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Article by DailyStocks_admin    (05-17-08 05:07 PM)

The Daily Magic Formula Stock for 05/17/2008 is Liquidity Services Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

We are a leading online auction marketplace for wholesale, surplus and salvage assets. We enable buyers and sellers to transact in an efficient, automated online auction environment offering over 500 product categories. Our marketplaces provide professional buyers access to a global, organized supply of wholesale, surplus and salvage assets presented with digital images and other relevant product information. Additionally, we enable our corporate and government sellers to enhance their financial return on excess assets by providing a liquid marketplace and value-added services that integrate sales and marketing, logistics and transaction settlement into a single offering. We organize our products into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, and specialty equipment. Our online auction marketplaces are www.liquidation.com , www.govliquidation.com and www.liquibiz.com . We also operate a wholesale industry portal, www.goWholesale.com, that connects advertisers with buyers seeking products for resale and related business services.

We believe our ability to create liquid marketplaces for wholesale, surplus and salvage assets generates a continuous flow of goods from our corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During fiscal year 2007, the number of registered buyers grew from approximately 524,000 to approximately 685,000, or 30.7%. During the past three fiscal years, we have conducted over 578,000 online transactions generating approximately $509 million in gross merchandise volume. Approximately 85% of our initial listings have resulted in a completed cash sale during the past three fiscal years.

In the fiscal year ended September 30, 2007, we generated revenue of $198.6 million through multiple sources, including transaction fees from sellers and buyers, revenue sharing arrangements, value-added service charges and online advertising fees. Our revenue has grown at a compound annual growth rate of approximately 34% since fiscal year 2003. Additionally, we have been profitable and cash flow positive for each quarter since the fourth quarter of fiscal year 2002.

Industry Overview

While a well-established forward supply chain exists for the procurement of assets, most manufacturers, retailers, corporations and government agencies have not made significant investments in the reverse supply chain process. The reverse supply chain addresses the redeployment and remarketing of wholesale, surplus and salvage assets. These assets generally consist of retail customer returns, overstock products and end-of-life goods from both the corporate and government sectors. According to D.F. Blumberg Associates, Inc., a research and consulting firm, the estimated reverse logistics market in North America will grow from approximately $38.5 billion in 2004 to over $63.1 billion in 2008.

The supply of wholesale, surplus and salvage assets in the reverse supply chain results from a number of factors, including:

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Supply chain inefficiencies. Forecasting inaccuracies, manufacturer overruns, cancelled orders, evolving market preferences, discontinued product lines, merchandise packaging changes and seasonal fluctuations result in the growth of surplus assets.

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Product innovation. Continuous innovation in technology products, such as computer and office equipment, consumer electronics, and personal communication and entertainment devices, results in a continuous flow of surplus assets.

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Return policies of large national and online retailers. The flexible return practices of many large national retailers and online shopping sites result in a continuous supply of returned merchandise, a significant portion of which must be liquidated.

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Compliance with government regulations. An increasingly stringent regulatory environment necessitates the verifiable recycling and remarketing of surplus assets that would otherwise be disposed of as waste.

Organizations that manufacture, distribute, sell or use finished goods regularly need to dispose of excess inventory or returned merchandise. We believe the management and remarketing of surplus assets traditionally has been an inefficient process. While many organizations spend considerable resources developing systems and channels supporting the flow of finished goods to their core customers, we believe that many have not historically dedicated significant resources to the reverse supply chain. Factors contributing to these inefficiencies in the reverse supply chain include the lack of:

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a centralized and global marketplace to sell bulk products in the reverse supply chain;

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awareness of available methods and mechanisms for disposal of surplus assets;

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experience in managing the reverse supply chain; and

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product information and tracking as surplus assets move through the reverse supply chain.

Traditional methods of surplus asset disposition include ad-hoc, negotiated direct sales, utilization of individual brokers or sales agents and live on-site auctions. We believe brokers specializing in surplus asset disposition are generally highly fragmented, geographically dispersed and predominantly small business owners. The manual, negotiated and geographically dispersed nature of traditional surplus resale methods results in a lack of pricing transparency for offered goods and a lower number of potential buyers and bids, which we believe typically lead to lower recovery rates for sellers.

A significant number of professional buyers seek wholesale, surplus and salvage assets. They include online and offline retailers, convenience and discount stores, value-added resellers such as refurbishers and scrap recyclers, import and export firms and small businesses. Traditionally, these buyers have had limited access to large sellers of surplus assets, relying instead on their own network of industry contacts and fixed-site auctioneers to locate, evaluate and purchase specific items of interest. Traditional methods are inefficient for buyers due to the lack of:

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global access to an available supply of desired assets;

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efficient and inexpensive sourcing processes;

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a professionally managed central marketplace;

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detailed information and product description for the offered goods; and

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pricing transparency or ability to compare asset prices.

The Internet has emerged as a global medium enabling millions of people worldwide to share information, communicate and conduct business electronically. International Data Corporation (IDC), a provider of global IT research and advice, estimates global business-to-business, or B2B, e-commerce will increase at a compound annual growth rate of 27.9% between 2004 and 2009 from $2,176 billion to $7,446 billion. (Source: IDC, Worldwide Internet Usage and Commerce 2005-2009 Forecast Version 10.1, Doc #34256, October 2005). We believe professional buyers of wholesale, surplus and salvage assets increasingly will use the Internet to identify and source goods available for immediate purchase.

Our Solution

Our solution is comprised of our online auction marketplaces, value-added services and our wholesale search and advertising portal. Our marketplaces and services are designed to provide sellers with a comprehensive solution to quickly bring surplus assets to market and enhance the financial value realized from the sale of these surplus assets while providing buyers with confidence in the goods they purchase. We provide sellers access to a liquid marketplace with thousands of professional buyers. Through our relationships with sellers, we provide buyers convenient access to a substantial and continuous flow of wholesale, surplus and salvage assets. We provide buyers with products in over 500 categories in lot sizes ranging from full truck loads to pallets, packages and large individual items. Our solution combines centralized marketplaces with a full suite of integrated sales, marketing, merchandising, fulfillment, payment collection, dispute mediation and logistics services. We provide sellers a convenient method of remarketing wholesale, surplus and salvage assets, including preparation of sales information, optional warehousing of goods, settlement and transaction reporting. For any given asset, buyers have access in a centralized location to a detailed product description, product manifest, digital images of a product, relevant transaction history regarding the seller, shipping weights, product dimensions and estimated shipping costs to the buyer's location.

We believe our marketplaces benefit over time from greater scale and adoption by our constituents. As of September 30, 2007, we had aggregated approximately 685,000 registered buyers in our marketplaces. Aggregating this level of buyer demand enables us to generate a continuous flow of goods from corporate and government sellers, which in turn attracts an increasing number of professional buyers. During the fiscal year ended September 30, 2007 we had approximately 1,115,000 auction participants in our online auctions from our registered buyers. During fiscal year 2007, we grew our registered buyer base by 30.7% or approximately 161,000. As buyers continue to discover and use our online trading platform as an effective method to source assets, we believe our marketplaces become an increasingly attractive sales channel for corporations and government agencies. We believe this self-reinforcing cycle results in greater transaction volume and enhances the value of our marketplaces.

Competitive Factors

We have created liquid marketplaces for virtually any type, quantity or condition of wholesale, surplus or salvage assets. The strengths of our business model include:

Aggregation of supply and demand for wholesale, surplus and salvage assets

Our ability to aggregate sellers and buyers through our marketplaces is a fundamental strength of our business model. Sellers benefit from a liquid market and more competitive bidding through our large base of professional buyers, which enhances returns. Buyers benefit from our relationships with high-volume, corporate and government sellers, which provides them with continuous access to a comprehensive selection of wholesale, surplus and salvage assets. Our solution eliminates the need for sellers and buyers to rely on the highly fragmented and geographically dispersed group of traditional liquidators. Instead, sellers and buyers can conveniently access our online marketplaces for all of their wholesale, surplus and salvage asset needs.

Integrated and comprehensive solution

Our marketplaces are designed to provide sellers and buyers with a comprehensive solution for the online sale and purchase of wholesale, surplus and salvage assets. We offer a full suite of value-added services to simplify the sales process for sellers and improve the utility of our marketplaces for buyers. For corporate and government sellers, we provide sales, marketing, logistics and customer support services that are fully integrated with our marketplaces, creating operational and informational efficiencies. For many of these sellers, asset disposition is not a core business function to which they desire to dedicate internal resources. With our solution, we manage each step of the transaction for sellers. Sellers simply make goods available at their facilities or deliver them to our distribution centers and we deliver the profits after the sale is completed. We provide a one stop solution to enable professional buyers of any size throughout the world to purchase assets in an efficient manner. For these buyers, we provide a broad range of services to give them the information necessary to make a more informed bid and to ensure that they ultimately receive the goods purchased. Our buyer services include intelligent alerts, search tools, dynamic pricing, shipping and delivery, secure settlement, live customer support and dispute resolution. Our solution also includes our wholesale industry portal, which provides sellers with an opportunity to target advertising to wholesale buyers and provides buyers with access to a single online destination for sourcing wholesale products and related services.

Flexible and aligned transaction model

We offer three primary transaction models to our sellers, consignment, profit-sharing and purchase. Under these models, our compensation is derived from either the gross or net proceeds received from cash sales. Our consignment and profit-sharing arrangements are designed to maximize returns for us and our sellers by aligning our economic interests.

Faster cycle times for our sellers

We believe our marketplace solution allows sellers to complete the entire sales process more rapidly than through traditional auction methods. Our solution generally reduces the sales and marketing cycle as compared to traditional auction methods. As a result, sellers are able to reduce inventory quickly, generate additional working capital and reduce the cost of carrying unwanted assets.

Our Strategy

Our objective is to build upon our position as a leading online marketplace for selling wholesale, surplus and salvage assets. The key elements of our strategy are to continue to:

Grow our buyer base and increase the total number of auction participants

We intend to increase our buyer base and the total number of auction participants and competition within each auction by attracting new buyers and leveraging our database of existing professional buyers. We intend to attract new buyers by using a variety of online and traditional marketing programs. In addition, we plan to use the comprehensive buyer profiles, preferences and transactional data we have compiled over the past several years for our existing professional buyers to enable us to identify and market assets available through our auctions to the most likely buyers. We believe these initiatives will help us to increase the total number of auction participants, lead to higher selling prices and increase loyalty among our buyer base.

Increase penetration of existing sellers

We intend to increase our sales by increasing business with our existing sellers. For many of our sellers, we currently handle only a small portion of the available supply of these assets. In recent years, we have developed relationships with large corporations and government agencies that offer significant growth opportunities by increasing our share of their supply of surplus assets. For example, on behalf of the U.S. Department of Defense, we initially handled sales of its surplus personal property classified as "useable" in the United States and have expanded this relationship to include additional locations and property classifications, such as "useable" surplus property in Germany, as well as "scrap" property in the United States.

Develop new seller relationships

We intend to attract additional corporate and government sellers to our marketplaces. We believe the vast majority of corporations and government agencies still rely on inefficient traditional disposition methods for their surplus assets such as regional auctions or bulk sales to local buyers and liquidators. We believe our demonstrated performance record coupled with an expanded sales and marketing initiative will allow us to attract additional corporate and government sellers. As part of our sales and marketing initiative, we plan to hire additional sales professionals and increase our marketing and advertising to sellers in our target markets.

Develop and enhance features and services

We intend to develop and enhance marketplace features and services that benefit both buyers and sellers. With each completed auction, we gain greater insight into the optimal ways of marketing goods in the reverse supply chain and the needs of buyers and sellers within the wholesale industry. Recent new service offerings, such as inventory assurance screening, automated shipping coordination, return processing for retail sellers and online invoicing, have enhanced our operations and user experience. We intend to continue to develop new tools to further automate our solution in order to enhance the value we provide to buyers and sellers and improve the scalability of our business.

Expand our wholesale industry portal business

We intend to further expand our advertising and search engine distribution network and develop products that enable wholesale buyers and sellers to more readily create and organize relevant industry information. As a result, our growing base of advertisers can cost-effectively connect with potential customers of wholesale, surplus and salvage assets. Our wholesale industry portal provides another value-added resource to assist buyers and sellers in sourcing goods and services via the Internet.

Acquire complementary businesses

We intend to increase our share of the supply of wholesale, surplus and salvage goods sold by expanding our operations geographically and across new complementary markets. To support this growth, we intend to continue our disciplined and targeted acquisition strategy. Our approach focuses on identifying target companies that will offer us new or complementary areas of expertise, technology advancements, client bases and geographic territories, such as the STR acquisition which we completed on October 16, 2006. In considering each acquisition scenario, we evaluate the merits of the individual opportunity and determine whether to employ a "buy" or "build" strategy.

Our Marketplaces

Our online auction marketplaces serve as an efficient and convenient method for the sale of wholesale, surplus and salvage assets. Through our online auction sites, sellers and professional buyers come together to transact for goods sold "as-is, where-is," generally without the discretionary right to return the merchandise. Items sold in our marketplaces range from new, used, salvage and scrap materials. We operate the following online marketplaces:

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Our www.liquidation.com marketplace enables corporations and selected government agencies located in the United States to sell wholesale, surplus and salvage assets. This marketplace and our related services are designed to meet the needs of clients selling to domestic and international buyers, including buyer qualification, brand and channel relationships protection, and shipping and logistics management.

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Our www.govliquidation.com marketplace enables selected federal government agencies to sell surplus and scrap assets. In addition to goods sold on behalf of other federal agencies, the surplus and scrap assets we sell as the exclusive contractor of the Defense Reutilization and Marketing Service of the U.S. Department of Defense are sold in this marketplace. To satisfy the requirements of U.S. federal government agency sellers, this marketplace incorporates additional terms and conditions of sale, such as U.S. Trade Security Controls clearance for the sale of export-controlled property.

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Our www.liquibiz.com marketplace enables European-based corporations and government agencies, including the U.K. Ministry of Defense and the U.S. Department of Defense in Germany, to sell goods to European and other international buyers. While all of our marketplaces reach a global buyer base, we recognize that high shipping costs can impact the amount a buyer is willing to bid for goods. As a result, we created this marketplace to geographically align European sellers and buyers. We intend to further expand our operations in Europe through our existing facilities in the United Kingdom and Germany.

Our three online auction marketplaces are designed to address the particular requirements and needs of buyers and sellers. Although our buyers may access and register on a single marketplace, we use numerous cross-marketing and cross-promotional methods to ensure that buyers are exposed to all of our marketplaces and to all product categories in which they have expressed an interest. For example, we display cross-search results for all our marketplaces in response to key word searches in a single marketplace.

Our Value-Added Services

We have integrated value-added services into our solution to simplify the sale process for sellers and improve the utility of our marketplaces for buyers. Unlike other online auction sites on which sellers post information on the auction website and deal directly with the buyer to complete a sale, we manage each step of the transaction. We perform all required pre-sale value-added services such as receiving and lotting of the merchandise and implementing marketing strategies. After an online auction transaction is executed, we perform all required post-sale value-added services such as payment collection, settlement and reporting. We believe these services contribute significantly to an enhanced selling price and a higher level of confidence for our buyers. Additionally, we believe these services improve compliance with the various policies, regulations and sale restrictions of our corporate and government sellers. Our employees provide the majority of our value-added services, outsourcing to third-party vendors in limited cases.

Seller services. We offer value-added services to sellers in three areas: (1) sales and marketing, (2) logistics and (3) settlement and customer support.

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Sales and marketing. Sales and marketing efforts encompass all of the services necessary to prepare merchandise for a successful auction and include the following:

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Marketing and promotion—we use a variety of both online and traditional marketing methods to promote our sellers' merchandise and generate interest in each auction.

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Asset lotting and merchandising—we leverage our industry experience to organize merchandise in lot sizes and product combinations that meet buyer preferences.

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Product information enhancement—we photograph and upload digital images of the merchandise to be sold and combine the images in a relevant format. In order to increase the realized sales value, we also research, collect and use supplemental product information to enhance product descriptions.

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Logistics. We provide standard and optional logistics services designed to support the receipt, handling, transportation and tracking of merchandise offered through our marketplaces, including the following:

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Distribution centers—we provide sellers with the flexibility of either having us manage the sales process at their location or delivering merchandise to one of our distribution centers.

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Inventory management—sellers benefit from our management and inventory tracking system designed so that merchandise is received, processed and delivered in a timely manner.

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Cataloguing merchandise—we catalogue all merchandise, which enables us to provide useful product information to buyers. We provide a detailed manifest for lots containing multiple goods. In certain circumstances, we will inspect the merchandise and provide condition descriptions.

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Delabeling—we can remove labels and product markings from merchandise prior to sale to protect sellers' brand equity and distribution relationships.

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Outbound fulfillment—we can arrange for domestic or international shipping for all merchandise, whether located in one of our distribution centers or at a seller's facility.

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Settlement and customer support. Settlement and customer support services are designed for successful completion of transactions and include:

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Buyer qualification—we qualify buyers to ensure their compliance with applicable government or seller mandated terms of sale, as well as to confirm their ability to complete a transaction.

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Collection and settlement—we collect all payments on behalf of sellers prior to delivery of any merchandise and only disburse the profits to the seller after the satisfaction of all conditions of a sale.

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Transaction tracking and reporting—we enable sellers to track and monitor the status of their transactions throughout the sales process. We provide a range of comprehensive reporting services to sellers upon the completion of a transaction. Our invoicing and reporting tools can be integrated with the seller's information system, providing a more efficient flow of data.

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Customer support and dispute resolution—we provide full customer support throughout the transaction process and dispute resolution for our customers if needed.

Buyer services. Many of the services we provide to sellers also benefit buyers by providing them with the information necessary to make a more informed bid and to receive the goods they purchased. Our buyer focused services include the following:

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Intelligent alerts—we automatically notify buyers of upcoming auctions based on their registered preferences and prior transaction history. Registered preferences can be as broad as a product category or as specific as a part number or key word. We use this information to generate automated notifications whenever we identify a product that fits a buyer's registered preference, when auctions are nearing conclusion and based on various other parameters.

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Search tools—buyers can search our marketplaces for products based on a variety of criteria including product category, keyword, lot size, product condition, product geographic location and auction ending date.

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Dynamic pricing tools—we offer multiple dynamic pricing tools including outbid notification, automated bid agent and automatic auction extension. For example, our automatic extension feature allows auctions to continue in set increments until the last bid is received, thus enhancing the pricing of goods.

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Shipping quote—we provide buyers with the information necessary to estimate the shipping costs associated with their purchase, such as shipping weights, packaging type and product dimensions.

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Delivery and shipping—we can provide packaging and shipping services for sales transactions.

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Secure settlement—in addition to qualifying sellers, providing several electronic payment options and serving as a trusted market intermediary, we verify transaction completion, which in turn enhances buyer confidence.

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Customer support and dispute resolution—we provide full customer support throughout the transaction process and dispute resolution for customers if needed.

Our Wholesale Industry Portal

In June 2004, we launched www.goWholesale.com, a wholesale industry portal supported by advertising and search services. goWholesale.com provides buyers of wholesale, surplus or salvage goods with tools to search for goods on the Internet and provides an avenue for manufacturers, drop shippers, distributors, importers and wholesalers to reach professional buyers. goWholesale.com also provides a single online destination for buyers to find specific products for resale and related business services. We developed this portal to provide advertisers with the ability to reach our growing network of professional buyers. Additionally, we believe that users of this site may have an interest in products offered in our marketplaces.

Our goWholesale.com portal is designed to allow advertisers to reach highly targeted wholesale buyer audiences in a more effective and efficient manner than other major search engine alternatives. Our wholesale industry portal focuses on three broad areas: generating leads for advertisers; providing access to a broad range of industry specific content for professional buyers; and creating an online community for the exchange of information by participants in the wholesale industry.

Sales and Marketing

We utilize a direct sales and marketing force to acquire and manage our seller accounts. As of September 30, 2007, we had 66 sales and 19 marketing personnel. Our sales activities are focused primarily on acquiring new sellers, and our marketing activities are focused primarily on acquiring new buyers and increasing existing buyer participation.

Sales

Our sales personnel develop seller relationships, establish agreements to provide our services and manage the business accounts on an on-going basis. Our sales representatives focus on building long-term relationships with sellers that we believe will generate recurring transactions. They also leverage our years of experience and database of completed transactions to identify which of our various services would be beneficial to each new or existing seller.

Our sales group is organized to serve three distinct groups of sellers: large corporate accounts, medium to small corporate accounts and government accounts. This approach is based on our experience in understanding and serving the unique needs of each type of seller:

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Large corporate sellers. These sellers require a customized approach, using a combination of our industry-focused sales team and our value-added services to create a comprehensive solution.

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Medium to small corporate sellers. These sellers are offered a turn-key solution enabling them to self-serve in our marketplaces by accessing tools and resources such as uploading product photographs and descriptions.

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Government sellers. These sellers require a customized approach. Sales efforts are both pro-active and re-active, including responding to already structured contract proposal requests and assisting government agencies in developing the appropriate scope of work to serve their needs.

Our sales personnel receive a salary and performance-based commissions.

Marketing

We use a variety of online and traditional marketing to attract and activate professional buyers to maximize the number of bidders participating in our online marketplaces as well as to support our sales team:

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Buyer acquisition. We utilize online marketing, including paid search advertising, search engine optimization, affiliate programs and cross promotion on all of our marketplaces to acquire new buyers. We supplement this online marketing with special event print media, classified advertisements and selected direct mail campaigns. Public relations campaigns, participation in trade shows and speaking engagements also complement our overall buyer acquisition efforts.

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Buyer participation. We use a variety of tools to increase buyer participation, including: targeted opt-in e-mail newsletters that rely on the buyer's stated categories of interest and past bidding or transaction activity; special e-mail alerts highlighting specific products of interest; convenient search tools that enable a buyer or prospective buyer to find desired items on our online marketplaces; and saved search agents that automatically alert registered buyers when items of interest are added to our marketplaces.

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Market research. In order to better target buyers by industry segment, geographic location or other criteria, our marketing department has gathered data and information from each of the buyer segments we serve. In addition, the marketing department conducts regular surveys to better understand buyers' behavior and needs. We have a privacy policy and have implemented security measures to protect this information.

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Sales support. Our marketing department creates supporting documentation and research to support our sales team in presenting our company to potential sellers and buyers, including sales brochures, white papers and participation in selected trade shows.


All marketing activities are evaluated based on the level of auction participation in our marketplaces and the cost effectiveness of each action.

Technology and Infrastructure

Our marketplaces are fully web-based and can be accessed from any Internet enabled computer by using a standard web browser. Our technology systems enable us to automate and streamline many of the manual processes associated with finding, evaluating, bidding on, paying for and shipping wholesale, surplus and salvage assets. The technology and content behind our marketplaces and integrated value-added services were developed in-house by full-time employees, providing us with control over the marketplaces and the ability to make rapid enhancements to better fit the specific needs of our business and customers. Our marketplaces are supported by a common database architecture and a shared system application. This infrastructure provides:

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an efficient channel to sell online through a variety of pricing mechanisms (standard auction, sealed bid, Dutch auction and fixed price);

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a scalable back office that enables buyers and sellers to efficiently manage transactions among remote business users by utilizing account management tools, including payment collection, invoicing management, shipping and transaction settlement; and

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an input/output agnostic platform, including conduits that enable us to integrate seamlessly with partner enterprise applications of sellers and third party service providers.

We have designed our websites and supporting infrastructure to be highly robust and to support new services and increased traffic. Our servers are fully-managed and hosted in a physically and network-secure environment at data centers in Ashburn, Virginia, which is managed by Equinix, Inc., and in Phoenix, Arizona, which is managed by Limelight Networks, Inc. Every critical piece of our application is fully redundant, and we maintain off-site back-up systems as well as a disaster recovery facility. Our network connectivity offers high performance and scalability to accommodate increases in website traffic. Since January 1, 2003, we have experienced no material service interruptions on our online marketplaces.

Our applications support multiple layers of security, including password-protected log-ins, encryption technology to safeguard information transmitted in web sessions and firewalls to help prevent unauthorized access to our network and servers. We devote significant efforts to protecting our systems from intrusion.

CEO BACKGROUND

Benjamin R. Brown is a co-founder of our company and served as Chairman of LSI's Technology Advisory Committee, and Chief Technology Officer of Government Liquidation.com, LLC, our wholly-owned subsidiary, from August 2001 until December 31, 2007. Mr. Brown has been on sabbatical since January 1, 2008. Mr. Brown served as Chief Technology Officer of LSI from January 2000 to August 2001. Mr. Brown was a consultant and lead developer and architect for IBM, Delta, Hewlett Packard, Merrill Lynch and Simon & Schuster from 1995 to 1999. Mr. Brown holds a B.B.A. with honors from the University of Georgia in Management Information Systems and Risk Management.

Eric C. Dean was appointed Chief Information Officer on October 2, 2007. From 2005 to 2007, Mr. Dean served as Senior Vice President and CIO for Schaller Anderson. From 2002 to 2005, Mr. Dean served as an independent consultant, providing advice and support to executives and management with responsibility for large IT projects. Mr. Dean also previously served as CIO for Andersen Worldwide and as CIO of UAL Corporation. Mr. Dean holds a B.S. degree in Mathematics from Indiana University.

James M. Rallo has served as Chief Financial Officer and Treasurer of LSI since February 2005. Prior to joining our company, Mr. Rallo served as Chief Financial Officer and Treasurer of Sleep Services of America, Inc. from July 1999 to February 2005. Mr. Rallo served as Vice President of Deutsche Banc Alex Brown's Healthcare Investment Banking Group from June 1995 to July 1999. Mr. Rallo holds an M.B.A. from the Smith School of Business at the University of Maryland and a B.S. from Washington and Lee University. Mr. Rallo is a CPA.

Thomas B. Burton has served as President and Chief Operating Officer of Government Liquidation.com, LLC, our wholly-owned subsidiary, since June 2001. Mr. Burton served as LSI's Director of Government Surplus from September 2000 through May 2001. Prior to joining our company in September 2000, Mr. Burton served as the Western Region Director of EG&G Technical Services, a government contractor, from August 1990 to September 2000. Mr. Burton holds a B.S. from Cameron University.

James E. Williams has served as our Vice President, General Counsel and Corporate Secretary since November 2005. Prior to joining our company, Mr. Williams was an independent consultant from March 2004 to November 2005. Mr. Williams served as Vice President, General Counsel and Secretary from October 2003 until February 2004 and as Senior Corporate Counsel from July 2002 to September 2003 for Acterna, a provider of telecommunications and test and measurement solutions that was acquired by JDS Uniphase Corporation. From June 2000 to June 2002 he served as Assistant General Counsel for PathNet Telecommunications, formerly a wholesale telecommunications provider. Mr. Williams was a corporate associate at the law firms of Kirkland & Ellis and Wilson Sonsini, Goodrich & Rosati. He received his B.A. from Brown University and his J.D. from the University of Chicago Law School.

COMPENSATION

General Compensation Philosophy

Liquidity Services' executive compensation programs are designed to support the attainment of our short- and long-term financial and strategic objectives, reward executives for continuous growth in revenue, earnings and stockholder value, and align executives' interests with those of our stockholders. The goal of Liquidity Services' compensation programs is to attract, retain and motivate key executives, and encourage a long-term commitment to Liquidity Services. To achieve these objectives, the Compensation Committee uses a variety of compensation elements, including:

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base salary;

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annual cash incentive compensation;

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long-term incentive compensation; and

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certain other compensation and benefits.

Factors Considered When Determining Compensation. The Compensation Committee seeks to set executive compensation at competitive levels that the Compensation Committee considers appropriate for a company of our size and stage of growth. On an annual basis the Compensation Committee determines and approves the total compensation level of each of our named executive officers based on its evaluation of external market conditions, Company performance and each named executive officer's individual performance relative to pre-established performance goals and objectives. The Compensation Committee also considers each executive's level of experience, and the executive's tenure, position and responsibilities with the Company. In fiscal 2007, the Compensation Committee did not engage an independent executive compensation consultant to assist in its review. The Compensation Committee considers recommendations from the Chairman and CEO regarding levels for base salary, annual incentive awards and long-term incentive awards for named executive officers, other than himself. The Chairman and CEO annually provides to the Compensation Committee historical and prospective breakdowns of the total compensation components for each named executive officer. The Chairman and CEO also recommends financial and non-financial performance goals for each named executive officer under the annual cash incentive compensation plan.

Pay Mix. Because our named executive officers are in a position to directly influence the Company's performance, a significant portion of their compensation is delivered in the form of annual cash incentive bonus and long-term incentive compensation. We rely on a mix of compensation components intended to reward short-term results (in the form of annual cash incentive bonuses) and motivate long-term performance (in the form of option grants that vest over several years). We do not have a specific allocation target between cash and equity-based compensation or between annual and long-term incentive compensation. Instead, we retain the flexibility when determining the compensation mix to react to our evolving business environment and our specific hiring and retention requirements. In 2007, the Compensation Committee awarded cash bonuses to all named executive officers, but made no annual equity-based incentive awards because significant option awards had been granted in March 2006 subsequent to our initial public offering. These options were granted as compensation for the remainder of fiscal year 2006 as well as for fiscal year 2007.

Base Salary

The fiscal 2007 salaries of the named executive officers are shown in the "Salary" column of the Summary Compensation Table. Salaries for named executive officers are designed to be competitive when compared with prevailing market rates and are based on a variety of factors, including level of responsibility, performance and the recommendations of the Chairman and CEO (other than with respect to his own compensation). The Compensation Committee generally reviews executive salaries annually and may adjust salaries upward based on the factors discussed above. As part of this review, the Compensation Committee reviewed the base salaries and overall compensation of executive officers of companies the Compensation Committee considered to be comparable, including Blue Nile, Inc., GSI Commerce, Inc., Loopnet, Inc., Provide Commerce, Inc. and VistaPrint, LTD. Under the terms of each employment agreement that we have with our named executive officers, the Committee may not adjust salaries downward unless a named executive officer consents to a reduction. Each named executive officers' employment agreement provides for a minimum base salary, as described beginning on page 29 under "Employment Agreements".

For fiscal 2007, the Compensation Committee approved base salary increases for the named executive officers ranging from 6% to 20%. The salary for Mr. Angrick was increased from $240,000 to $275,000; the salary for Mr. Mateus-Tique was increased from $210,000 to $245,000; the salary for Mr. Rallo was increased from $200,000 to $240,000; the salary for Mr. Brown was increased from $190,000 to $215,000; and Mr. Burton's salary was increased from $225,000 to $240,000. These increases were based on the Compensation Committee's evaluation of individual performance, changes in responsibilities, and an assessment of the external market for similar positions within public reporting companies, including a review of the comparable companies listed above. The Compensation Committee relies on external market data to inform its deliberations on base salary but does not establish specific targets for base salary based on market data. Mr. Rallo received the most significant base salary increase based on the Compensation Committee's evaluation of the expansion of his scope and responsibility as CFO of a public reporting company (we completed our public offering during fiscal year 2006) and the fact that he did not receive a salary increase in fiscal 2006.

For fiscal 2008, the Compensation Committee approved base salary increases for the named executive officers ranging from 5% to 6%. The salary for Mr. Angrick was increased from $275,000 to $288,750; the salary for Mr. Mateus-Tique was increased from $245,000 to $260,000; the salary for Mr. Rallo was increased from $240,000 to $252,000; and Mr. Burton's salary was increased from $240,000 to $255,000. These increases were based on the Compensation Committee's evaluation of individual performance, an assessment of the scope and responsibility of each position and an assessment of market comparison information. The Compensation Committee engaged an independent compensation consultant to assist in its review of the Company's executive compensation for fiscal year 2008. As part of this review, the Compensation Committee reviewed the base salaries and overall compensation of executive officers of companies that it deemed comparable upon the recommendation of its compensation consultant, including 1-800-Flowers.com, Inc., Bidz.com, Inc., Blackboard, Inc., Blue Nile, Inc., GSI Commerce, Inc., Loopnet, Inc., Neustar, Inc., Overstock.com. Inc., Provide Commerce, Inc., U.S. Auto Parts Network, Inc. and VistaPrint, LTD. In setting base salaries for fiscal year 2006 and 2007, the Compensation Committee relied on external market data to inform its deliberations on base salary but did not establish specific targets for our named executive officers' base salaries based on market data.

Annual Incentive Compensation

Annual incentive compensation is an "at risk" cash bonus that is designed to motivate our named executive officers to achieve financial and non-financial goals that are consistent with the Company's strategic plan. The annual incentive bonus plan is also designed to attract and retain key employees by providing our named executive officers with a significant opportunity to earn additional annual cash compensation. The Committee assesses the competitiveness of the opportunity by reviewing the marketplace for the Company's executive talent and the incentive compensation at comparable companies, including those listed above.

At the beginning of each fiscal year, the Committee establishes the performance goals and target cash bonus award for each named executive officer. Each target cash bonus award is set as a percentage of the named executive officer's base salary. The amount of the cash bonus award ultimately received depends on the achievement of performance goals and the Committee's discretion. Our named executive officers may receive up to 200% of their target cash bonus awards based on the achievement of financial and non-financial goals related to the Company's strategic plan. The Grants of Plan-Based Awards table on page 33 shows the range of possible payments to each of our named executive officers under the annual incentive bonus plan.

For fiscal year 2007, the target annual cash bonus award for Messrs. Angrick, Mateus-Tique and Rallo was 100%, 80% and 50% of base salary, respectively. The target bonus opportunity for Messrs. Brown and Burton was approximately 50% of base salary. The Committee established these target cash bonus award opportunities based upon (1) the relative scope and responsibility of the named executive officer's position and his respective impact on overall Company performance and (2) the Compensation Committee's evaluation of the external market and the annual cash incentive compensation at comparable companies, including those listed above.

During the beginning of the fiscal year, the Committee established performance goals for each named executive officer. The Committee determined that fiscal 2007 target awards under the performance plan for our named executive officers would be based on the achievement of the Company's financial plan and achievement of certain individual department goals and non-financial strategic objectives. The Committee's evaluation of financial performance was principally based on the measurement of earnings before interest, taxes depreciation and amortization, adjusted for non cash stock compensation expense (Adjusted EBITDA) under the executive's area of responsibility. The Committee selected Adjusted EBITDA as the principal financial performance measure for certain of our named executive officers because it is a key metric used by management to measure the Company's business performance and the basis upon which we communicate forward-looking financial information to the investment community.

The performance goals established for each of our named executive officers varied based on their relative job responsibilities and emphasized improvement in metrics within the control of each named executive officer. Our Chairman and CEO's performance was evaluated based on the Company's consolidated Adjusted EBITDA results and additional strategic goals and objectives, including enhanced revenue and customer diversification, and client retention . The target for consolidated Adjusted EBITDA for the Company was $20 million. The full-year Adjusted EBITDA performance target represented an approximately 33% increase over the Company's consolidated Adjusted EBITDA for the prior fiscal year.

Mr. Mateus-Tique's performance was evaluated based on the Asset Recovery Division's Adjusted EBITDA results and additional strategic objectives, including the development and expansion of the Asset Recovery Division's operations and infrastructure, expansion of the Company's portfolio of large commercial sellers and increased buyer participation. Mr. Burton's performance was evaluated based on the Government Liquidation's Division Adjusted EBITDA results and additional strategic objectives, including client retention and achievement of contractual deliverables with the Company's Department of Defense client, the Defense Reutilization and Marketing Service (DRMS). Since we believe disclosure of the Adjusted EBITDA results for the Asset Recovery Division and Government Liquidation Division would cause the Company competitive harm by providing sensitive information that would not otherwise be disclosed, the Company is not disclosing these specific targets. The Company's future performance is inherently uncertain and can be significantly affected by factors such as fluctuations in the flow of goods we receive from our sellers, continued growth in the use of the Internet as a medium for commerce, the rapid pace of technological change in the Internet and e-commerce industries and other variables that are difficult to predict at the time the Committee establishes the performance measures and targets for the annual incentive bonus plan. Achievement of the Adjusted EBITDA target for the Asset Recovery Division required significant improvement in the performance of the division; specifically, an approximately 114% increase in the Division's Adjusted EBITDA over the prior fiscal year. The Compensation Committee also believed that accomplishing the Adjusted EBITDA goal for the Asset Recovery Division would be difficult as Mr. Mateus-Tique would be responsible for leading the Division:

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to complete the integration of both the operations of STR, Inc.(STR) and the additional STR facilities obtained as part of its acquisition (our first as a public company);

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to hire and train several individuals in senior positions in the Division; and

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to develop new services to meet the demands of the Division's clients.

The Adjusted EBITDA target for the Government Liquidation Division for fiscal year 2007 also required significant improvement in the performance of the Government Liquidation Division; specifically, a 24% increase in the Division's Adjusted EBITDA over the prior fiscal year. When establishing the Adjusted EBITDA target for the Division, the Compensation Committee believed that the goal would be difficult because it was anticipated that the Division's overall revenue and the flow of surplus goods the Division received from the DRMS would decline in fiscal year 2007. At the time the targets for the Asset Recovery Division and Government Liquidation Division were established, the Committee believed these targets were challenging, but achievable with significant effort.

The performance goals established for Mr. Rallo and Mr. Brown were non-financial and were based on successfully completing strategic goals for their respective departments.

At the end of the performance year, our Chairman and CEO assesses the achievement of the Company and individual performance goals and makes a recommendation to the Committee regarding the annual bonus payouts. The Committee has discretion to accept, modify or reject this recommendation when determining the actual cash bonus awarded to named executive officers. The Compensation Committee's determination of individual bonus awards reflects a discretionary assessment by the Compensation Committee of each officer's individual performance and contribution to the Company's performance during the year.

The awards under the plan for fiscal 2007 paid to each of our named executive officers are shown in the "Non-Equity Incentive Compensation" column of the Summary Compensation Table. In determining the amount of these awards, the Committee assessed the Company's and each named executive officer's performance measured against the previously set financial and strategic objectives. The assessment included a review of Liquidity Services' fiscal 2007 Adjusted EBITDA results and the contributions of each named executive officer towards additional strategic objectives under their area of responsibility. Mr. Angrick's bonus was 100% of his target due to the Company's achievement of its consolidated Adjusted EBITDA target of $20,000,00 and contributions towards the Company's strategic goals, including enhanced revenue and customer diversification, and client retention.

Mr. Mateus-Tique's bonus was at 100% of his target due to the Asset Recovery Division's achievement of 100% its Adjusted EBITDA target and his contributions towards strategic objectives, including the development and expansion of the Asset Recovery Division's operations and infrastructure, expansion of the Company's portfolio of large commercial sellers and increased buyer participation.

Mr. Burton's bonus was 150% of his target due to (1) the Government Liquidation Division's achievement of 108% of its Adjusted EBITDA target and (2) his success in expanding the scope of work under the Company's Surplus and Scrap Contracts with the DRMS, including the successful implementation of an inventory assurance program, which helps prevent the sale of restricted property to the public. Due to the Government Liquidation Division's successful implementation of the inventory assurance program, the Company achieved the highest possible profit sharing percentage (30.5%) under our Surplus Contract with the DRMS.

Mr. Rallo's bonus was 129% of his target bonus due to the successful integration of the financial reporting functions of STR (a company we acquired in October 2006), his role in building the Company's investor relations program, including the expansion of our research analyst coverage. Mr. Brown's bonus was 133% of his target due his successful expansion of the depth of the Company's technology organization and for his support of the technical aspects of the implementation of the inventory assurance program for the DRMS.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

About us. We are a leading online auction marketplace for wholesale, surplus and salvage assets. We enable buyers and sellers to transact in an efficient, automated online auction environment offering over 500 product categories. Our marketplaces provide professional buyers access to a global, organized supply of wholesale, surplus and salvage assets presented with digital images and other relevant product information. Additionally, we enable our corporate and government sellers to enhance their financial return on excess assets by providing a liquid marketplace and value-added services that integrate sales and marketing, logistics and transaction settlement into a single offering. We organize our products into categories across major industry verticals such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware, and specialty equipment. Our online auction marketplaces are www.liquidation.com , www.govliquidation.com and www.liquibiz.com . We also operate a wholesale industry portal, www.goWholesale.com, that connects advertisers with buyers seeking products for resale and related business services.

We believe our ability to create liquid marketplaces for wholesale, surplus and salvage assets generates a continuous flow of goods from our corporate and government sellers. This flow of goods in turn attracts an increasing number of professional buyers to our marketplaces. During fiscal year 2007, the number of registered buyers grew from approximately 524,000 to approximately 685,000, or 30.7%. During the past three fiscal years, we have conducted over 578,000 online transactions generating approximately $509 million in gross merchandise volume. Approximately 85% of our initial listings have resulted in a completed cash sale during the past three fiscal years.

Our history. We were incorporated in Delaware in November 1999 as Liquidation.com, Inc. and commenced operations in early 2000. During 2000, we developed our online auction marketplace platform and began auctioning merchandise primarily for small commercial sellers and government agencies. In 2001, we changed our name to Liquidity Services, Inc. In June 2001, we were awarded our first major DoD contract, the Commercial Venture Two or CV2 contract. Under this agreement, we became the exclusive contractor with the Defense Reutilization and Marketing Service, or DRMS, for the sale of usable DoD surplus assets in the United States. In June 2005, we were awarded an additional exclusive contract with the DRMS to manage and sell substantially all DoD scrap property. During 2004, we launched our wholesale industry portal, www.goWholesale.com .

STR acquisition. We completed the acquisition of the wholesale business of STR for approximately $9.9 million in cash on October 16, 2006. STR is a California-based remarketer of reverse supply chain merchandise, including retail customer returns, overstocks, shelf pulls, and seasonal merchandise, to wholesale buyers. The acquisition of STR strengthens our core business by adding long-standing relationships with traditional discount store chain buyers as well as Fortune 500 commercial sellers. The acquisition also expanded our distribution center network, with the addition of STR's approximately 117,000 square foot leased distribution center in Fullerton, California, a suburb of Los Angeles, as well as 21,000 square feet facility in Sacramento, California, which we believe will provide efficiencies for both domestic and international buyers and sellers.

Recent initiatives. On March 13, 2007, we sold 100,000 shares of our common stock in a follow-on offering at $18.00 per share. Aggregate net proceeds from the follow-on offering, after deducting underwriting discounts and commissions and issuance costs, were approximately $1.1 million. In the follow-on offering, including the partial exercise of the over-allotment option granted to the underwriters, the selling stockholders sold an aggregate of 3,662,400 shares of common stock held by them. We did not receive any proceeds from the sale of shares by the selling stockholders.

On May 21, 2007, through a modification to our existing Scrap Contract with the DoD, we agreed to provide additional value-added services to the sales process designed to ensure compliance with requirements relating to the mutilation of scrap material. As part of these value-added services, we manage centralized processing centers that provide a secure area to complete the mutilation of scrap metal prior to removal of the material from the DoD sales location. In addition, we provide oversight and verification procedures to enhance the audit trail related to sales of scrap material. In exchange for our agreement to provide these services, the DoD agreed to increase our share of net proceeds under the Scrap Contract to 23% from 20%. The contract modification also provides that we manage the receipt, marketing and sale of virtually all surplus scrap property generated by the DoD in Hawaii and Guam. All terms and conditions set forth in the modified Scrap Contract apply to material processed and sold in these locations. The contract modification became effective June 1, 2007. All other principal terms of the original contract remain in effect.

The Scrap Contract includes a performance incentive that allows us to receive up to an additional 2% of the profit-sharing distribution. This incentive is measured annually on June 30 th , and is applied to the prior 12 months. We received a performance incentive payment for the 12 months ended June 30, 2007 of approximately $1,000,000, in the quarter ended June 30, 2007.

On June 1, 2007, we agreed, as provided in the modification to the Surplus Contract that became effective as of September 12, 2006, to provide additional value-added services with respect to demilitarized property that is returned to DRMS for reutilization. In exchange for our agreement to provide these services, the DoD exercised its existing option to increase our share of net proceeds under the Surplus Contract by 1%. The Surplus Contract, in accordance with the contract modification on September 12, 2006, includes a performance incentive that allows us to receive up to 30.5% of the profit-sharing distribution. This incentive will be measured quarterly beginning in fiscal year 2008. This performance incentive was recognized for the period earned during fiscal year 2007, which began December 1, 2006. For the fiscal year 2007 measurement period, we received a performance payment of approximately $1,500,000, in the quarter ended September 30, 2007.

Our revenue. We generate substantially all of our revenue by retaining a percentage of the proceeds from the sales we manage for our sellers. We offer our sellers three primary transaction models: a profit-sharing model, a consignment model and a purchase model.

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Profit-sharing model. Under our profit-sharing model, we purchase inventory from our suppliers and share with them a portion of the profits received from a completed sale in the form of a distribution. Distributions are calculated based on the value received from the sale after deducting direct costs, such as sales and marketing, technology and operations and other general and administrative costs. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our profit-sharing model accounted for approximately 87.9%, 83.1% and 61.5% of our total revenue for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. The merchandise sold under our profit-sharing model accounted for approximately 76.8%, 70.9% and 52.3% of our gross merchandise volume, or GMV, for the fiscal years ended September 30, 2005, 2006 and 2007, respectively.

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Consignment model. Under our consignment model, we recognize commission revenue from sales of merchandise in our marketplaces that is owned by others. These commissions, which we refer to as seller commissions, represent a percentage of the sale price the buyer pays upon completion of a transaction. We vary the percentage amount of the seller commission depending on the various value-added services we provide to the seller to facilitate the transaction. For example, we generally increase the percentage amount of the commission if we take possession, handle, ship or provide enhanced product information for the merchandise. We collect the seller commission by deducting the appropriate amount from the sales proceeds prior to their distribution to the seller after completion of the transaction. Revenue from our consignment model accounted for approximately 5.2%, 7.2% and 7.3% of our total revenue for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. The merchandise sold under our consignment model accounted for approximately 18.5%, 22.4% and 22.4% of our GMV for the fiscal years ended September 30, 2005, 2006 and 2007, respectively.

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Purchase model. Under our purchase model, we offer our sellers a fixed amount or the option to share a portion of the proceeds received from our completed sales in the form of a distribution. Distributions are calculated based on the value we receive from the sale after deducting a required return to us that we have negotiated with the seller. Because we are the primary obligor, and take general and physical inventory risks and credit risk under this transaction model, we recognize as revenue the sale price paid by the buyer upon completion of a transaction. Revenue from our purchase model accounted for approximately 1.4%, 3.0% and 25.4% of our total revenue for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. The merchandise sold under our purchase model accounted for approximately 1.3%, 2.6% and 21.6% of our gross merchandise volume, or GMV, for the fiscal years ended September 30, 2005, 2006 and 2007, respectively.

We collect a buyer premium on substantially all of our transactions under all of our transaction models. Buyer premiums are calculated as a percentage of the sale price of the merchandise sold and are paid to us by the buyer. Buyer premiums are in addition to the price of the merchandise. Under our profit-sharing model, we typically share the proceeds of any buyer premiums with our sellers.

In fiscal years 2005, 2006 and 2007, we generated approximately 2% of our revenue from advertisements on our wholesale industry portals.

Industry trends. We believe there are several industry trends impacting the growth of our business including: (1) the increase in the adoption of the Internet by businesses to conduct e-commerce both in the United States and abroad; (2) product innovation in the retail supply chain that has increased the pace of product obsolescence and, therefore, the supply of surplus assets; (3) the increase in the volume of returned merchandise handled by both online and offline retailers; (4) the increase in government regulations necessitating verifiable recycling and remarketing of surplus assets; and (5) the increase in outsourcing by corporate and government organizations of disposition activities for surplus and end-of-life assets.

Our Seller Agreements

Our DoD agreements. We have three contracts with the DoD pursuant to which we acquire, manage and sell excess property:

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Surplus contract. In June 2001, we were awarded the CV2 contract, a competitive-bid exclusive contract under which we acquire, manage and sell all usable DoD surplus personal property turned into the DRMS. Surplus property generally consists of items determined by the DoD to be no longer needed, and not claimed for reuse by, any federal agency, such as computers, electronics, office supplies, scientific and medical equipment, aircraft parts, clothing and textiles. In connection with the award of this surplus contract, we agreed to acquire SurplusBid.com, Inc. and its wholly owned subsidiary Levy Latham Global, LLC, the holder of the predecessor DoD surplus agreement, the Commercial Venture One or CV1 contract. Revenue from our surplus contract (including buyer premiums) accounted for approximately 87.5%, 56.6% and 33.9% of our total revenue for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. The property sold under our surplus contract accounted for approximately 76.5%, 48.3% and 28.8% of our GMV for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. The surplus contract expires in June 2008.

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Scrap contract. In June 2005, we were awarded a competitive-bid exclusive contract under which we acquire, manage and sell substantially all scrap property of the DoD turned into the DRMS. Scrap property generally consists of items determined by DoD to have no use beyond their base material content, such as metals, alloys, and building materials. The contract accounted for 0.4%, 26.5% and 27.6% of our revenue and 0.3%, 22.6% and 23.5% of our GMV for the fiscal years ended September 30, 2005, 2006 and 2007, respectively. We were required to pay $5.7 million to the DoD in fiscal 2005 for the right to manage the operations and remarket scrap material in connection with the scrap contract. The contract expires in June 2012, subject to DoD's right to extend it for three additional one-year terms.


Under the surplus property contract, we are obligated to purchase all DoD surplus property at set prices representing a percentage of the original acquisition cost, which varies depending on the type of surplus property being purchased. Under the Scrap Contract, we acquire scrap property at a per pound price. We were initially entitled to approximately 20% of the profits of sale (defined as gross proceeds of sale less allowable operating expenses) under the Contracts, and the DoD was entitled to approximately 80% of the profits. We refer to these disbursement payments to DoD as profit-sharing distributions. As a result of these arrangements, we recognize as revenue the gross proceeds from these sales. DoD also reimburses us for actual costs incurred for packing, loading and shipping property under the contracts that we are obligated to pick up from non-DoD locations. On September 12, 2006, we entered into a bilateral contract modification under which the DoD agreed to increase our profit-sharing percentage under the Surplus Contract in exchange for our agreement to implement additional inventory assurance processes and procedures with respect to the sale of demilitarized property. Under the terms of the contract modification, from August 1, 2006 until November 30, 2006, we were entitled to receive 27.5% of the profits under the Surplus Contract and the DoD was entitled to receive 72.5%. Since November 30, 2006, we have been entitled to receive between 25% and 30.5% of the profits, based on the results of an audit of the effectiveness of the inventory controls we implement under the contract modification. On June 1, 2007, we agreed, as provided in the modification to the Surplus Contract that became effective as of September 12, 2006, to provide additional value-added services with respect to demilitarized property that is returned to the DoD for reutilization. In exchange for our agreement to provide these services, the DoD exercised its existing option to increase our share of net proceeds under the Surplus Contract by 1%.

Under the Scrap Contract, we also have a small business performance incentive based on the number of scrap buyers that are small businesses that would allow us to receive up to an additional 2% of the profit sharing distribution. On May 21, 2007, we entered into a bilateral contract modification under which the DoD agreed to increase the profit-sharing distribution for the Scrap Contract from 20% to 23% effective June 1, 2007, in exchange for our agreement to implement additional inventory assurance processes and procedures with respect to the mutilation of demilitarized scrap property sold.

In January 2006, we were awarded a contract to purchase DoD surplus property located in Germany. This contract generated approximately 1% of our revenue in fiscal years 2006 and 2007. This contract expires in January 2009.

Our UK MoD agreement. In July 2003, we were awarded a contract to manage and sell surplus property from the United Kingdom Ministry of Defence. This contract generated less than 4% of our revenue in fiscal years 2005, 2006 and 2007. This contract expires in July 2008, subject to the Ministry's right to extend the contract for two additional one-year terms.

Our commercial agreements. During fiscal year 2007, we had over 360 corporate clients who each sold in excess of $10,000 of wholesale, surplus and salvage assets in our marketplaces. Our agreements with these clients are generally terminable at will by either party.

Key Business Metrics

Our management periodically reviews certain key business metrics for operational planning purposes and to evaluate the effectiveness of our operational strategies, allocation of resources and our capacity to fund capital expenditures and expand our business. These key business metrics include:

Gross merchandise volume. Gross merchandise volume, or GMV, is the total sales value of all merchandise sold through our marketplaces during a given period. We review GMV because it provides a measure of the volume of goods being sold in our marketplaces and thus the activity of those marketplaces. GMV also provides a means to evaluate the effectiveness of investments that we have made and continue to make, including in the areas of customer support, value-added services, product development, sales and marketing, and operations. The GMV of goods sold in our marketplace during fiscal year 2007 totaled $233.6 million.

Completed transactions. Completed transactions represents the number of auctions in a given period from which we have recorded revenue. Similar to GMV, we believe that completed transactions is a key business metric because it provides an additional measurement of the volume of activity flowing through our marketplaces. During the fiscal year ended September 30, 2007, we completed approximately 212,000 transactions.

Total registered buyers. We grow our buyer base through a combination of marketing and promotional efforts. A person becomes a registered buyer by completing an online registration process on one of our marketplaces. As part of this process, we collect business and personal information, including name, title, company name, business address and contact information, and information on how the person intends to use our marketplaces. Each prospective buyer must also accept our terms and conditions of use. Following the completion of the online registration process, we verify each prospective buyer's e-mail address and confirm that the person is not listed on any banned persons list maintained internally or by the U.S. federal government. After the verification process, which is completed generally within 24 hours, the registration is approved and activated and the prospective buyer is added to our registered buyer list.

Total registered buyers as of a given date represents the aggregate number of persons or entities who have registered on one of our marketplaces. We use this metric to evaluate how well our marketing and promotional efforts are performing. Total registered buyers excludes duplicate registrations, buyers who are suspended from utilizing our marketplaces and those buyers who have voluntarily removed themselves from our registration database. In addition, if we become aware of registered buyers that are no longer in business, we remove them from our database. As of September 30, 2007, we had approximately 685,000 registered buyers.

Total auction participants. For each auction we manage, the number of auction participants represents the total number of registered buyers who have bid one or more times in that auction. As a result, a registered buyer who bids, or participates, in more than one auction is counted as an auction participant in each auction in which he or she participates. Thus, total auction participants for a given period is the sum of the auction participants in each auction conducted during that period. We use this metric to allow us to compare our online auction marketplaces to our competitors, including other online auction sites and traditional on-site auctioneers. In addition, we measure total auction participants on a periodic basis to evaluate the activity level of our base of registered buyers and to measure the performance of our marketing and promotional efforts. For the fiscal year ended September 30, 2007, approximately 1,115,000 total auction participants participated in auctions on our marketplaces.

Results of Operations

Year Ended September 30, 2007 Compared to Year Ended September 30, 2006

Revenue. Revenue increased $50.8 million, or 34.4%, to $198.6 million for the year ended September 30, 2007 from $147.8 million for the year ended September 30, 2006. This increase was primarily due to a 23.8% increase in the average value of our transactions resulting from product mix, lotting and merchandising strategies, and buyer demand, as well as an increase in the number of completed transactions through our online auction marketplaces. During the same period, the number of completed transactions increased from approximately 194,000 to 212,000, or 9.0%. The amount of gross merchandise volume transacted through our marketplaces increased $60.5 million, or 34.9%, to $233.6 million for the year ended September 30, 2007 from $173.1 million for the year ended September 30, 2006. We believe this increase is attributable to our investment in our sales and marketing organization and the acquisition of STR on October 16, 2006, as well as increased market acceptance by corporate sellers and professional buyers of our online marketplaces as an efficient channel to auction and purchase wholesale, surplus and salvage assets, which resulted in 137.5% growth in our commercial market place over the same period last year. In addition, our Scrap Contract which generated 27.6% of our revenue and 23.5% of our gross merchandise volume for the fiscal year ended September 30, 2007, grew 40.0% from fiscal year ended September 30, 2006. The growth of our commercial and scrap businesses was partially offset by a 19.6% decrease in our surplus business from fiscal year ended September 30, 2007 compared to fiscal year ended September 30, 2006. We also benefited from our ability to more effectively market assets to potential buyers as we gained transaction experience and industry knowledge in the vertical product segments auctioned through our marketplaces. Our marketing efforts resulted in an approximate 30.7% increase in registered buyers to approximately 685,000 at September 30, 2007 from approximately 524,000 at September 30, 2006.

Cost of goods sold (excluding amortization). Cost of goods sold (excluding amortization) increased $34.9 million, or 286.9%, to $47.1 million for the year ended September 30, 2007 from $12.2 million for the year ended September 30, 2006. As a percentage of revenue, cost of goods sold (excluding amortization) increased to 23.7% in fiscal 2007 compared to 8.2% in fiscal 2006. These increases are primarily due to an increase in revenue, as well as, an increase in the number of goods sold in our marketplace from sellers utilizing our purchase model.

Profit-sharing distributions. Profit-sharing distributions decreased $10.6 million, or 13.2%, to $69.6 million for the year ended September 30, 2007 from $80.2 million for the year ended September 30, 2006. As a percentage of revenue, profit-sharing distributions decreased to 35.1% in fiscal 2007 from 54.3% in fiscal 2006. These decreases are a result of faster growth in our commercial business, where most of our sellers do not use the profit-sharing model, as well as a decrease in the amount of profits we are required to pay the DoD under our Surplus and Scrap Contracts, which were modified on September 12, 2006 and May 21, 2007, respectively. A detailed discussion of the Contract modifications can be found above under "Our Seller Agreements."

Technology and operations expenses. Technology and operations expenses increased $13.3 million, or 66.4%, to $33.4 million for the year ended September 30, 2007 from $20.1 million for the year ended September 30, 2006. As a percentage of revenue, these expenses increased to 16.8% in fiscal 2007 from 13.6% in fiscal 2006. These increases were primarily due to the addition of 81 technology and operations personnel the majority of whom were needed to support the increased volume of transactions and merchandise discussed above for our commercial business and an additional 49 operating personnel, who were needed to support our inventory assurance program under the Surplus Contract in conjunction with the contract modification on September 12, 2006. We are also experiencing less than optimal utilization of our distribution center network, where we have invested over the last 12 months to support continued growth in our commercial business.

Sales and marketing expenses. Sales and marketing expenses increased $4.3 million, or 49.0%, to $13.2 million for the year ended September 30, 2007 from $8.9 million for the year ended September 30, 2006. As a percentage of revenue, these expenses increased to 6.6% in fiscal 2007 from 6.0% in fiscal 2006. These increases were primarily due to hiring of 20 additional sales and marketing personnel and $1.4 million in increased expenditures on marketing and promotional activities across our marketplaces.

General and administrative expenses. General and administrative expenses increased $4.8 million, or 40.0%, to $16.9 million for the year ended September 30, 2007 from $12.1 million for the year ended September 30, 2006. As a percentage of revenue, these expenses increased to 8.5% in fiscal 2007 from 8.2% in fiscal 2006. These increases were primarily due to (1) costs of $2.6 million related to additional accounting, legal, insurance, compliance and other expenses needed to support our growth and the requirements of being a public company, (2) expenses of $0.8 million related to the adoption of Statement 123(R) and (3) costs of $0.5 million for travel-related expenses associated with business development efforts.

Amortization of contract intangibles. Amortization of contract intangibles was consistent at $0.8 million for the year ended September 30, 2007 and 2006, as a result of our DoD scrap contract award during June 2005. This contract required us to purchase the rights to operate the scrap operations of the DoD during the seven year base term of the contract. The intangible asset created from the $5.7 million purchase is being amortized over 84 months on a straight line basis, which began in August 2005.

Depreciation and amortization expenses. Depreciation and amortization expenses increased $0.6 million, or 79.1%, to $1.3 million for the year ended September 30, 2007 from $0.7 million for the year ended September 30, 2006. This increase was due primarily to additional depreciation expense resulting from the purchase of $2.0 million of property and equipment during fiscal year ended September 30, 2006.

Interest income and expense and other income, net. Interest income and expense and other income, net increased $1.8 million, or 405.5%, to $2.2 million for the year ended September 30, 2007 from $0.4 million for the year ended September 30, 2006. This increase is a result of the repayment in February 2006 of the $2.4 million indebtedness associated with our senior credit facility as well as our $2.0 million subordinated note payable, following the completion of our initial public offering, and investing the remaining proceeds from our initial public offering.

Provision for income tax expense. Income tax expense increased $2.2 million, or 40.9%, to $7.5 million for the year ended September 30, 2007 from $5.3 million for the year ended September 30, 2006, primarily due to the increase in income before provision for income taxes.

Net income. Net income increased $3.0 million, or 38.1%, to $11.0 million for the year ended September 30, 2007 from $8.0 million for the year ended September 30, 2006. This increase was due to the result of our growth in gross merchandise volume. As a percentage of revenue, net income was consistent at 5.5% for the year ended September 30, 2007 and 5.4% for the year ended September 30, 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007



Revenue. Revenue increased $13.5 million, or 27.5%, to $62.8 million for the three months ended March 31, 2008 from $49.3 million for the three months ended March 31, 2007, primarily due to an increase in the number of completed transactions, which increased from approximately 52,000 to 91,000, or 73.6%. The amount of gross merchandise volume increased $28.2 million, or 47.1%, to $88.2 million for the three months ended March 31, 2008 from $60.0 million for the three months ended March 31, 2007, primarily due to (1) our scrap business, which generated 29.1% of our revenue and 20.7% of our gross merchandise volume for the three months ended March 31, 2008, grew 33.2%; (2) our surplus business, which generated 33.5% of our revenue and 23.9% of our gross merchandise volume for the three months ended March 31, 2008, grew 37.8%; and (3) the acquisition of GovDeals completed on January 1, 2008, which generated 1.8% of our revenue and 18.0% of our gross merchandise volume for the three months ended March 31, 2008. We also benefited from our ability to more effectively market assets to potential buyers; our marketing efforts resulted in an approximate 45.6% increase in registered buyers to approximately 892,000 at March 31, 2008 from approximately 613,000 at March 31, 2007, including GovDeals.



Cost of goods sold (excluding amortization). Cost of goods sold (excluding amortization) increased $4.7 million, or 40.1%, to $16.2 million for the three months ended March 31, 2008 from $11.5 million for the three months ended March 31, 2007. As a percentage of revenue, cost of goods sold (excluding amortization) increased to 25.7% from 23.4%. These increases are primarily due to (1) an increase in the volume of goods sold by existing sellers utilizing our purchase model; (2) a ramp up in volume with existing sales programs which resulted in lower inventory turnover; and (3) a mix shift to apparel items, which realized a lower margin during the three months ended March 31, 2008.



Profit-sharing distributions. Profit-sharing distributions increased $4.7 million, or 26.5%, to $22.6 million for the three months ended March 31, 2008 from $17.9 million for the three months ended March 31, 2007, primarily due to 37.8% growth in our surplus business and 33.2% growth in our scrap business. As a percentage of revenue, profit-sharing distributions decreased to 36.0% from 36.3%, primarily due to a decrease in the amount of profits we are required to pay the DoD under our Surplus Contract, which was modified on September 12, 2006, as well as the Scrap Contract, which was modified on June 1, 2007. A detailed discussion of the Surplus and Scrap Contract modifications can be found above under “Our Seller Agreements.”

Technology and operations expenses. Technology and operations expenses increased $1.9 million, or 22.7%, to $10.3 million for the three months ended March 31, 2008 from $8.4 million for the three months ended March 31, 2007, primarily due to (1) the addition of 71 technology and operations personnel, the majority of whom were needed to support the increased volume of transactions and merchandise discussed above; (2) an additional 30 operating personnel, who were needed to support our inventory assurance program under the Surplus Contract; and (3) the acquisition of GovDeals, which was completed on January 1, 2008. As a percentage of revenue, these expenses decreased to 16.4% from 17.1%, primarily due to our growth in revenue, while leveraging our fixed expenses, such as programming personnel.



Sales and marketing expenses. Sales and marketing expenses increased $0.7 million, or 21.5%, to $3.9 million for the three months ended March 31, 2008 from $3.2 million for the three months ended March 31, 2007, primarily due to (1) our hiring of 14 additional sales and marketing personnel; (2) $0.4 million in increased expenditures on marketing and promotional activities across our marketplaces; and (3) the acquisition of GovDeals, which was completed on January 1, 2008. As a percentage of revenue, these expenses decreased to 6.2% from 6.6%, primarily due to our growth in revenue, while leveraging our fixed expenses, such as marketing personnel.



General and administrative expenses. General and administrative expenses increased $1.3 million, or 30.2%, to $5.3 million for the three months ended March 31, 2008 from $4.0 million for the three months ended March 31, 2007. As a percentage of revenue, these expenses increased to 8.4% from 8.2%. These increases are primarily due to (1) costs of $0.2 million related to additional accounting, legal, insurance, compliance and other expenses needed to support our growth; (2) expenses of $0.3 million related to the adoption of Statement 123(R); (3) costs of $0.1 million for travel related expenses associated with business development efforts; and (4) expenses of $0.2 million associated with GovDeals, which was acquired on January 1, 2008.



Amortization of contract intangibles. Amortization of contract intangibles was $0.2 million for the three months ended March 31, 2008 and 2007, as a result of our DoD Scrap Contract award during June 2005. This contract required us to purchase the rights to operate the scrap operations of the DoD during the seven-year base term of the contract. The intangible asset created from the $5.7 million purchase is being amortized on a straight-line basis over 84 months, which began in August 2005.



Depreciation and amortization expenses. Depreciation and amortization expenses increased $0.2 million, or 50.5%, to $0.5 million for the three months ended March 31, 2008 from $0.3 million for the three months ended March 31, 2007, primarily due to additional depreciation expense resulting from the purchase of $2.7 million of property and equipment during the fiscal year ended September 30, 2007.



Interest income and expense and other income, net. Interest income and expense and other income, net was consistent at $0.6 million for the three months ended March 31, 2008 and 2007.



Provision for income tax expense. Income tax expense increased $0.2 million, or 6.7%, to $1.9 million for the three months ended March 31, 2008 from $1.7 million for the three months ended March 31, 2007, primarily due to the increase in income before provision for income taxes.



Net income. Net income increased $0.1 million, or 7.0%, to $2.6 million for the three months ended March 31, 2008 from $2.5 million for the three months ended March 31, 2007.

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