6.6  |  |  |        | 6.6  |  |  |        | 6.4    |  
|                               | Marketing                     |                    |        | 16.1 |         |  |        | 12.0    |  |  |         | 16.1 |  |         |        | 13.4 |         |  |        | 13.2    |  |  |         | 13.6 |  |  |        | 12.8 |  |  |        | 10.7   |  
|                               | General and administrative    |                    |        | 18.1 |         |  |        | 32.3    |  |  |         | 22.6 |  |         |        | 19.3 |         |  |        | 13.8    |  |  |         | 25.1 |  |  |        | 19.5 |  |  |        | 63.8(1 | )
|                               | Depreciation and amortization |                    |        | 4.9  |         |  |        | 10.5    |  |  |         | 7.5  |  |         |        | 6.7  |         |  |        | 3.6     |  |  |         | 5.7  |  |  |        | 6.4  |  |  |        | 7.2    |  
|                               | Goodwill Impairment Charge    |                    |        | 53.0 |         |  |        |        |  |  |         |     |  |         |        |     |         |  |        |        |  |  |         |     |  |  |        |     |  |  |        |       |  
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|Total operating expenses       |                               |                    | 99.4   |      |         |  | 61.1   |         |  |  | 53.2    |      |  |         | 46.3   |      |         |  | 37.6   |         |  |  | 51.0    |      |  |  | 45.2   |      |  |  | 88.1   |       
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|Loss from operations           |                               |                    | (75.4  | )    |         |  | (38.8  | )       |  |  | (28.7   | )    |  |         | (20.9  | )    |         |  | (7.9   | )       |  |  | (23.0   | )    |  |  | (17.4  | )    |  |  | (58.7  | )     
|Interest income (expense), net |                               |                    | (0.1   | )    |         |  | (0.1   | )       |  |  | 0.2     |      |  |         | (0.6   | )    |         |  | (0.8   | )       |  |  | (1.0    | )    |  |  | (0.6   | )    |  |  | (2.4   | )     
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     
|Net loss                       |                               |                    | (75.5  | )%   |         |  | (38.7  | )%      |  |  | (28.4   | )%   |  |         | (21.5  | )%   |         |  | (8.7   | )%      |  |  | (24.0   | )%   |  |  | (18.0  | )%   |  |  | (61.1  | )%    
|                               |                               |                    |        |      |         |  |        |         |  |  |         |      |  |         |        |      |         |  |        |         |  |  |         |     






|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Includes non-cash stock-based compensation expense of
    $4.7 million in March 2004.

Liquidity and Capital Resources




Discussion of Cash
Flows










33



---



##### Table of Contents





www.ashford.com


Liquidity Sources












34



---



##### Table of Contents







Contractual
Obligations




|                            |  |       |       |                        |        |  |     |           |  |  |           |  |  |  |     | 
|--------------------------- |  | ----- | ----- | ---------------------- | ------ |  | --- | --------- |  |  | --------- |  |  |  | --- | 
|                            |  |       |       | Payments Due by Period |       
|                            |  |       |       |                        |       
|                            |  |       |       | Less Than              |        |  |    
|                            |  | Total |       |                        | 1 Year |  |     | 1-3 Years |  |  | 3-5 Years | 
|                            |  |       |       |                        |        |  |     |           |  |  |           | 
|                            |  |       |       | (In thousands)         |        |  |    
|Bank Credit Facility(1)     |  |       |      |                        |        |  |    |           |  |  |          |  |  |  |    | 
|Operating lease obligations |  |       | 1,215 |                        |        |  | 243 |           |  |  | 486       |  |  |  | 486 | 
|                            |  |       |       |                        |        |  |     |           |  |  |           | 
|Total                       |  |       | 1,215 |                        |        |  | 243 |           |  |  | 486       |  |  |  | 486 | 
|                            |  |       |       |                        |        |  |     |           |  |  |           | 






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include any repayments to be made under our credit
    facility anticipated to be made during the next 12 months.

Off Balance Sheet Arrangements




Outstanding Stock Options








35



---



##### Table of Contents





Critical Accounting Policies and Estimates






Revenue Recognition






Inventories




Goodwill and Other
Long-Lived Assets


Goodwill and Other Intangible Assets


Accounting for the Impairment or Disposal of Long-Lived
Assets


36



---



##### Table of Contents





Income Taxes




Stock-Based
Compensation


Accounting for Stock Issued to
Employees,




Accounting for Stock-Based
Compensation, Accounting for Stock-Based Compensation 
Transition Disclosure.


® Share-Based Payment. ® ® ®


®


37



---



##### Table of Contents



Recently Issued Accounting Standards


Accounting for Changes and Error Corrections, a
Replacement of APB Opinion No. 20 and FASB Statement
No. 3.


Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement
No. 143


Exchanges on Nonmonetary Assets  An
Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions Accounting for Nonmonetary
Transactions,





Item 7A. Quantitative and Qualitative Disclosures
About Market Risk




38



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##### Table of Contents






Item 8. Financial Statements and Supplementary
Data







Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures















Item 9A. Controls and Procedures











Item 9B. Other Information




39



---



##### Table of Contents






PART III





Item 10.  Directors and Executive Officers
of the Registrant







Item 11. Executive Compensation









|          |                                                                                                   
|--------- | --------------------------------------------------------------------------------------------------
|Item  12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters






Item 13.  Certain Relationships and Related
Transactions







Item 14.  Principal Accounting Fees and
Services




40



---



##### Table of Contents






PART IV





Item 15.  Exhibits and Financial Statement
Schedules


Documents filed as part of this report.




|                                                          |  |      |     | 
|--------------------------------------------------------- |  | ---- | --- | 
|                                                          |  | Page |    
|                                                          |  |      |    
|Reports of Independent Registered Public Accounting Firms |  |      | F-2 | 
|Consolidated Balance Sheets                               |  |      | F-4 | 
|Consolidated Statements of Operations                     |  |      | F-5 | 
|Consolidated Statements of Stockholders Equity           |  |      | F-6 | 
|Consolidated Statements of Cash Flows                     |  |      | F-7 | 
|Notes to Consolidated Financial Statements                |  |      | F-8 | 









Exhibits.


|        |    |             |  |                                                                                                                                                                    
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Asset Purchase Agreement among registrant and Ashford.com, Inc.
    dated December 6, 2002.                                                                        
|       
|        | 3  | .1(1)       |  | Amended and Restated Certificate of Incorporation                                                                                                                  
|       
|        | 3  | .2(1)       |  | Amended and Restated Bylaws                                                                                                                                        
|       
|        | 4  | .1(1)       |  | Form of Specimen Stock Certificate                                                                                                                                 
|       
|        | 4  | .2.1(1)     |  | Investors Rights Agreement dated November 18, 1999 by and
    between the registrant and certain holders of the
    registrants capital stock                    
|       
|        | 4  | .2.2(1)     |  | Amended and Restated Registration Rights Agreement dated March
    30, 2004 by and between the registrant and certain holders of
    the registrants capital stock
|       
|        | 10 | .1.1(1)     |  | Odimo Incorporated Amended and Restated Stock Incentive Plan                                                                                                       
|       
|        | 10 | .1.2(1)     |  | Form of Stock Option Agreement pursuant to the Odimo
    Incorporated Stock Incentive Plan                                                                         
|       
|        | 10 | .2(1)       |  | Amended and Restated Series C Convertible Preferred Stock
    Purchase Agreement dated as of March 30, 2004 between the
    registrant and SDG Marketing, Inc.     
|       
|        | 10 | .3.1(1)     |  | Promissory Note dated December 6, 2002 by the registrant in
    favor of GSI Commerce Solutions, Inc.                                                              
|       
|        | 10 | .3.2(1)     |  | Security Agreement dated December 6, 2002 between the registrant
    and GSI Commerce Solutions, Inc., as assignee                                                 
|       
|        | 10 | .3.3(1)     |  | Patents, Trademarks, Copyrights and Licenses Security Agreement
    dated December 6, 2002 between the registrant and GSI Commerce
    Solutions, Inc., as assignee
|       
|        | 10 | .4.1(1)     |  | Lease Agreement dated December 14, 1999 between the registrant
    and MDR Fitness Corp.                                                                           
|       
|        | 10 | .4.2(1)     |  | Lease Amendment and Extension Agreement dated January 8, 2003
    between the registrant and MDR Fitness Corp.                                                     
|       
|        | 10 | .5.1(1)     |  | Employment Agreement dated July 12, 2004 between the registrant
    and Alan Lipton                                                                                
|       
|        | 10 | .5.2(1)     |  | Employment Agreement dated July 12, 2004 between the registrant
    and Jeff Kornblum                                                                              

41



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|       
|       
|        | 10 | .5.3(1)     |  | Employment Agreement dated July 12, 2004 between the registrant
    and Amerisa Kornblum                                                                                                         
|       
|        | 10 | .5.4(1)     |  | Employment Agreement dated July 12, 2004 between the registrant
    and George Grous                                                                                                             
|       
|        | 10 | .5.5(1)     |  | Lock-up Agreement dated July 12, 2004, between the registrant
    and Alan Lipton                                                                                                                
|       
|        | 10 | .5.6(1)     |  | Lock-up Agreement dated July 12, 2004, between the registrant
    and Jeff Kornblum                                                                                                              
|       
|        | 10 | .5.7(1)     |  | Lock-up Agreement dated July 12, 2004, between the registrant
    and Amerisa Kornblum                                                                                                           
|       
|        | 10 | .5.8(1)     |  | Lock-up Agreement dated July 12, 2004, between the registrant
    and George Grous                                                                                                               
|       
|        | 10 | .5.9(1)     |  | Lock-up Agreement dated July 12, 2004, between the registrant
    and Michael DellArciprete                                                                                                     
|       
|        | 10 | .5.10(1)    |  | Amended and Restated Employment Agreement dated August 27, 2004
    between the registrant and Alan Lipton                                                                                       
|       
|        | 10 | .6(1)       |  | Form of Indemnification Agreement between the registrant and
    each of its directors and executive officers                                                                                    
|       
|        | 10 | .7(1)       |  | Supply Agreement dated March 30, 2004 between the registrant and
    SDG Marketing, Inc.                                                                                                         
|       
|        | 10 | .8.1(1)     |  | Loan and Security Agreement dated as of July 31, 2004 by and
    among Silicon Valley Bank, the registrant and its subsidiaries
    Ashford.com, Inc. and D.I.A. Marketing, Inc.                 
|       
|        | 10 | .8.2(1)     |  | Revolving Promissory Note dated as of July 31, 2004 in favor of
    Silicon Valley Bank, by the registrant and its subsidiaries
    Ashford.com, Inc. and D.I.A. Marketing, Inc.                 
|       
|        | 10 | .8.3(1)     |  | Intellectual Property Security Agreements dated as of July 31,
    2004 in favor of Silicon Valley Bank, by each of the registrant
    and Ashford.com, Inc.                                     
|       
|        | 10 | .8.4(1)     |  | Unconditional Guaranties dated as of July 31, 2004 of Softbank
    Capital LP, Softbank Capital Partners LP and Softbank Capital
    Advisors Fund LP                                            
|       
|        | 10 | .9(1)       |  | Commercial Lease dated as of January 1, 2006 between the
    registrant and IBB Realty, LLC                                                                                                      
|       
|        | 10 | .10(1)      |  | First Loan Modification Agreement dated as of November 13, 2004
    by and among Silicon Valley Bank, the registrant and its
    subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc.       
|       
|        | 10 | .11(1)      |  | First Amended and Restated Note dated as of November 13, 2004 in
    favor of Silicon Valley Bank by the registrant and its
    subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc.        
|       
|        | 10 | .12(1)      |  | Amendment and Reaffirmation of Guaranty dated as of November 13,
    2004 of Softbank Capital, LP, Softbank Capital Partners, LP and
    Softbank Capital Advisors Fund LP                       
|       
|        | 10 | .13(1)      |  | Second Loan Modification Agreement dated as of January 7, 2005
    by and among Silicon Valley Bank, the registrant and its
    subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc.        
|       
|        | 10 | .14(1)      |  | Second Amended and Restated Note dated as of January 7, 2005 in
    favor of Silicon Valley Bank, by the registrant and its
    subsidiaries Ashford.com, Inc. and D.I.A. Marketing, Inc.        
|       
|        | 10 | .15(1)      |  | Second Amendment and Reaffirmation of Guaranty dated as of
    January 7, 2005 of Softbank Capital, L.P., Softbank Capital
    Partners, LP and Softbank Capital Advisors Fund LP                
|       
|        | 10 | .16(1)      |  | Confirmation letter dated January 7, 2005 from Softbank Capital
    Partners LP, regarding financial support.                                                                                    
|       
|        | 10 | .17(4)      |  | Termination Agreement dated March 29, 2006 by and between
    the registrant and SDG Marketing, Inc.                                                                                             
|       
|        | 10 | .18(4)      |  | Third Amendment to Loan and Security Agreement dated
    March 30, 2006 by and among Silicon Valley Bank the
    registrant and its subsidiaries Ashford.com, Inc. and D.I.A.
    Marketing, Inc.
|       
|        | 14 | .1(2)       |  | Code of Business Conduct and Ethics                                                                                                                                                              
|       
|        | 16 | .1(3)       |  | Letter of Deloitte & Touche LLP dated September 2, 2005                                                                                                                                          
|       
|        | 16 | .2(3)       |  | Letter of Rachlin Cohen & Holtz LLP dated September 2, 2005                                                                                                                                      
|       
|        | 21 | .1(1)       |  | Subsidiaries of Odimo Incorporated                                                                                                                                                               
|       
|        | 23 | .1(4)       |  | Consent of Deloitte & Touche LLP                                                                                                                                                                 
|       
|        | 23 | .2(4)       |  | Consent of Rachlin Cohen & Holtz LLP                                                                                                                                                             

42



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                   
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|       
|        | 31 | .1(4)       |  | Certification of Chief Executive Officer pursuant to Rules
    13a-14(a) and 15d-14(a) promulgated pursuant to the Securities
    Exchange Act of 1934, as amended
|       
|        | 31 | .2(4)       |  | Certification of Chief Financial Officer pursuant to Rules
    13a-14(a) and 15d-14(a) promulgated pursuant to the Securities
    Exchange Act of 1934, as amended
|       
|        | 32 | .1(4)       |  | Certification of Chief Executive Officer pursuant to Section 906
    of t he Sarbanes-Oxley Act of 2002                                                           
|       
|        | 32 | .2(4)       |  | Certification of Chief Financial Officer pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                            






|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This exhibit was previously filed as an exhibit to the
    Registration Statement on Form S-1 (File
    No. 333-117400) originally filed with the Securities and
    Exchange Commission on July 16, 2004, as amended
    thereafter, and is incorporated herein by reference.
|   
|(2) | This exhibit was previously filed as an exhibit to the Annual
    Report on Form 10-K for the year ended December 31,
    2004 filed with the Securities and Exchange Commission on
    March 31, 2005 and is incorporated herein by reference.                               
|   
|(3) | This exhibit was previously filed as an exhibit to the
    Form 8-K dated August 31, 2005 filed with the
    Securities and Exchange Commission on September 2, 2005 and
    is incorporated herein by reference.                                                             
|   
|(4) | Filed herewith.                                                                                                                                                                                                                                                               

43



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##### Table of Contents






SIGNATURES






| |                   
| | ------------------
| | ODIMO INCORPORATED



| |     |                
| | --- | ---------------
| | By: | /s/ Alan Lipton

| |                                                   
| | --------------------------------------------------
| |                                                   
| | Name: Alan Lipton                                 
| | Title:   President and Chief Executive
    Officer





|                                         |  |                                                                                                             |  |                |  | 
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                     |  | Title                                                                                                       |  | Date          
|                                         |  |                                                                                                             |  |               
|                                        
|/s/ Alan LiptonAlan Lipton               |  | President, Chief Executive Officer and Chairman of the Board of
    Directors (Principal Executive Officer) |  | March 30, 2006
|                                        
|/s/ Amerisa KornblumAmerisa Kornblum     |  | Chief Financial Officer (Principal Financial and Accounting
    Officer)                                    |  | March 30, 2006
|                                        
|/s/ Sidney FeltensteinSidney Feltenstein |  | Director                                                                                                    |  | March 30, 2006
|                                        
|/s/ Eric HippeauEric Hippeau             |  | Director                                                                                                    |  | March 30, 2006
|                                        
|/s/ Lior LevinLior Levin                 |  | Director                                                                                                    |  | March 30, 2006
|                                        
|/s/ Stanley SternStanley Stern           |  | Director                                                                                                    |  | March 30, 2006
|                                        
|/s/ Steven TishmanSteven Tishman         |  | Director                                                                                                    |  | March 30, 2006
|                                        
|/s/ Robert VossRobert Voss               |  | Director                                                                                                    |  | March 30, 2006

44



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                          |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                          |  | Page |     
|                                                                                                                          |  |      |     
|Financial Statements:                                                                                                     |  |      |      | 
|Report of Independent Registered Public
    Accounting Firm                                                               |  |      | F-2  | 
|Consolidated Balance Sheets at
    December 31, 2005 and 2004                                                             |  |      | F-4  | 
|Consolidated Statements of Operations for
    each of the three years in the period ended December 31,
    2005           |  |      | F-5  | 
|Consolidated Statements of
    Stockholders Equity for each of the three years in the
    period ended December 31, 2005 |  |      | F-6  | 
|Consolidated Statements of Cash Flows for
    each of the three years in the period ended December 31,
    2005           |  |      | F-7  | 
|Notes to Consolidated Financial
    Statements                                                                            |  |      | F-8  | 
|Financial Statement Schedule:                                                                                             |  |      |      | 
|Schedule II  Valuation and Qualifying Accounts                                                                           |  |      | F-28 | 



F-1



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















RACHLIN COHEN & HOLTZ LLP








F-2



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















F-3



---



##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |   |        |         |        | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                                     |                                                                                                                                                                                                                                                                             | December 31,               |       
|                                     |                                                                                                                                                                                                                                                                             |                            |       
|                                     |                                                                                                                                                                                                                                                                             | 2005                       |        |         | 2004   |  
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|                                     |                                                                                                                                                                                                                                                                             | (In thousands, except par  |       
|                                     |                                                                                                                                                                                                                                                                             | value)                     |       
|ASSETS                              
|CURRENT ASSETS:                      |                                                                                                                                                                                                                                                                             |                            |        |         |        |   |        |        
|                                     | Cash and cash equivalents                                                                                                                                                                                                                                                   |                            | $      | 3,831   |        |   | $      | 1,663   |       
|                                     | Deposits with credit card processing company                                                                                                                                                                                                                                |                            |        | 755     |        |   |        | 813     |       
|                                     | Accounts receivable                                                                                                                                                                                                                                                         |                            |        | 308     |        |   |        | 476     |       
|                                     | Inventories                                                                                                                                                                                                                                                                 |                            |        | 10,244  |        |   |        | 14,321  |       
|                                     | Deposits with vendors                                                                                                                                                                                                                                                       |                            |        |        |        |   |        | 660     |       
|                                     | Prepaid expenses and other current assets                                                                                                                                                                                                                                   |                            |        | 657     |        |   |        | 961     |       
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|                                     |                                                                                                                                                                                                                                                                             | Total current assets       |        |         | 15,795 |   |        |         | 18,894 | 
|PROPERTY AND EQUIPMENT  net         |                                                                                                                                                                                                                                                                             |                            | 6,927  |         |        |   | 5,320  |        
|GOODWILL                             |                                                                                                                                                                                                                                                                             |                            |       |         |        |   | 9,792  |        
|INTANGIBLE AND OTHER ASSETS  net    |                                                                                                                                                                                                                                                                             |                            | 2,008  |         |        |   | 6,504  |        
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|TOTAL                                |                                                                                                                                                                                                                                                                             | $                          | 24,730 |         |        | $ | 40,510 |        
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY
|CURRENT LIABILITIES:                 |                                                                                                                                                                                                                                                                             |                            |        |         |        |   |        |        
|                                     | Accounts payable                                                                                                                                                                                                                                                            |                            | $      | 7,883   |        |   | $      | 10,833  |       
|                                     | Accounts payable to related parties                                                                                                                                                                                                                                         |                            |        | 3,329   |        |   |        | 5,691   |       
|                                     | Accrued liabilities                                                                                                                                                                                                                                                         |                            |        | 2,170   |        |   |        | 3,499   |       
|                                     | Bank credit facility                                                                                                                                                                                                                                                        |                            |        |        |        |   |        | 9,282   |       
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|                                     |                                                                                                                                                                                                                                                                             | Total current liabilities  |        |         | 13,382 |   |        |         | 29,305 | 
|COMMITMENTS AND CONTINGENCIES        |                                                                                                                                                                                                                                                                             |                            |        |         |        |   |        |        
|STOCKHOLDERS EQUITY:                |                                                                                                                                                                                                                                                                             |                            |        |         |        |   |        |        
|                                     | Convertible preferred stock, $0.001 par value, 50,000 and 2,370
    shares authorized, 0 and 2,370 shares issued and outstanding at
    December 31, 2005 and 2004, respectively (liquidation value
    of $0 and $139,271 at December 31, 2005 and 2004,
    respectively) |                            |        |        |        |   |        | 3       |       
|                                     | Common stock, $0.001 par value, 300,000 and 4,800 shares
    authorized at December 31, 2005 and December 31, 2004;
    7,162 and 629 shares issued and outstanding at December 31,
    2005 and 2004, respectively                                                         |                            |        | 7       |        |   |        | 1       |       
|                                     | Additional paid-in capital                                                                                                                                                                                                                                                  |                            |        | 103,705 |        |   |        | 80,074  |       
|                                     | Accumulated deficit                                                                                                                                                                                                                                                         |                            |        | (92,364 | )      |   |        | (68,873 | )     
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|                                     |                                                                                                                                                                                                                                                                             | Total stockholders equity |        |         | 11,348 |   |        |         | 11,205 | 
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  
|TOTAL                                |                                                                                                                                                                                                                                                                             | $                          | 24,730 |         |        | $ | 40,510 |        
|                                     |                                                                                                                                                                                                                                                                             |                            |        |         |        |  



F-4



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                               |                               |                                       |         |        |      |   |         |        |   |   |         |        |  
|-------------------------------------------------------------- | ----------------------------- | ------------------------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                               |                               | Year Ended December 31,               |        
|                                                               |                               |                                       |        
|                                                               |                               | 2005                                  |         |        | 2004 |   |         | 2003   |  
|                                                               |                               |                                       |         |        |      |   |         |        |  
|                                                               |                               | (In thousands, except per share data) |        
|NET SALES                                                      |                               | $                                     | 51,841  |        |      | $ | 52,244  |        |   | $ | 41,694  |       
|COST OF SALES                                                  |                               |                                       | 39,310  |        |      |   | 37,141  |        |   |   | 29,945  |       
|                                                               |                               |                                       |         |        |      |   |         |        |  
|                                                               | Gross profit                  |                                       |         | 12,531 |      |   |         | 15,103 |   |   |         | 11,749 |  
|                                                               |                               |                                       |         |        |      |   |         |        |  
|OPERATING EXPENSES:                                            |                               |                                       |         |        |      |   |         |        |   |   |         |       
|                                                               | Fulfillment                   |                                       |         | 3,620  |      |   |         | 3,516  |   |   |         | 2,589  |  
|                                                               | Marketing                     |                                       |         | 7,625  |      |   |         | 6,629  |   |   |         | 3,709  |  
|                                                               | General and administrative(1) |                                       |         | 11,343 |      |   |         | 14,140 |   |   |         | 8,463  |  
|                                                               | Depreciation and amortization |                                       |         | 3,576  |      |   |         | 2,749  |   |   |         | 3,024  |  
|                                                               | Goodwill impairment charge    |                                       |         | 9,792  |      |   |         |       |   |   |         |       |  
|                                                               |                               |                                       |         |        |      |   |         |        |  
|Total operating expenses                                       |                               |                                       | 35,956  |        |      |   | 27,034  |        |   |   | 17,785  |       
|                                                               |                               |                                       |         |        |      |   |         |        |  
|LOSS FROM OPERATIONS                                           |                               |                                       | (23,425 | )      |      |   | (11,931 | )      |   |   | (6,036  | )     
|INTEREST EXPENSE, Net                                          |                               |                                       | 66      |        |      |   | 585     |        |   |   | 1,107   |       
|                                                               |                               |                                       |         |        |      |   |         |        |  
|NET LOSS                                                       |                               |                                       | (23,491 | )      |      |   | (12,516 | )      |   |   | (7,143  | )     
|DIVIDENDS TO PREFERRED STOCKHOLDERS                            |                               |                                       | (832    | )      |      |   | (15,378 | )      |   |   | (4,519  | )     
|                                                               |                               |                                       |         |        |      |   |         |        |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                   |                               | $                                     | (24,323 | )      |      | $ | (27,894 | )      |   | $ | (11,662 | )     
|                                                               |                               |                                       |         |        |      |   |         |        |  
|Net loss per common share attributable to common stockholders: |                               |                                       |         |        |      |   |         |        |   |   |         |       
|                                                               | Basic and diluted             |                                       | $       | (3.86  | )    |   | $       | (44.35 | ) |   | $       | (18.54 | )
|                                                               |                               |                                       |         |        |      |   |         |        |  
|Weighted average number of shares:                             |                               |                                       |         |        |      |   |         |        |   |   |         |       
|                                                               | Basic and diluted             |                                       |         | 6,302  |      |   |         | 629    |   |   |         | 629    |  
|                                                               |                               |                                       |         |        |      |   |         |        |  






|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock-based compensation of $4.7 million
    and $2 during the years ended December 31, 2004 and 2003,
    respectively.



F-5



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |   |  |   |         |         |   |   |        |         |  
|--------------------------- | -------------------------------------------------------------------------------------------- | ---------------- | ----- | ------ | ------------ | - | - | ---------- | --- |  | ----- | ------- |  | ------- | ----------- | - | ------------ | ----------- | ------- | ------- | ------------- | - | ------ | - |  | - | ------- | ------- | - | - | ------ | ------- | -
|                            |                                                                                              | Preferred Stocks |       |        | Common Stock |   |   |            |     |  |       |         |  |        
|                            |                                                                                              |                  |       |        |              |   |   | Additional |     |  |       |         |  |         | Total       |  
|                            |                                                                                              |                  |       | Par    |              |   |   |            | Par |  |       | Paid-In |  |         | Stock-Based |   |              | Accumulated |         |         | Stockholders |  
|                            |                                                                                              | Shares           |       |        | Value        |   |   | Shares     |     |  | Value |         |  | Capital |             |   | Compensation |             |         | Deficit |               |   | Equity |  
|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |  
|                            |                                                                                              | (In thousands)   |      
|BALANCE  December 31, 2002 |                                                                                              |                  | 1,740 |        |              | $ | 2 |            |     |  | 629   |         |  | $       | 1           |   |              | $           | 68,326  |         |               | $ | (2     | ) |  | $ | (49,214 | )       |   | $ | 19,113 |        
|                            | Amortization of deferred stock-based compensation                                            |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         |        |               |   |        | 2 |  |   |         |        |   |   |        | 2       |  
|                            | Issuance of convertible preferred stock and warrants                                         |                  |       | 56     |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         | 500     |               |   |        |  |  |   |         |        |   |   |        | 500     |  
|                            | Issuance of warrants                                                                         |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         | 436     |               |   |        |  |  |   |         |        |   |   |        | 436     |  
|                            | Net loss                                                                                     |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         |        |               |   |        |  |  |   |         | (7,143  | ) |   |        | (7,143  | )
|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |  
|BALANCE  December 31, 2003 |                                                                                              |                  | 1,796 |        |              |   | 2 |            |     |  | 629   |         |  |         | 1           |   |              |             | 69,262  |         |               |   |       |   |  |   | (56,357 | )       |   |   | 12,908 |        
|                            | Issuance of stock options to employees                                                       |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         | 4,689   |               |   |        |  |  |   |         |        |   |   |        | 4,689   |  
|                            | Issuance of convertible preferred stock                                                      |                  |       | 269    |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         | 7,030   |               |   |        |  |  |   |         |        |   |   |        | 7,030   |  
|                            | Issuance of convertible preferred stock and warrants in
    connection with exchange of debt |                  |       | 305    |              |   |   | 1          |     |  |       |        |  |         |             |  |              |             |         | 8,785   |               |   |        |  |  |   |         |        |   |   |        | 8,786   |  
|                            | Dividends to preferred stockholders                                                          |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         | (9,692  | )             |   |        |  |  |   |         |        |   |   |        | (9,692  | )
|                            | Net loss                                                                                     |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         |        |               |   |        |  |  |   |         | (12,516 | ) |   |        | (12,516 | )
|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |  
|BALANCE  December 31, 2004 |                                                                                              |                  | 2,370 |        |              |   | 3 |            |     |  | 629   |         |  |         | 1           |   |              |             | 80,074  |         |               |   |       |   |  |   | (68,873 | )       |   |   | 11,205 |        
|                            | Issuance of common stock in public offering, net of offering
    costs                       |                  |       |       |              |   |   |           |     |  |       | 3,125   |  |         |             | 3 |              |             |         | 22,282  |               |   |        |  |  |   |         |        |   |   |        | 22,285  |  
|                            | Conversion of preferred stock to common stock                                                |                  |       | (2,370 | )            |   |   | (3         | )   |  |       | 3,154   |  |         |             | 3 |              |             |         |         |               |   |        |  |  |   |         |         |   |   |        |         |  
|                            | Proceeds from exercise of warrants                                                           |                  |       |       |              |   |   |           |     |  |       | 255     |  |         |             |  |              |             |         | 1,349   |               |   |        |  |  |   |         |        |   |   |        | 1,349   |  
|                            | Net loss                                                                                     |                  |       |       |              |   |   |           |     |  |       |        |  |         |             |  |              |             |         |        |               |   |        |  |  |   |         | (23,491 | ) |   |        | (23,491 | )
|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |  
|BALANCE  December 31, 2005 |                                                                                              | $                |      |        |              | $ |  |            |     |  | 7,163 |         |  | $       | 7           |   |              | $           | 103,705 |         |               | $ |       |   |  | $ | (92,364 | )       |   | $ | 11,348 |        
|                            |                                                                                              |                  |       |        |              |   |   |            |     |  |       |         |  |         |             |   |              |             |         |         |               |   |        |  



F-6



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |        |       |        |        |        |      |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------ | ------ | ------- | ------ | ----- | ------ | ------ | ------ | ---- | -
|                                                    |                                                                                                                     | Years Ended December 31,                          |                                                    
|                                                    |                                                                                                                     |                                                   |                                                    
|                                                    |                                                                                                                     | 2005                                              |                                                     |         | 2004   |        |        | 2003    |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    |                                                                                                                     | (In thousands)                                    |                                                    
|OPERATING ACTIVITIES:                               |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |        |       |        |       
|                                                    | Net loss                                                                                                            |                                                   | $                                                   | (23,491 | )      |        | $      | (12,516 | )      |       | $      | (7,143 | )     
|                                                    | Adjustments to reconcile net loss to net cash (used in) provided
    by operating activities:                       |                                                   |                                                     |         |        |        |        |         |        |       |        |        |       
|                                                    |                                                                                                                     | Depreciation and amortization                     |                                                     |         | 3,576  |        |        |         | 2,749  |       |        |        | 3,024  |     
|                                                    |                                                                                                                     | Goodwill impairment charge                        |                                                     |         | 9,792  |        |        |         |       |       |        |        |       |     
|                                                    |                                                                                                                     | (Gain) loss on disposal of property and equipment |                                                     |         |       |        |        |         | (3     | )     |        |        | 12     |     
|                                                    |                                                                                                                     | Stock-based compensation                          |                                                     |         |       |        |        |         | 4,689  |       |        |        | 2      |     
|                                                    |                                                                                                                     | Amortization of supply agreement                  |                                                     |         | 144    |        |        |         | 84     |       |        |        | 61     |     
|                                                    |                                                                                                                     | Amortization of discount on stockholder notes     |                                                     |         |       |        |        |         | 174    |       |        |        | 608    |     
|                                                    | Changes in operating assets and liabilities:                                                                        |                                                   |                                                     |         |        |        |        |         |        |       |        |        |       
|                                                    |                                                                                                                     | (Increase) Decrease in operating assets:          |                                                     |         |        |        |        |         |        |       |        |        |        |     
|                                                    |                                                                                                                     | Deposits with credit card processing company      |                                                     |         | 58     |        |        |         | (168   | )     |        |        | (235   | )   
|                                                    |                                                                                                                     | Accounts receivable                               |                                                     |         | 169    |        |        |         | (104   | )     |        |        | (285   | )   
|                                                    |                                                                                                                     | Inventories                                       |                                                     |         | 4,077  |        |        |         | (8,315 | )     |        |        | (1,548 | )   
|                                                    |                                                                                                                     | Deposits with vendors                             |                                                     |         | 660    |        |        |         | (434   | )     |        |        | (181   | )   
|                                                    |                                                                                                                     | Prepaid expenses and other current assets         |                                                     |         | 304    |        |        |         | (192   | )     |        |        | (184   | )   
|                                                    |                                                                                                                     | Other assets                                      |                                                     |         |       |        |        |         | (2,625 | )     |        |        | (1     | )   
|                                                    | Increase (Decrease) in operating liabilities:                                                                       |                                                   |                                                     |         |        |        |        |         |        |       |        |        |       
|                                                    |                                                                                                                     | Accounts payable                                  |                                                     |         | (2,950 | )      |        |         | 2,909  |       |        |        | 4,517  |     
|                                                    |                                                                                                                     | Accounts payable to related parties               |                                                     |         | (2,362 | )      |        |         | 4,636  |       |        |        | 453    |     
|                                                    |                                                                                                                     | Accrued liabilities                               |                                                     |         | (1,327 | )      |        |         | 180    |       |        |        | 1,628  |     
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|Net cash (used in) provided by operating activities |                                                                                                                     |                                                   | (11,350                                             | )       |        |        | (8,936 | )       |        |       | 728    |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|INVESTING ACTIVITIES                               |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |        |       |        |       
|                                                    | Purchase of property and equipment                                                                                  |                                                   |                                                     | (3,387  | )      |        |        | (3,698  | )      |       |        | (1,694 | )     
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|FINANCING ACTIVITIES:                               |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |        |       |        |       
|                                                    | Proceeds from stockholder notes                                                                                     |                                                   |                                                     |        |        |        |        |        |        |       |        | 3,000  |       
|                                                    | Payments on stockholder notes                                                                                       |                                                   |                                                     |        |        |        |        | (2,870  | )      |       |        | (3,900 | )     
|                                                    | Net (repayments) borrowings under bank credit facility                                                              |                                                   |                                                     | (9,282  | )      |        |        | 9,282   |        |       |        |       |       
|                                                    | Proceeds from issuance of convertible preferred stock and
    warrants                                              |                                                   |                                                     |        |        |        |        | 2,750   |        |       |        | 500    |       
|                                                    | Proceeds from exercise of warrants                                                                                  |                                                   |                                                     | 1,349   |        |        |        |        |        |       |        |       |       
|                                                    | Proceeds from issuance of common stock, net of offering costs                                                       |                                                   |                                                     | 24,838  |        |        |        |        |        |       |        |       |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    |                                                                                                                     |                                                   | Net cash provided by (used in) financing activities |         |        | 16,905 |        |         |        | 9,162 |        |        |        | (400 | )
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    |                                                                                                                     |                                                   | 2,168                                               |         |        |        | (3,472 | )       |        |       | (1,366 | )     
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR        |                                                                                                                     |                                                   | 1,663                                               |         |        |        | 5,135  |         |        |       | 6,501  |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|CASH AND CASH EQUIVALENTS, END OF YEAR              |                                                                                                                     | $                                                 | 3,831                                               |         |        | $      | 1,663  |         |        | $     | 5,135  |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:       |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |        |       |        |       
|                                                    | Interest paid                                                                                                       |                                                   | $                                                   | 101     |        |        | $      | 372     |        |       | $      | 379    |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    | SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
    ACTIVITIES:                                           |                                                   |                                                     |         |        |        |        |         |        |       |        |        |       
|                                                    | Offering costs recorded as other assets during 2004 reclassed
    and netted against IPO proceeds during 2005       |                                                   | $                                                   | 2,556   |        |        | $      |        |        |       | $      |       |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    | Issuance of warrants to purchase convertible preferred stock                                                        |                                                   | $                                                   |        |        |        | $      |        |        |       | $      | 436    |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    | Exchange of stockholder notes (including accrued interest of
    $211) for convertible preferred stock and warrants |                                                   | $                                                   |        |        |        | $      | 2,996   |        |       | $      |       |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       
|                                                    | Fair value of supply agreement                                                                                      |                                                   | $                                                   |        |        |        | $      | 433     |        |       | $      |       |       
|                                                    |                                                                                                                     |                                                   |                                                     |         |        |        |        |         |       



F-7



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES





Notes to Consolidated Financial Statements


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Business www.diamond.com, www.ashford.com, www.worldofwatches.com.


Basis of Presentation


Use of Estimates


Concentration of Risk




Other Risks


Cash and Cash Equivalents


Accounts Receivable


Inventories


F-8



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Deposits with Vendors


Property and Equipment


Software and Website Development Costs Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use Accounting for Web Site Development Costs


Long-Lived Assets


Goodwill


Goodwill and Other Intangible Assets


Intangible Assets


Warranty Costs


F-9



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Fair Value of Financial Instruments


Revenue Recognition Reporting Revenue Gross as a Principal versus Net as
an Agent,




Cost of Sales


Fulfillment Expenses


Marketing Expenses


General and Administrative Expenses


Stock-Based Compensation Accounting
for Stock Issued to Employees Accounting for
Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25


F-10



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Accounting for Stock-Based Compensation




|                                                                                               |                                 |                         |         |       |      |   |         |        |   |   |         |        |  
|---------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ------- | ----- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                               |                                 | Year Ended December 31, |        
|                                                                                               |                                 |                         |        
|                                                                                               |                                 | 2005                    |         |       | 2004 |   |         | 2003   |  
|                                                                                               |                                 |                         |         |       |      |   |         |        |  
|Net loss attributable to common stockholders, as reported                                      |                                 | $                       | (24,323 | )     |      | $ | (27,894 | )      |   | $ | (11,662 | )     
|Add: Stock-based compensation expense, as reported                                             |                                 |                         |        |       |      |   | 4,689   |        |   |   | 2       |       
|Deduct: Stock-based employee compensation expense determined
    under fair-value-based method |                                 |                         | (14     | )     |      |   | (5,615  | )      |   |   | (76     | )     
|                                                                                               |                                 |                         |         |       |      |   |         |        |  
|Pro forma net loss                                                                             |                                 | $                       | (24,337 | )     |      | $ | (28,820 | )      |   | $ | (11,736 | )     
|                                                                                               |                                 |                         |         |       |      |   |         |        |  
|Net loss per share:                                                                            |                                 |                         |         |       |      |   |         |        |   |   |         |       
|                                                                                               | Basic and diluted  as reported |                         | $       | (3.86 | )    |   | $       | (44.35 | ) |   | $       | (18.54 | )
|                                                                                               |                                 |                         |         |       |      |   |         |        |  
|                                                                                               | Basic and diluted  pro forma   |                         | $       | (3.87 | )    |   | $       | (45.82 | ) |   | $       | (18.66 | )
|                                                                                               |                                 |                         |         |       |      |   |         |        |  



|                        |  |              |      |   |      |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                        |  | Year Ended   |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2004         |      |   | 2003 | 
|                        |  |              |      |   |      | 
|Dividend yields         |  |              | 0    | % |      |  | 0    | %
|Volatility              |  |              | 70   | % |      |  | 70   | %
|Risk-free interest rate |  |              | 3.69 | % |      |  | 2.87 | %
|Expected life (years)   |  |              | 5    |   |      |  | 5    |  

Share-Based Payment.


F-11



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Income Taxes Accounting for Income Taxes.


Loss Per Share






Reclassification


Segments


Stock Splits 


F-12



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




New Accounting Pronouncements Accounting for
Changes and Error Corrections, a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.


Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement
No. 143


Exchanges on Nonmonetary Assets  An
Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions Accounting for Nonmonetary
Transactions,


2.  GOING CONCERN CONSIDERATIONS






F-13



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


3.  ASSET PURCHASE


www.ashford.com e.g., www.ashford.com








4.  INVENTORIES




|                  |  |              |        |  |      |   |        | 
|----------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                  |  | December 31, |       
|                  |  |              |       
|                  |  | 2005         |        |  | 2004 |  
|                  |  |              |        |  |      |  
|Diamonds          |  | $            | 4,148  |  |      | $ | 5,488  | 
|Fine jewelry      |  |              | 2,422  |  |      |   | 2,967  | 
|Watches           |  |              | 2,592  |  |      |   | 3,344  | 
|Luxury goods      |  |              | 1,082  |  |      |   | 2,522  | 
|                  |  |              |        |  |      |  
|Total inventories |  | $            | 10,244 |  |      | $ | 14,321 | 
|                  |  |              |        |  |      |  

F-14



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


5.  PROPERTY AND EQUIPMENT




|                                  |  |              |   |  |              |   |        |      |  |   |        |  
|--------------------------------- |  | ------------ | - |  | ------------ | - | ------ | ---- |  | - | ------ | -
|                                  |  | Estimated    |   |  | December 31, |  
|                                  |  | Useful Lives |   |  |              |  
|                                  |  | (in Years)   |   |  | 2005         |   |        | 2004 | 
|                                  |  |              |   |  |              |   |        |      | 
|Computers, software and equipment |  |              | 3 |  |              | $ | 12,846 |      |  | $ | 9,049  |  
|Leasehold improvements            |  |              | 4 |  |              |   | 1,196  |      |  |   | 1,066  |  
|Furniture and fixtures            |  |              | 5 |  |              |   | 596    |      |  |   | 598    |  
|Automobiles                       |  |              | 4 |  |              |   | 43     |      |  |   |       |  
|                                  |  |              |   |  |              |   |        |      | 
|                                  |  |              |   |  |              |   | 14,681 |      |  |   | 10,713 |  
|Less: accumulated depreciation    |  |              |   |  |              |   | (8,516 | )    |  |   | (6,737 | )
|                                  |  |              |   |  |              |   |        |      | 
|                                  |  |              |   |  |              |   | 6,165  |      |  |   | 3,976  |  
|Software development in process   |  |              |   |  |              |   | 762    |      |  |   | 1,344  |  
|                                  |  |              |   |  |              |   |        |      | 
|Property and equipment  net      |  |              |   |  |              | $ | 6,927  |      |  | $ | 5,320  |  
|                                  |  |              |   |  |              |   |        |      | 





6.  GOODWILL




|                                |  |   |        |  
|------------------------------- |  | - | ------ | -
|Balance as of December 31, 2004 |  | $ | 9,792  |  
|Impairment loss                 |  |   | (9,792 | )
|                                |  |   |       
|Balance as of December 31, 2005 |  | $ |       |  
|                                |  |   |       



F-15



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


7.  INTANGIBLE AND OTHER ASSETS




|                               |                            |              |        |       |      |   |        |       | 
|------------------------------ | -------------------------- | ------------ | ------ | ----- | ---- | - | ------ | ----- | 
|                               |                            | December 31, |       
|                               |                            |              |       
|                               |                            | 2005         |        |       | 2004 |  
|                               |                            |              |        |       |      |  
|Marketing-related:             |                            |              |        |       |      |   |        |      
|                               | www.diamond.comdomain name |              | $      | 2,137 |      |   | $      | 2,137 | 
|                               | www.ashford.comdomain name |              |        | 7,186 |      |   |        | 7,186 | 
|                               | Affinity phone number      |              |        | 288   |      |   |        | 288   | 
|Inventory-related:             |                            |              |        |       |      |   |        |      
|                               | 2004 Supply Agreement      |              |        | 433   |      |   |        | 433   | 
|                               |                            |              |        |       |      |  
|                               |                            |              | 10,044 |       |      |   | 10,044 |      
|Less: accumulated amortization |                            |              | (8,192 | )     |      |   | (6,252 | )    
|                               |                            |              |        |       |      |  
|Intangibles  net              |                            |              | 1,852  |       |      |   | 3,792  |      
|Other assets                   |                            |              | 156    |       |      |   | 2,712  |      
|                               |                            |              |        |       |      |  
|Total                          |                            | $            | 2,008  |       |      | $ | 6,504  |      
|                               |                            |              |        |       |      |  



www.diamond.com






|     |  |           |       |  |           |   |     |       |  |   |       | 
|---- |  | --------- | ----- |  | --------- | - | --- | ----- |  | - | ----- | 
|     |  | Marketing |       |  | Inventory |   |     |      
|Year |  | Related   |       |  | Related   |   |     | Total | 
|     |  |           |       |  |           |   |     |       | 
|2006 |  | $         | 1,649 |  |           | $ | 145 |       |  | $ | 1,794 | 
|2007 |  |           |      |  |           |   | 58  |       |  |   | 58    | 
|     |  |           |       |  |           |   |     |       | 
|     |  | $         | 1,649 |  |           | $ | 203 |       |  | $ | 1,852 | 
|     |  |           |       |  |           |   |     |       | 

8.  BANK CREDIT FACILITY




F-16



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)








9.  STOCKHOLDER NOTES






F-17



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)










10.  INCOME TAXES




|                                           |                                          |        |        |       |      |  |      |        |   |   |        |       |  |        |      |       |      |   |        |       |   |  |      |       |  
|------------------------------------------ | ---------------------------------------- | ------ | ------ | ----- | ---- |  | ---- | ------ | - | - | ------ | ----- |  | ------ | ---- | ----- | ---- | - | ------ | ----- | - |  | ---- | ----- | -
|                                           |                                          | 2005   |        |       | 2004 |  |      | 2003   |  
|                                           |                                          |        |        |       |      |  |      |        |  
|                                           |                                          | Amount |        |       | Rate |  |      | Amount |   |   | Rate   |       |  | Amount |      |       | Rate |  
|                                           |                                          |        |        |       |      |  |      |        |   |   |        |       |  |        |      |       |      |  
|Income taxes at statutory rate             |                                          | $      | (7,987 | )     |      |  | 34.0 | %      |   |   | (4,255 | )     |  |        | 34.0 | %     |      | $ | (2,429 | )     |   |  | 34.0 | %    
|State income taxes, net of federal benefit |                                          |        | (466   | )     |      |  | 2.0  |        |   |   | (454   | )     |  |        | 3.6  |       |      |   | (259   | )     |   |  | 3.6  |      
|Increase in taxes:                         |                                          |        |        |       |      |  |      |        |   |   |        |       |  |        |      |       |      |   |        |       |   |  |      |      
|                                           | Penalties and fines                      |        |        | 3     |      |  |      | 0.0    |   |   |        | 1     |  |        |      | 0.0   |      |   |        | 1     |   |  |      | 0.0   |  
|                                           | Meals and entertainment                  |        |        | 14    |      |  |      | (0.1   | ) |   |        | 29    |  |        |      | (0.2  | )    |   |        | 9     |   |  |      | (0.1  | )
|                                           | Stock-based compensation                 |        |        |      |      |  |      |       |   |   |        | 1,594 |  |        |      | (12.7 | )    |   |        |      |   |  |      |      |  
|                                           | Goodwill impairment                      |        |        | 3,329 |      |  |      | (14.2  | ) |   |        |      |  |        |      | 0.0   |      |   |        |      |   |  |      | 0.0   |  
|                                           | Intangible amortization                  |        |        | 277   |      |  |      | (1.2   | ) |   |        | 258   |  |        |      | (2.1  | )    |   |        | 293   |   |  |      | (4.1  | )
|                                           | Adjustment of beginning deferred balance |        |        | 760   |      |  |      | (3.2   | ) |   |        |      |  |        |      | 0.0   |      |   |        |      |   |  |      | 0.0   |  
|                                           | Other                                    |        |        | (3    | )    |  |      | 0.0    |   |   |        | 199   |  |        |      | (1.6  | )    |   |        | (32   | ) |  |      | 0.4   |  
|                                           | Valuation allowance                      |        |        | 4,073 |      |  |      | (17.3  | ) |   |        | 2,628 |  |        |      | (21.0 | )    |   |        | 2,417 |   |  |      | (33.8 | )
|                                           |                                          |        |        |       |      |  |      |        |   |   |        |       |  |        |      |       |      |  
|                                           |                                          | $      |       |       |      |  |     | %      |   | $ |       |       |  |        |     | %     |      | $ |       |       |   |  |     | %    
|                                           |                                          |        |        |       |      |  |      |        |   |   |        |       |  |        |      |       |      |  

F-18



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                   |             |                                  |         |   |        |   |         |   |        |  
|---------------------------------- | ----------- | -------------------------------- | ------- | - | ------ | - | ------- | - | ------ | -
|                                   |             | December 31,                     |        
|                                   |             |                                  |        
|                                   |             | 2005                             |         |   | 2004   |  
|                                   |             |                                  |         |   |        |  
|Deferred tax assets (liabilities): |             |                                  |         |   |        |   |         |  
|                                   | Noncurrent: |                                  |         |   |        |   |         |   |       
|                                   |             | Net operating loss carryforwards |         | $ | 24,198 |   |         | $ | 18,715 |  
|                                   |             | Property and equipment           |         |   | (834   | ) |         |   | (141   | )
|                                   |             | Intangible assets                |         |   | 1,617  |   |         |   | 2,334  |  
|                                   |             |                                  |         |   |        |  
|Gross deferred tax assets          |             |                                  | 24,981  |   |        |   | 20,908  |  
|Valuation allowance                |             |                                  | (24,981 | ) |        |   | (20,908 | )
|                                   |             |                                  |         |   |        |  
|Net deferred tax assets            |             | $                                |        |   |        | $ |        |  
|                                   |             |                                  |         |   |        |  



11.  COMMITMENTS AND CONTINGENCIES


Leases


|                       |  |        |       | 
|---------------------- |  | ------ | ----- | 
|Year                   |  | Amount |      
|                       |  |        |      
|2006                   |  | $      | 243   | 
|2007                   |  |        | 243   | 
|2008                   |  |        | 243   | 
|2009                   |  |        | 243   | 
|2010                   |  |        | 243   | 
|                       |  |        |      
|Total minimum payments |  | $      | 1,215 | 
|                       |  |        |      



Litigation


F-19



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












Employment Agreements


12.  CONVERTIBLE PREFERRED STOCK




F-20



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|         |  |                   |       |            |             |  |          |           |  |         |         |  |      |            |        |             |       |  |       |  |  |   |         | 
|-------- |  | ----------------- | ----- | ---------- | ----------- |  | -------- | --------- |  | ------- | ------- |  | ---- | ---------- | ------ | ----------- | ----- |  | ----- |  |  | - | ------- | 
|         |  | December 31, 2004 |      
|         |  |                   |      
|         |  |                   |       | Common     |             |  |         
|         |  |                   |       | Shares     |             |  |         
|         |  |                   |       | Additional |             |  | Issuable |           |  |        
|         |  | Authorized        |       |            | Shares      |  |          |           |  | Paid-In |         |  | Upon |            |        | Liquidation |      
|         |  | Shares            |       |            | Outstanding |  |          | Par Value |  |         | Capital |  |      | Conversion |        |             | Value | 
|         |  |                   |       |            |             |  |          |           |  |         |         |  |      |            |        |             |       | 
|Series A |  |                   | 186   |            |             |  | 186      |           |  | $       |        |  |      | $          | 6,678  |             |       |  | 933   |  |  | $ | 6,700   | 
|Series B |  |                   | 514   |            |             |  | 514      |           |  |         | 1       |  |      |            | 36,250 |             |       |  | 551   |  |  |   | 50,441  | 
|Series C |  |                   | 1,046 |            |             |  | 1,046    |           |  |         | 1       |  |      |            | 29,718 |             |       |  | 1,046 |  |  |   | 77,843  | 
|Series D |  |                   | 624   |            |             |  | 624      |           |  |         | 1       |  |      |            | 1,756  |             |       |  | 624   |  |  |   | 4,287   | 
|         |  |                   |       |            |             |  |          |           |  |         |         |  |      |            |        |             |       | 
|         |  |                   | 2,370 |            |             |  | 2,370    |           |  | $       | 3       |  |      | $          | 74,402 |             |       |  | 3,154 |  |  | $ | 139,271 | 
|         |  |                   |       |            |             |  |          |           |  |         |         |  |      |            |        |             |       | 



|         |  |                   |         |  |            |   |        |             |  |   |         | 
|-------- |  | ----------------- | ------- |  | ---------- | - | ------ | ----------- |  | - | ------- | 
|         |  | December 31, 2004 |        
|         |  |                   |        
|         |  | Liquidation       |         |  | Cumulative |   |        | Liquidation | 
|         |  | Preference        |         |  | Dividends  |   |        | Value       | 
|         |  |                   |         |  |            |   |        |             | 
|Series A |  | $                 | 6,700   |  |            | $ |       |             |  | $ | 6,700   | 
|Series B |  |                   | 36,251  |  |            |   | 14,190 |             |  |   | 50,441  | 
|Series C |  |                   | 71,842  |  |            |   | 6,001  |             |  |   | 77,843  | 
|Series D |  |                   | 3,416   |  |            |   | 871    |             |  |   | 4,287   | 
|         |  |                   |         |  |            |   |        |             | 
|         |  | $                 | 118,209 |  |            | $ | 21,062 |             |  | $ | 139,271 | 
|         |  |                   |         |  |            |   |        |             | 



|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |   |  |  |      |   |  |   |        |  
|--------------------------------------------- |  | -------- | ---- | - | -------- | - | ------ | -------- |  |  | -------- | - |  | ------ | ------- | - | ------ |  | ------ | ------ |  | - | ------- | - |  |  | ---- | - |  | - | ------ | -
|                                              |  | Series A |      |   | Series B |   |        | Series C |  |  | Series D |  
|                                              |  |          |      |   |          |   |        |          |  |  |          |  
|                                              |  | Shares   |      |   | Amount   |   |        | Shares   |  |  | Amount   |   |  | Shares |         |   | Amount |  |        | Shares |  |   | Amount  |  
|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |  
|Balance, December 31, 2002                    |  |          | 186  |   |          | $ | 6,678  |          |  |  | 514      |   |  | $      | 36,251  |   |        |  | 416    |        |  | $ | 14,265  |   |  |  | 624  |   |  | $ | 1,757  |  
|Issuance of Series C                          |  |          |     |   |          |   |       |          |  |  |         |   |  |        |        |   |        |  | 56     |        |  |   | 427     |   |  |  |     |   |  |   |       |  
|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |  
|Balance, December 31, 2003                    |  |          | 186  |   |          |   | 6,678  |          |  |  | 514      |   |  |        | 36,251  |   |        |  | 472    |        |  |   | 14,692  |   |  |  | 624  |   |  |   | 1,757  |  
|Issuance of Series C (see Notes 8 and 13)     |  |          |     |   |          |   |       |          |  |  |         |   |  |        |        |   |        |  | 574    |        |  |   | 15,027  |   |  |  |     |   |  |   |       |  
|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |  
|Balance, December 31, 2004                    |  |          | 186  |   |          |   | 6,678  |          |  |  | 514      |   |  |        | 36,251  |   |        |  | 1,046  |        |  |   | 29,719  |   |  |  | 624  |   |  |   | 1,757  |  
|Conversion of preferred stock to common stock |  |          | (186 | ) |          |   | (6,678 | )        |  |  | (514     | ) |  |        | (36,251 | ) |        |  | (1,046 | )      |  |   | (29,719 | ) |  |  | (624 | ) |  |   | (1,757 | )
|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |  
|Balance, December 31, 2005                    |  |          |     |   |          | $ |       |          |  |  |         |   |  | $      |        |   |        |  |       |        |  | $ |        |   |  |  |     |   |  | $ |       |  
|                                              |  |          |      |   |          |   |        |          |  |  |          |   |  |        |         |   |        |  |        |        |  |   |         |  

Issuances


Conversion and Dividend Features


F-21



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)






Liquidation Preferences




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of Series D preferred stock are entitled to
    receive, prior and in preference to any distribution of any of
    the assets of the Company to the other stockholders including
    holders of any other series of convertible preferred stock, by
    reason of their ownership thereof, in cash, an amount per share
    equal to (a) if the valuation of the Company in connection
    with a liquidation event is $70 million or less, then 10%
    of such valuation amount, plus any accrued but unpaid dividends,
    or (b) if the valuation amount is more than $70 million,
    then $7 million plus 20% of the valuation amount in excess
    of $70 million, plus any accrued but unpaid dividends. If
    the assets are insufficient to permit payment of the
    Series D liquidation amount in full to all holders of
    Series D, the assets will be distributed ratably to the
    holders of Series D in proportion to the amount each such
    holder would otherwise be entitled to receive.
|
| |  | After payment of the Series D liquidation amount to the
    holders of Series D to the extent there are additional
    assets available for distribution to stockholders, the holders
    of Series C are entitled to receive, prior and in
    preference to any distribution of any of the assets of the
    Company to the holders of Series A, Series B and
    common stockholders, by reason of their ownership thereof, in
    cash, an amount per share equal to two times the original
    Series C issue price, plus any accrued but unpaid
    dividends. If the assets are insufficient to permit payment of
    the Series C liquidation amount in full to all holders of
    Series C, the assets will be distributed ratably to the
    holders of Series C in proportion to the amount each such
    holder would otherwise be entitled to receive.                                                                                                                                                        
|
| |  | After payment of the Series C liquidation amount to the
    holders of Series C to the extent there are additional
    assets available for distribution to stockholders, the holders
    of Series B are entitled to receive, prior and in
    preference to any distribution of any of the assets of the
    Company to the holders of Series A and common stockholders,
    by reason of their ownership thereof, in cash, an amount per
    share equal to the original Series B issue price, plus any
    accrued but unpaid dividends. If the assets are insufficient to
    permit payment of the Series B liquidation amount in full
    to all holders of Series B, the assets will be distributed
    ratably to the holders of Series B in proportion to the
    amount each such holder would otherwise be entitled to receive.                                                                                                                                                                                
|
| |  | After payment of the Series B liquidation amount to the
    holders of Series B to the extent there are additional
    assets available for distribution to stockholders, the holders
    of Series A are entitled to receive, prior and in
    preference to any distribution of any of the assets of the
    Company to the common stockholders, by reason of their ownership
    thereof, in cash, an amount per share equal to the original
    Series A issue price, plus any accrued but unpaid dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Preferred Stock Warrants


F-22



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)














|                                         |  |           |     |  |          |   |      |           |  |  |          |  |  |   |      | 
|---------------------------------------- |  | --------- | --- |  | -------- | - | ---- | --------- |  |  | -------- |  |  | - | ---- | 
|                                         |  | Series C  |     |  | Series D |  
|                                         |  |           |     |  |          |  
|                                         |  | Number of |     |  | Exercise |   |      | Number of |  |  | Exercise | 
|                                         |  | Warrants  |     |  | Price    |   |      | Warrants  |  |  | Price    | 
|                                         |  |           |     |  |          |   |      |           |  |  |          | 
|Warrants outstanding  December 31, 2004 |  |           | 147 |  |          | $ | 9.00 |           |  |  | 107      |  |  | $ | 0.25 | 
|Warrants outstanding- December 31, 2003  |  |           | 102 |  |          | $ | 9.00 |           |  |  | 107      |  |  | $ | 0.25 | 



|                          |  |  |       |  
|------------------------- |  |  | ----- | -
|Dividend rate             |  |  | 8.00  | %
|Expected volatility       |  |  | 70.00 | %
|Risk-free interest rate   |  |  | 3.93  | %
|Contract lives (in years) |  |  | 10    |  



13.  STOCK OPTION PLAN




F-23



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


i.e.,






Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services




|                                 |           |         |     |          |       |   |       |         |          |  |       |     |   |          |       |       |       |  |     |     |   |   |       |       | 
|-------------------------------- | --------- | ------- | --- | -------- | ----- | - | ----- | ------- | -------- |  | ----- | --- | - | -------- | ----- | ----- | ----- |  | --- | --- | - | - | ----- | ----- | 
|                                 |           | 2005    |     |          | 2004  |   |       | 2003    |         
|                                 |           |         |     |          |       |   |       |         |         
|                                 |           |         |     | Weighted |       |   |       |         | Weighted |  |       |     |   | Weighted |      
|                                 |           |         |     | Average  |       |   |       |         | Average  |  |       |     |   | Average  |      
|                                 |           |         |     | Exercise |       |   |       |         | Exercise |  |       |     |   | Exercise |      
|                                 |           | Options |     |          | Price |   |       | Options |          |  | Price |     |   | Options  |       |       | Price | 
|                                 |           |         |     |          |       |   |       |         |          |  |       |     |   |          |       |       |       | 
|Outstanding at beginning of year |           |         | 446 |          |       | $ | 10.75 |         |          |  | 184   |     |   | $        | 16.25 |       |       |  | 209 |     |   | $ | 17.00 |      
|                                 | Granted   |         |     |         |       |   |       |        |          |  |       | 290 |   |          |       | 8.75  |       |  |     | 11  |   |   |       | 37.75 | 
|                                 | Exercised |         |     |         |       |   |       |        |          |  |       |    |   |          |       |      |       |  |     |    |   |   |       |      | 
|                                 | Canceled  |         |     | (42      | )     |   |       | 21.47   |          |  |       | (28 | ) |          |       | 24.75 |       |  |     | (36 | ) |   |       | 27.00 | 
|                                 |           |         |     |          |       |   |       |         |          |  |       |     |   |          |       |       |       | 
|Outstanding at end of year       |           |         | 404 |          |       | $ | 9.90  |         |          |  | 446   |     |   | $        | 10.75 |       |       |  | 184 |     |   | $ | 16.25 |      
|                                 |           |         |     |          |       |   |       |         |          |  |       |     |   |          |       |       |       | 

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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                |  |                |     |                  |      |  |          |       |  |         |             |  |          |       |     |  |  |   |       | 
|--------------- |  | -------------- | --- | ---------------- | ---- |  | -------- | ----- |  | ------- | ----------- |  | -------- | ----- | --- |  |  | - | ----- | 
|                |  |                |     | Weighted Average |      |  |          |       | 
|                |  |                |     |                  |      |  |          |       | 
|                |  |                |     | Contractual      |      |  | Exercise |       |  | Options |             |  | Exercise |      
|Exercise Prices |  | Options        |     |                  | Life |  |          | Price |  |         | Exercisable |  |          | Price |    
|                |  |                |     |                  |      |  |          |       |  |         |             |  |          |       |    
|                |  | (in thousands) |    
|$7.25  $12.50  |  |                | 391 |                  |      |  | 6        |       |  | $       | 8.33        |  |          |       | 391 |  |  | $ | 8.33  | 
|$34.25          |  |                | 4   |                  |      |  | 5        |       |  |         | 34.25       |  |          |       | 4   |  |  |   | 34.25 | 
|$37.75  $38.00 |  |                | 1   |                  |      |  | 6        |       |  |         | 37.80       |  |          |       | 1   |  |  |   | 37.80 | 
|$70.50          |  |                | 8   |                  |      |  | 8        |       |  |         | 70.50       |  |          |       | 8   |  |  |   | 70.50 | 
|                |  |                |     |                  |      |  |          |       |  |         |             |  |          |       |    
|                |  |                | 404 |                  |      |  | 6        |       |  | $       | 9.90        |  |          |       | 404 |  |  | $ | 9.90  | 
|                |  |                |     |                  |      |  |          |       |  |         |             |  |          |       |    

14.  RELATED PARTY TRANSACTIONS


Diamond and Jewelry Purchases and Sales


Supply Agreement




Stock Purchase and Supply Agreement


F-25



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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)










Other Inventory Purchases www.worldofwatches.com


Use of Jet Aircraft


15.  INITIAL PUBLIC OFFERING




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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




16.  SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)




|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |   |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | --------- |  | - | -------- | - |  | -------- | ------- | - | -------- | - | ------ | --------- |  | - | --------- | - |  | - | ------ | - |  | - | ------ | -
|                                             |  | Quarter Ended  |       
|                                             |  |                |       
|                                             |  | Mar. 31,       |        |   | Jun. 30, |   |        | Sept. 30, |  |   | Dec. 31, |   |  | Mar. 31, |         |   | Jun. 30, |   |        | Sept. 30, |  |   | Dec.      |  
|                                             |  | 2005           |        |   | 2005     |   |        | 2005      |  |   | 2005     |   |  | 2004     |         |   | 2004     |   |        | 2004      |  |   | 31,  2004 |  
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|                                             |  | (In thousands) |       
|                                             |  | (Unaudited)    |       
|Net sales                                    |  | $              | 12,784 |   |          | $ | 11,451 |           |  | $ | 9,132    |   |  | $        | 18,474  |   |          | $ | 10,444 |           |  | $ | 10,290    |   |  | $ | 10,006 |   |  | $ | 21,504 |  
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|Gross profit                                 |  |                | 3,252  |   |          |   | 2,813  |           |  |   | 2,041    |   |  |          | 4,424   |   |          |   | 3,068  |           |  |   | 2,864     |   |  |   | 2,798  |   |  |   | 6,373  |  
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|Loss from operations(1)                      |  |                | (2,673 | ) |          |   | (3,283 | )         |  |   | (3,541   | ) |  |          | (13,928 | ) |          |   | (6,130 | )         |  |   | (1,790    | ) |  |   | (2,301 | ) |  |   | (1,710 | )
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|Net loss(1)                                  |  | $              | (2,749 | ) |          | $ | (3,258 | )         |  | $ | (3,531   | ) |  | $        | (13,953 | ) |          | $ | (6,383 | )         |  | $ | (1,855    | ) |  | $ | (2,406 | ) |  | $ | (1,872 | )
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|Net loss attributable to common stockholders |  | $              | (3,581 | ) |          | $ | (3,258 | )         |  | $ | (3,531   | ) |  | $        | (13,953 | ) |          | $ | (7,540 | )         |  | $ | (12,976   | ) |  | $ | (3,956 | ) |  | $ | (3,422 | )
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  
|Net loss per share, basic and diluted        |  | $              | (0.97  | ) |          | $ | (0.46  | )         |  | $ | (0.50    | ) |  | $        | (1.95   | ) |          | $ | (11.99 | )         |  | $ | (20.63    | ) |  | $ | (6.29  | ) |  | $ | (5.44  | )
|                                             |  |                |        |   |          |   |        |           |  |   |          |   |  |          |         |   |          |   |        |           |  |   |           |  






|    |                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------
|(1) | During the fourth quarter of 2005, the Company recorded an
    impairment charge of $9,792 related to its goodwill.

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##### Table of Contents



ODIMO INCORPORATED AND SUBSIDIARIES


SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS


|                                                 |                                                                         |                            |   |            |          |  |   |               |         |           |        |       |   |  |   |        |    | 
|------------------------------------------------ | ----------------------------------------------------------------------- | -------------------------- | - | ---------- | -------- |  | - | ------------- | ------- | --------- | ------ | ----- | - |  | - | ------ | -- | 
|                                                 |                                                                         |                            |   | Charged to |          |  |   |               |        
|                                                 |                                                                         |                            |   | Revenue,   |          |  |   |               | Balance |          
|                                                 |                                                                         | Beginning                  |   |            | Costs or |  |   |               |         | at End of |       
|Description                                      |                                                                         | of Period                  |   |            | Expenses |  |   | Deductions(1) |         |           | Period |      
|                                                 |                                                                         |                            |   |            |          |  |   |               |         |           |        |      
|Reserve deducted from asset to which it applies: |                                                                         |                            |   |            |          |  |   |               |         |           |        |       |   |  |   |       
|                                                 | Year Ended December 31, 2005 Reserve for deferred income
    tax assets |                            | $ | 20,908     |          |  | $ | 4,073         |         |           | $      |      |   |  | $ | 24,981 |   
|                                                 | Year Ended December 31, 2004 Reserve for deferred income
    tax assets |                            | $ | 18,295     |          |  | $ | 2,613         |         |           | $      |      |   |  | $ | 20,908 |   
|                                                 | Year Ended December 31, 2003 Reserve for deferred income
    tax assets |                            | $ | 15,878     |          |  | $ | 2,417         |         |           | $      |      |   |  | $ | 18,295 |   
|Reserves recorded as accrued liabilities:        |                                                                         |                            |   |            |          |  |   |               |         |           |        |       |   |  |   |       
|                                                 | Year Ended December 31, 2005 Reserve for sales returns                  |                            | $ | 333        |          |  | $ | 7,411         |         |           | $      | 7,432 |   |  | $ | 312    |   
|                                                 |                                                                         | Reserve for warranty costs |   | $          | 15       |  |   | $             |        |           |        | $     |  |  |   | $      | 15 | 
|                                                 | Year Ended December 31, 2004 Reserve for sales returns                  |                            | $ | 355        |          |  | $ | 7,491         |         |           | $      | 7,513 |   |  | $ | 333    |   
|                                                 |                                                                         | Reserve for warranty costs |   | $          | 15       |  |   | $             |        |           |        | $     |  |  |   | $      | 15 | 
|                                                 | Year Ended December 31, 2003 Reserve for sales returns                  |                            | $ | 175        |          |  | $ | 5,620         |         |           | $      | 5,440 |   |  | $ | 355    |   
|                                                 |                                                                         | Reserve for warranty costs |   | $          | 15       |  |   | $             |        |           |        | $     |  |  |   | $      | 15 | 






|    |                                                 
|--- | ------------------------------------------------
|(1) | Consists of actual sales returns in each period.

F-28