|   | **UNITED  STATES**                       | OMB APPROVAL                                                                                                        |
|--------|------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|   | **SECURITIES  AND EXCHANGE  COMMISSION** | OMB Number: 3235-0063  Expires: January 31,  2008  Estimated average burden hours per response.. 2,196.00 |
|   | **Washington,  D.C. 20549**              |
|   | **FORM 10-K**                            |

 

**(MarkOne)**
| **x**                                                | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                 |       |                                                                                                    |
| **For the fiscal year ended December 31, 2006** |
| ** **                                           | ** ** | ** **                                                                                              |
| ** **                                           | ** ** | **or**                                                                                                  |
|                                                 |       |                                                                                                    |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                  to                  **

**Commissionfile Number  000-51257**

**BIDZ.com, Inc.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                    |   | **95-4728109**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| State or other  jurisdiction of   incorporation or organization |   | (I.R.S. Employer    Identification No.) |
|                                                            |   |                                    |
| **3562  Eastham Drive, Culver City, California**                |   | **90232**                               |
| (Address of  principal executive offices)                       |   | (Zip Code)                              |

 

Registrant’s telephonenumber, including area code      **(310) 280-7373**

Securities registered pursuantto Section 12(b) of the Act:  **None**
| Title of each class | ** ** | **Name of each exchange on which registered** |
|---------------------|------------|-----------------------------------------------|
| ** **          | ** ** | ** **                                    |

 

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, $.001 par value**

(Title of class)

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. 
|  | o  YES | x  NO |
|--|------------------|-----------------|

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. 
|  | o  YES | x  NO |
|--|------------------|-----------------|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
|  | x  YES | o  NO |
|--|------------------|-----------------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements 
| incorporated by reference in Part III of this  Form 10-K or any amendment to this Form 10-K | o   |
|------------------------------------------------------------------------------------------------------------|---------------|

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer  o | Accelerated filer   o | Non-accelerated filer  x |
|--------------------------------------|---------------------------------|------------------------------------|

 
| Indicate by check mark  whether the registrant is a shell company (as defined in Rule 12b-2 of  the Act). | o  YES | x  NO |
|----------------------------------------------------------------------------------------------------------------|------------------|-----------------|

 

The aggregatemarket value of the voting stock held by non-affiliates of the registrant basedupon the price at which the common stock was last sold was approximately$63,173,000. For purposes hereof, directors, executive officers and 10% orgreater shareholders have been deemed affiliates.  This determination ofaffiliate status is not necessarily a conclusive determination for otherspurposes.

The number ofshares outstanding of the registrant’s common stock was 23.252,654 as of March12, 2007.

DOCUMENTSINCORPORATED BY REFERENCE

Information requiredby Part III (Items 10, 11, 12, 13 and 14) is incorporated byreference to portions of our definitive proxy statement for our 2007 AnnualMeeting of Stockholders, which will be filed with the Securities and ExchangeCommission within 120 days of December 31, 2006.

 

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**BIDZ.COM, INC.**

**ANNUAL REPORT ON FORM 10-K FORTHE FISCAL YEAR ENDED DECEMBER 31, 2006**

Table ofContents
|                                                                                                                             | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                        |       |     |
|                                                                                                                        |       |     |
| PART I                                                                                                                 |       | 1        |
| Item  1. Business                                                                                                           |       | 1        |
| Item  1A. Risk Factors                                                                                                      |       | 13       |
| Item 1B.Unresolved  Staff Comments                                                                                          |       | 25       |
| Item  2. Properties                                                                                                         |       | 25       |
| Items  3. Legal Proceedings                                                                                                 |       | 25       |
| Item 4.  Submission of Matter to a Vote of Securities Holders                                                               |       | 25       |
|                                                                                                                        |       |     |
| PART II                                                                                                                |       | 26       |
| Item 5. Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 26       |
| Item 6. Selected  Financial data                                                                                            |       | 29       |
| Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                        |       | 30       |
| Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                                                        |       | 40       |
| Item 8.  Financial Statements and Supplementary Data                                                                        |       | 40       |
| Item 9. Changes  in and Disagreements With Accounting on Accounting and Financial Disclosure                                |       | 40       |
| Item 9A. Controls  and Procedures                                                                                           |       | 40       |
| Item  9B. Other Information                                                                                                 |       | 40       |
|                                                                                                                        |       |     |
| PART III                                                                                                               |       | 41       |
| Item 10.  Directors and Executive Officers of the Registrant                                                                |       | 41       |
| Item 11. Executive  Compensation                                                                                            |       | 41       |
| Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                   |       | 41       |
| Item 13.  Certain Relationships and Related Transactions                                                                    |       | 41       |
| Item 14.  Principal Accounting Fees and Services                                                                            |       | 41       |
|                                                                                                                        |       |     |
| PART IV                                                                                                                     |       | 41       |
| Item 15.  Exhibits and Financial Statement Schedules                                                                        |       | 41       |

 

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**Part I**

**Item1.**           Business

**Overview**

We area leading online retailer of jewelry, featuring a live auction format. We haveestablished our retail brand in the online marketplace by offering high-qualitymerchandise, a unique user-friendly shopping experience, and the opportunityfor buyers to achieve significant cost savings versus traditional retailchannels. A key to our success has been our ability to efficiently andeffectively source jewelry merchandise and rapidly respond to changing consumerdemands for certain jewelry. We offer our products through a continuous liveformat, featuring “no reserve” auctions, a $1 minimum opening bid, and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. The majority of our auctions are short-term, oftenlasting less than one hour, providing immediate gratification to our customersand encouraging frequent visits and active viewing of our website. Our productinventory includes gold, platinum, and silver jewelry set with diamonds,rubies, emeralds, sapphires, and other precious and semi-precious stones; andwatches. We offer to sell products through our website at *www.bidz.com.*

We sell to consumerslooking for reliable bargains on jewelry. Because we purchase and retain all ofour jewelry inventory onsite, we can provide our customers with timely serviceand delivery of their purchases. In addition, each item is inspected by one ofour trained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weprovide a trustworthy and secure buying environment with a 15-day return policyon all merchandise. We believe that some of our customers are resellersintending to sell our goods in secondary markets, such as on eBay, at localauctions, and through other retail channels. These resellers have theopportunity to purchase products at lower prices than they would receive frommanufacturers or other distributors. Our auctions are conducted 24 hours aday, seven days a week. We also offer daily telephone customer support forpayments, 24-hour live-help and e-mail customer support.

The following aspects ofour innovative auction model differentiate us from other auction websites:

·                  a $1 minimum bidformat with no reserve,

·                  interactiveauctions with 15-second time extensions for all auctions each time a bid isreceived within 15 seconds of termination of the auction, and

·                  short-termauctions, often lasting less than one hour, providing our customers immediategratification to encourage frequent visits and active viewing of our website.

There is no charge to apotential buyer for registering on our website or placing bids. Buyers haveaccess to a broad selection of items without expensive additional markups orcommissions to intermediaries. Our website offers detailed product information,including photographs of our merchandise. Our website also provides a dynamicdisplay of auto-refreshing screens, enabling our customers to follow ourin-progress auctions in real-time. Successful bidders are automaticallynotified when an auction is completed. To assist users further, we offercustomer support via phone, live-help and e-mail seven days a week. We providea mechanism for our customers to provide comments and feedback on their biddingand purchasing experience.

We purchase jewelryinventory directly from manufacturers and liquidators. We also closely monitorour sales trends to assess consumer demand for certain jewelry styles andcategories and purchase such non-closeout inventory directly frommanufacturers. We have eliminated various inefficiencies and mark-upsassociated with traditional intermediaries in the jewelry market. Our sourcingmodel provides a critical alternative liquidation channel for manufacturers,for which disposal of closeout inventory represents a significant challenge. Wehave the flexibility to purchase a variety of lot sizes, and our centralizedwarehouse and fulfillment center enables our suppliers to ship their productsto a single location, easing the burden on their infrastructures. We havedeveloped a database of product descriptions and pictures that enables usrapidly to post inventory for sale. In addition, we

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closely monitor sales andgross margin trends of our products on a daily basis, allowing us to selectcarefully additional products for purchase and adjust supplier pricing asnecessary.

We also maintain aCertified Merchant Program, which allows independent online merchants to sellon our auction website a variety of goods, such as art and collectibles. Itemssold through our Certified Merchant program represented less than 1% of our netrevenue in 2006.

**History**

Wecommenced operations in early 1998 by offering a limited selection ofmerchandise for sale on eBay’s website through our predecessor, Asset Lendersof America, a group of 11 collateral lending stores. In the fall of 1998, weformed Bidz.com, Inc., acquired Asset Lenders of America, and purchasedthe domain name *www.bidz.com*. InFebruary 1999, we launched the *www.bidz.com*website and began offering closeout jewelry through our auctionformat. In November 1999, we merged Asset Lenders of America into ourcompany.

**Industry Overview**

**Growth of Online Commerce and theOnline Auction Market**

TheInternet’s development into a significant global medium for communication,content, and commerce has led to substantial growth in online shopping and hasprovided online retailers with new opportunities to eliminate intermediariesfrom the traditional retail supply chain. Internet usage and online commercecontinue to grow worldwide. The growth can be attributed to factors such as anincreased awareness of the convenience of online shopping, an expanded range ofproducts available online, improvements in security and electronic paymenttechnology, and increased access to broadband Internet connections facilitatingonline shopping.

Onlineauction sites have created a robust global marketplace, which overcomes theinefficiencies associated with traditional auction purchasing while offeringthe benefits of online commerce. Companies such as eBay spearheaded thecreation of a centralized online auction market, offering buyers asignificantly broader selection of goods to purchase. Today, online auctionsites offer significant convenience, allowing trading at all hours andproviding continually updated product offerings. By leveraging the interactivenature of the Internet, our website also enables customers to experience theexcitement of live auctions, including the competitive bidding process.

**The Jewelry Market**

Jewelry is designed andmanufactured by a large number of manufacturers, generally with smalloperations. Jewelry manufacturers sell to a variety of wholesalers,distributors, and retailers. Jewelry in turn is sold to consumers through avariety of jewelry stores. The U.S. jewelry retail market consists primarily ofsmall, independent stores, regional operators, and a limited number of nationalretail chains, such as Tiffany & Co., Zales, and Kay Jewelers.Multi-line department and discount stores and others also sell jewelry, such asWal-Mart, Target, J. C. Penney, and Costco, as well as enterprises such as QVCand Home Shopping Network. Despite the presence of major jewelry retail chains,a majority of the jewelry retail business remains fragmented.

Manufacturerstraditionally hold inventory to buffer against uncertain demand within theirnormal, offline sales channels. Manufacturers’ primary distribution channelsconsist of regular sales to major established retailers at wholesale prices andsales to wholesalers that service smaller retail chains. In recent years,several dynamics have shifted inventory risk from retailers to manufacturers,including the following:

dominant retailers insisting on just-in-time deliveries from manufacturers;

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dominant retailers often demanding to cancel orders mid-production andreturning unsold merchandise;

rapid changes in style, color, or models, turning inventory intocloseout merchandise;

incorrect estimates of consumer demand leading to overproduction; and

changes in a retailer’s financial situation or strategy resulting incancelled orders.

Disposal of closeoutjewelry represents a significant challenge for many manufacturers andliquidators. Manufacturers often use multiple channels, such as catalogs,resellers, liquidators, and small retailers, to sell their closeout jewelryinventory as a result of the wide variety in lot size of their products.Multiple channels create additional logistical burdens and reduce the controlof manufacturers over distribution.

Manufacturers are oftenrequired to adhere to delivery and quantity specifications. If a manufacturerdoes not meet required delivery schedules or specifications, or products areunsold, the products may be returned to the manufacturer. In both cases,manufacturers rarely meet their costs on their closeout products. Manufacturersoften opt to melt down the jewelry into its component parts and reconstructjewelry pieces with current season styles. The melt-down process is difficult,requires skilled labor, and results in a very low return on manufacturingcosts.

**Our Value Proposition**

*Valueto Buyers*

Through online auctionson our website, we believe that we offer value to a broad range of customers byproviding the following:

***Bargain prices.     ***The price of allour products is dictated by the buyer alone based on that buyer’s valuation ofthe product. Therefore, many items offered on our website are sold at asubstantial discount to the prices in traditional retail channels, such as atjewelry stores located in shopping malls. Our $1 minimum bid policy allows thesavvy or lucky consumer the potential to purchase any product being auctionedfor only $1, offering even greater value to the consumer. Regardless of theclosing price, once an auction is closed, the final bidder will receive theproduct. We also offer an auto-bidding option under which customers may pre-bidfor a product.

***Entertainingauction format.***    We offer ourcustomers the excitement of winning an item that may not be available in thefuture. We offer short-term, live auctions, many lasting less than one hour,providing our customers an alternative to the traditional, longer auctionformat. We believe the shorter time frame of our auctions encourages repeatvisits and active viewing of our website.

***Broad productselection.***    We offer a broadselection of jewelry, including rings, necklaces, earrings, bracelets, jewelrysets, and watches. Our selection includes gold and silver jewelry, as well asjewelry with precious and semi-precious stones. We also sell individual andsets of gemstones.

***Product qualityassurance.***    We provide detailedand accurate descriptions of each product. Our trained product specialistsinspect our jewelry, utilizing the Gemological Institute of America Diamond andColored Stone Grading System prior to posting on our website for auction. Weguarantee the quality of our products through our 15-day return policy on allof our merchandise with a money-back guarantee if the product is not asdescribed on our website. Items that are returned that are identical to theirdescription are subject to a restocking fee, which is 15% of the originalpurchase price. Shipping fees are non-refundable. Our commitment to quality andproduct description accuracy is demonstrated by consistently low return rateson our items, which were approximately 3% of all items sold in 2006.

***Prompt fulfillmentand responsive customer service.***    Wemaintain in inventory all the products we offer on our website, enabling us toensure prompt order fulfillment and delivery to our customers. Our customerservice

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representatives are available seven days a week, via live-help ande-mail, and are trained to provide assistance and answer a broad range ofquestions regarding payment, delivery, and other matters.

***Positive shoppingexperience.***    Our easy-to-navigatewebsite provides our customers with clear and detailed information about ourproducts, including multiple photographs of many items. Customers can bid onour products 24 hours a day, seven days a week. Buyers are provided a five-daypayment grace period on all products purchased.

*Valueto Suppliers*

Jewelry manufacturerscontinually look for a cost-effective, efficient way to sell their regular andcloseout inventory. Our ability to purchase jewelry in various quantitiesprovides a critical one-stop inventory clearance alternative for manufacturersand an efficient sales channel for liquidators that purchase closeout inventoryfrom manufacturers.

***Single source forproduct disposition:***    Unlike manymulti-store retail chains that often require large lot purchases to stockappropriate levels of inventory at their multiple locations, we have theflexibility to buy and sell both small and large jewelry lots in a highlyefficient manner. As a single source for the sale of regular and closeoutjewelry products, we provide suppliers with greater control of distribution byreducing the need to spread products across multiple channels. In addition,manufacturers and liquidators are often required to adhere to stringent productquantity and delivery schedule requirements. Products not delivered on time orin exact amounts are returned. We have the flexibility to tailor our purchasingto a supplier’s needs with regard to quantity, variety, and timing.

***Resolution ofchannel conflict:***    Manufacturersseek to avoid liquidating their products through traditional retail channels inwhich their discounted products may be sold alongside their full-priceproducts. Such side-by-side selling can result in weaker pricing and decreasedbrand strength, which is known as channel conflict or sales channel pollution.As a result, many manufacturers turn to liquidation wholesalers and discountretailers. These liquidation channels, however, provide manufacturers limitedcontrol over distribution and are unreliable and expensive to manage. Becausewe offer an alternate online distribution channel that focuses on the sale ofjewelry, our suppliers are able to sell their discounted jewelry independentlyof their full-priced products. We believe this enables our suppliers to avoidcustomer confusion and potential loss of sales of their full-priced jewelryproducts.

***Profitablealternative for suppliers:***    Weeliminate the various inefficiencies and mark-ups associated with traditionalintermediaries, and our high volume of sales from a single location provides uswith favorable inventory turnover and lower inventory carrying and handlingcosts versus traditional jewelry retailers.

**GrowthStrategy**

Our objective is to becomethe leading online jewelry retailer. We intend to achieve this objectivethrough the following strategies:

***Expanding ourcustomer base***by maintaining and expanding ourrelationships with third-party search engines, Internet portals, and websitesand by increasing our online advertising expenditures within these channels;

***Enhancing sourcingrelationships***by expanding the number of suppliers fromwhich we opportunistically purchase regular and closeout inventory, therebyassuring consistent availability of a wide variety of designs and styles ofjewelry, and purchasing for cash from suppliers that do not extend credit termsand to obtain better supplier pricing;

***Increasing thebreadth and depth of our product offerings***by increasingavailable inventory within specific jewelry categories, allowing us to makemore jewelry categories available and enabling us to list more auction items ona daily basis; and

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***Focusing on newinternational markets***by expanding into and creating astrong presence in a number of English-speaking countries, including the UnitedKingdom, Canada, Australia, Ireland, and New Zealand, and introducing foreignlanguage versions of our website for certain international markets.

**Marketing**

Our marketing strategy isdesigned to generate consumer traffic by increasing awareness of our websiteand recognition of our brand, building a loyal buyer base, and maximizingrepeat purchases. Our website has experienced substantial growth in users andbuyers, as evidenced through data compiled by us through the measurement toolson our website.

Our marketing andadvertising efforts consist primarily of the following initiatives:

***Searchmarketing:    ***We purchase searchengine advertising primarily at an auction based price, which is paid each timea potential customer clicks on one of our advertisements. We currently maintainadvertising relationships with, among others, Google (US, UK, Australia,Canada, European Union, South East Asia, Mid East and South America), YahooOverture (US, UK and Australia), Looksmart USA and MIVA for search engineadvertising.

***Online bannermarketing:***    We utilize banneradvertisements and product data feeds from the largest banner advertisingchannels. We focus on contextual and behavioral advertisements that appear onwebsites related to jewelry, fashion, shopping and women’s lifestyle. TheCompany maintains portal advertising relationships with Yahoo, MSN, CasaleMedia, Advertising.com, ValueClick Media, Tribal Fusion and others. Thefee structure for our purchase of banner advertisements is based on a set pricefor an action (such as clicks or new buyers), or on a cost per thousand basis,for which we pay a set fee per thousand banner advertisements that appear onthe selected websites.

***E-mail campaigns:***    Weutilize an electronic direct marketing program to encourage prospectactivation, customer referrals, customer retention, repeat purchases andcustomer acquisition. This program includes permission-based e-mail marketingto visitors who indicate a desire to continue to receive productrecommendations and promotional discounts. We purchase e-mail direct marketingfor a set fee per thousand e-mails sent or for each new lead from websites andmarketing agencies that meet our policies against spamming. We also purchase ona cost per action basis such as clicks, new registration users and new buyers.

***Affiliate programs:***    We attract customers byparticipating in affiliate programs. Our affiliate programs offer other websiteoperators an opportunity to earn commissions by providing their visitors accessto our website. We use Link Share for our U.S. and U.K. programs and CommissionJunction for our European affiliate programs. We also work with several otherAffiliate Networks including Azoogle, Hydra Media and CPA Empire. In so doing,we intend to extend the reach of our website and draw customers from a varietyof other websites. By participating in our affiliate programs, websitepublishers earn volume-based commissions by directing customers to our website.

**SourcingStrategy**

We purchase closeoutinventory directly from manufacturers and liquidators. We also closely monitorour sales trends to assess consumer demand for certain jewelry styles andcategories and purchase regular jewelry inventory directly from manufacturers.We have eliminated various inefficiencies and mark-ups associated withtraditional intermediaries in the jewelry market. Our sourcing model provides acritical alternative liquidation channel for

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manufacturers, for whichdisposal of closeout inventory represents a significant challenge. We have theflexibility to purchase a variety of lot sizes, and our centralized warehouseand fulfillment center enables our suppliers to ship their products to a singlelocation, easing the burden on their infrastructure. We have developed adatabase of product descriptions and pictures that enables us rapidly to postinventory for sale. In addition, we closely monitor sales and gross margintrends of our products on a daily basis, allowing us to select carefully additionalproducts for purchase and adjust supplier pricing as necessary.

We identify manufacturersand liquidators with high-value products by capitalizing on our extensiveexperience in the jewelry industry. Our jewelry sourcing model capitalizes onour close industry relationships to avoid several layers of supply chainintermediaries and the mark-ups associated with additional intermediaries. Weclosely monitor the historical sales trends of our products on a daily basis.

We do not have any supplyarrangements with our suppliers to purchase jewelry on favorable terms andconditions. We do not have any formal or binding supply agreements with any ofour suppliers, manufacturers, distributors, or other suppliers. We purchase andcarry in inventory all of the products we offer for sale to ensure availabilityand expedited delivery. Currently, we acquire inventories from our suppliers ona revolving credit basis, with payment typically due within 60 days. In aneffort to achieve cost efficiencies and a more diverse supplier base, we havestarted to acquire substantially more products on a cash basis. This strategywill allow for more flexibility with respect to product selection, reduce ourproduct costs, and enlarge our supply relationships by allowing us to purchasefrom vendors that do not extend credit to their customers.

In 2006, we startedpurchasing loose diamonds and semi-previous stones and delivering them tomanufacturers to produce into finished jewelry inventory. This allows us toreduce our product costs and this source of inventory is expected to grow infuture periods.

**Merchandising Strategy**

We seekto maintain profitability while providing variety and value to our customers bycarefully selecting the types of products we post on our website at any giventime, the duration of the auction for each item, and the frequency with whichwe repost comparable items after sales. We actively monitor our auctions andsales so that we are able to adjust continually the makeup and quantity ofgoods on our website at any given time. Since bids on all company-ownedmerchandise start at $1, losses are incurred on approximately 15% to 25% of theitems sold on an annual basis. The risks associated with a $1 minimum bidauction are mitigated by profits generated from items sold at a gain, whichresulted in an overall 23.7% gross profit margin in 2006.

We postmore expensive items with longer auction durations, typically running for twoto three days, allowing customers to peruse the piece and make thoughtfuldecisions. Less expensive items are selected for shorter auctions, typicallyrunning for an hour or less, creating more excitement for the product andproviding the customer with more immediate gratification. Items purchased inbulk are slotted for posting sequentially so that all items simultaneouslyposted on our website are unique.

**Certified Merchant Program**

We created the Certified Merchant Program toprovide our customers the opportunity to purchase products beyond just those inour inventory.  Online auctions offer merchantsthe ability to minimize their risk of price erosion on unsold products.  This opportunity has created great interestin our Certified Merchant Program.  Weensure that the same value and reliability we provide to our customers is alsoprovided by our Certified Merchants through a comprehensive application processand continued monitoring of Certified Merchants participating in the program.

All prospective program participants mustcomplete an on-line application and is required to provide a list of referencesand a copies of both a business and a reseller license. Additionally, eachapplicant must submit a valid credit card to be kept on file at our offices. Wereview each application and contact references for each applicant.  We also conduct background checks of eachapplicant through Dunn & Bradstreet or the Better Business Bureau.

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If selected to participate in the CertifiedMerchant Program, the Certified Merchant must agree to comply with our rules,policies and regulations.  All CertifiedMerchant products listed on our website must be in stock and available forimmediate shipment. All Certified Merchants must offer a 15-day money backguarantee on all products listed on our website. We manage and monitorcompliance of our Certified Merchants through customer complaints and verifyall complaints immediately.  We have a “NoTolerance” rule for unethical activities, or any activities that violate theconsumers’ trust.  At our discretion, ifany Certified Merchant engages in activity unacceptable to us, such CertifiedMerchant’s products will be immediately removed from our website and theCertified Merchant will no longer be permitted to participate in our program.

If a customer bids on and wins a product onour website listed by a Certified Merchant, the customer will purchase theproduct not through our website but by making the payment directly to theCertified Merchant. The Certified Merchant is expected to ship the purchasedproduct to the customer within 7 days of receipt of the payment.

As of December 31, 2006, we haveapproximately 40 Certified Merchants. We maintain only the larger CertifiedMerchants and discontinued business with smaller merchants.  From April 2006, most Certified Merchants areallowed to sell without a fee to us. This is intended to attract good CertifiedMerchants and provide a greater variety of products on our website. We intendto expand our Certified Merchant Program by creating relationships with leadingestablished retailers of electronics, hard to find collectibles, and otherproducts.

**TechnologyOperations**

Both our website userinterface and back-office transaction processing systems are internallydeveloped. This proprietary system maintains records for our registered users,sales invoicing and cash receipts, auction transactions, inventory control, andhistorical transaction data. Our system handles all aspects of the auctionprocess, including notifying users via e-mail of auction status.

Our system architectureis built on industry-standard platforms that are designed to provide continuousservice 24 hours a day, 365 days per year. Our website servers arelocated at a third-party co-location facility operated by AlchemyCommunications in downtown Los Angeles. Alchemy provides redundant web-facingcommunications lines and emergency power backup. The back-office processingsystem is housed in our headquarters in Culver City and communicates withAlchemy over three independent T1 lines. These systems include both PostgreSQLand Microsoft SQL database engines operating in a multi-processing Linuxenvironment designed to accommodate large volumes of online traffic and areconfigured for high fault tolerance with redundancy and load balancing. OurInternet servers utilize VeriSign Inc. digital certificates to provide securewebsite communications for sales and payment transactions.

We are currently planningto scale up our auction system infrastructure to enable systems operations toperform at greater capacity and develop a second co-location in a differentregion to provide greater load balancing and disaster recovery. We utilize thefirewall protection and the services of TrustWave, which provides regularscanning of our systems for security vulnerabilities.

At December 31,2006, we had a technology and development staff of 17. We have structured thetechnology and development into two distinct departments: software developmentand production support. We anticipate that we will continue to devotesignificant resources to product development and product management in the futureas we add new features and functionality.

**CustomerService and Fulfillment Operations**

An important element ofour sales strategy is to provide a high level of customer service support inorder to establish long-term relationships with our customers and encouragerepeat visits and purchases. Our customer service support staff providesdetailed payment, billing, and delivery guidance and is trained to answer abroad array of questions regarding auctions and payments conducted on ourwebsite. Our informed and helpful staff, together with the informative andeducational aspects of our website, promotes customer confidence in purchasedecisions.

At December 31, 2006, wehad a customer service and billing staff of 21. We utilize automated onlinelive-help, e-mail and phone systems to route traffic to our customer serviceand billing support representatives to provide

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personalized assistance.The customer service center operates between the hours of 8:00 a.m. and5:00 p.m., Pacific time, seven days a week for telephone support and24 hours a day for online live-help and e-mail support. We outsourcesubstantially all of our online live-help and e-mail support.

Customers may utilize thefollowing payment methods: credit card, money orders, and checks. We also offerour customers the opportunity to make payments using PayPal and Bill-Me-Laterservices. We require payment to be received by us prior to shipping themerchandise.

We maintain a fraudprevention department to detect suspect payments. Our internal system flagssuspect payments when the billing address or other pertinent information doesnot match cardholder information. Our fraud department then requests that thecustomer provide additional information to verify identity before shipment ismade.

We provide our customerswith a five-day grace period to pay for products won through auctions. Ifpayment is not received by the fifth day, the purchase order lapses and theproduct is cycled back into inventory. If a customer purchases additional itemsduring the five-day period, we offer the customer the opportunity to save onshipping by aggregating all purchased items into one shipment at a cost of only$3 per additional item for up to 30 items. We also offer free worldwideshipping on selected auction items.

Our goal is to fulfillpurchase orders on a timely, secure, and accurate basis. Following payment, themerchandise is packaged for shipment. We inspect and track each product at allstages of the receiving and order fulfillment process. Customer orders aretypically delivered within seven business days, depending on the shippingmethod. Most purchases are delivered with signature or delivery confirmation.We ship all products via nationally recognized carriers, such as FederalExpress and the U. S. Postal Service. All of our shipments are fully insured.

We have a 15-day returnpolicy on all of our merchandise with a money-back guarantee if the product isnot as described on our website. Items that are returned that are as describedare subject to a 15% restocking fee. Our facility has security controls andrestricted access and has been designed for the prompt receipt, storage, andshipment of our products. In addition, we have security guards on duty24 hours a day, seven days a week to patrol the premises.

**Seasonality**

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter as a result of higher consumer spending during the December holidayshopping season. Approximately 29.3%, 33.9% and 28.5% of our net revenue in 2004,2005 and 2006, respectively, was generated during the fourth quarter. As wecontinue to grow, we expect to experience more pronounced seasonal fluctuationsin our net revenue and anticipate a disproportionate amount of our revenue willbe in the fourth quarter.

**Competition**

The online jewelryauction market is new, rapidly evolving, and intensely competitive withrelatively low barriers to entry, as new competitors can launch websites atrelatively low cost. We believe that competition in the online jewelry marketis based predominantly on the following:

price,

product quality and selection,

vendor reliability,

shopping convenience,

customer service, and

brand recognition.

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We currently compete witha variety of online auction jewelry sellers, such as eBay and uBid; onlineliquidation companies, such as Overstock; and online jewelry retailers, such asBlue Nile. We also compete with traditional offline jewelry retail chains, suchas Zales, Finlay Fine Jewelry, and Reed’s Jewelers, as well as with departmentand discount and other stores that sell jewelry at wholesale prices, such asWal-Mart, Target, J. C. Penney, and Costco, as well as with QVC and HomeShopping Network. We compete primarily on the basis of our prices, theselection of merchandise, and our website functionality and ease-of-use. Thenegative factors relating to our competitive position relate primarily to therelative size and name recognition of our competitors.

As the online regularjewelry and liquidation market grows, we believe that companies involved inonline retail, as well as traditional retailers and liquidation brokers, willincrease their efforts to develop services that compete with our onlineservices. We also face potential competition from online companies not yetfocused on the liquidation market and from retail companies not yet operatingonline.

Many of our competitorshave greater brand recognition, longer operating histories, larger customerbases, and significantly greater financial, marketing, and other resources thanwe do. Smaller competitors may enter into strategic or commercial relationshipswith larger, more established and well-financed companies. Some of ourcompetitors could enter into exclusive distribution arrangements with oursuppliers and deny us access to their products, devote greater resources tomarketing and promotional campaigns, and devote substantially more resources totheir website and systems development than we do. New technologies and thecontinued enhancement of existing technologies also may increase competitivepressures on us.

**Intellectual Property**

Weregard our domain names and similar intellectual property as critical to oursuccess. However, we do not hold any patents or registrations on suchintellectual property. We rely on a combination of laws and contractualrestrictions with our employees, customers, suppliers, affiliates, and othersto establish and protect our proprietary rights. Despite these precautions, itmay be possible for a third party to copy or otherwise obtain and use ourintellectual property without authorization. In addition, others mayindependently develop substantially similar intellectual property. Although weare pursuing the registration of our key trademarks and patents in the UnitedStates, some of our trade names are not eligible to receive trademarkprotection. In addition, effective trademark and patent protection may not beavailable or may not be sought by us in every country in which our products aremade available online.

Fromtime to time, we may be subject to legal proceedings and claims in the ordinarycourse of our business, including claims of alleged infringement of thetrademarks and other intellectual property rights of third parties. Inaddition, litigation may be necessary in the future to enforce our intellectualproperty rights, to protect our trade secrets, or to determine the validity andscope of our intellectual proprietary rights and those of others. Any suchlitigation, regardless of outcome or merit, could result in substantial costsand diversion of management and technical resources, any of which couldmaterially harm our business.

**GovernmentRegulation**

We are subject to federaland state consumer protection laws, including laws protecting the privacy ofconsumer non-public information and regulations prohibiting unfair anddeceptive trade practices. In particular, under federal and state financialprivacy laws and regulations, we must provide notice to consumers of ourpolicies on sharing non-public information with third parties, must provideadvance notice of any changes to our policies and, with limited exceptions,must give consumers the right to prevent sharing of their non-public personalinformation with unaffiliated third parties. Furthermore, the growth and demandfor online commerce could result in more stringent consumer protection lawsthat impose additional compliance burdens on online retailers. These consumerprotection laws could result in substantial compliance costs and couldinterfere with the conduct of our business.

Moreover, there iscurrently great uncertainty in many states whether or how existing lawsgoverning issues such as property ownership, sales and other taxes, and libeland personal privacy apply to the Internet and commercial online retailers.These issues may take years to resolve. For example, tax authorities in anumber of states, as well as a Congressional advisory commission, are currentlyreviewing the appropriate tax treatment of companies engaged in onlinecommerce, and new state tax regulations may subject us to additional statesales and income taxes. New legislation or regulation, the application of lawsand regulations from jurisdictions whose laws do not currently

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apply to our business, orthe application of existing laws and regulations to the Internet and commercialonline services could result in significant additional taxes on our business.These taxes could have an adverse effect on our results of operations.Furthermore, there is a possibility that we may be subject to significant finesor other payments for any past failures to comply with these requirements.

Numerous states andforeign jurisdictions, including California, where our headquarters is located,have regulations regarding how auctions may be conducted and the liability ofauctioneers in conducting such auctions. No final legal determination has beenmade whether the California regulations apply to businesses such as thebusiness we conduct, and little precedent exists in this area. Several statesand some foreign jurisdictions have attempted, and may attempt in the future,to impose such regulations upon companies similar to us and their customers,which could harm our business. Regulatory and licensure claims could result incostly litigation or could require us to change our manner of doing business inways that increase our costs or reduce our revenue or force us to prohibitlistings of certain items for some locations. We could also be subject to finesor other penalties. Any of these outcomes could harm our business.

**Employees**

AtDecember 31, 2006, we had 198 full-time employees. We may utilize part-timeemployees, temporary employees, and independent contractors to respond tofluctuations in our business. None of our employees is covered by a collectivebargaining agreement with us, and we consider our relations with our employeesto be good.

We havean agreement with Administaff, a professional employer organization, to manageall payroll processing, workers’ compensation, health insurance, and otheremployment-related benefits for our employees. Although Administaff processesour payroll and pays our workers’ compensation, health insurance and otheremployment-related benefits, we are responsible for such payments and forcomplying with state and federal employment regulations, as well as allpersonnel management policies and procedures that are maintained byAdministaff. We pay Administaff a fee based on the aggregate salaries paid toour employees for these services.

**DelawareReincorporation**

On June22, 2006 the Company reincorporated in the state of Delaware. In connectionwith our reincorporation in Delaware, we are authorized to issue 100,000,000shares of common stock, $0.001 par value, and 4,000,000 shares of undesignatedpreferred stock, $0.001 par value.

The following discussiondescribes the Delaware Certificate of Incorporation and the Bylaws that wasadopted and is intended to be a summary and does not describe all provisions ofour certificate of incorporation or bylaws or Delaware law that may beapplicable to us. For a more thorough understanding of the terms of our capitalstock, you should refer to our certificate of incorporation and bylaws, whichhave been filed as exhibits to this report.

**CommonStock**

The holders of commonstock are entitled to one vote per share on all matters to be voted upon bystockholders. There will be no cumulative voting. Subject to preferences thatmay be applicable to any outstanding preferred stock, holders of common stockare entitled to receive ratably such dividends as may be declared by our Boardof Directors out of funds legally available for that purpose. In the event ofthe liquidation, dissolution, or winding up of our company, the holders ofcommon stock are entitled to share ratably in all assets remaining afterpayment of liabilities and the liquidation preferences of any outstandingpreferred stock. The common stock has no preemptive or conversion rights, othersubscription rights, or redemption or sinking fund provisions.

**PreferredStock**

Our certificate ofincorporation authorizes our Board of Directors, without any vote or action bythe holders of our common stock, to issue preferred stock from time to time inone or more series. Our Board of Directors are

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authorized to determinethe number of shares and to fix the designations, powers, preferences, and therelative, participating, optional, or other rights of any series of preferredstock. Issuances of preferred stock would be subject to the applicablerules of Nasdaq or other organizations on which our securities are then quotedor listed. Depending upon the terms of preferred stock established by our Boardof Directors, any or all series of preferred stock could have preference overthe common stock with respect to dividends and other distributions and upon ourliquidation. If any shares of preferred stock are issued with voting powers,the voting power of the outstanding common stock would be diluted. No shares ofpreferred stock are presently outstanding, and we have no present intention toissue any shares of preferred stock.

**Anti-TakeoverEffects of Provisions of the Certificate of Incorporation and Bylaws**

*General*

Our Delaware certificateof incorporation, our bylaws, and the DGCL contain certain provisions thatcould delay or make more difficult an acquisition of control of our company notapproved by our Board of Directors, whether by means of a tender offer, openmarket purchases, a proxy contest, or otherwise. These provisions have beenimplemented to enable us, particularly but not exclusively in the initial yearsof our existence as a publicly owned company, to develop our business in amanner that will foster our long-term growth without disruption caused by thethreat of a takeover not deemed by our Board of Directors to be in thebest interests of our company and our stockholders. These provisions could havethe effect of discouraging third parties from making proposals involving anacquisition or change of control of our company even if such a proposal, ifmade, might be considered desirable by a majority of our stockholders. Theseprovisions may also have the effect of making it more difficult for thirdparties to cause the replacement of our Board of Directors or our currentmanagement without the concurrence of our Board of Directors.

There is set forth belowa description of the provisions contained in our Delaware certificate ofincorporation and bylaws and the DGCL that could impede or delay an acquisitionof control of our company that our Board of Directors has not approved. Thisdescription is intended as a summary only and is qualified in its entirety byreference to our certificate of incorporation and bylaws, which are included asexhibits to this report, as well as the DGCL.

*Authorizedbut Unissued Preferred Stock*

Our certificate ofincorporation authorizes our Board of Directors to issue one or more series ofpreferred stock and to determine, with respect to any series of preferredstock, the terms and rights of such series without any further vote or actionby our stockholders. The existence of authorized but unissued shares ofpreferred stock may enable our Board of Directors to render more difficult ordiscourage an attempt to obtain control of our company by means of a proxycontest, tender offer, or other extraordinary transaction. Any issuance of preferredstock with voting and conversion rights may adversely affect the voting powerof the holders of common stock, including the loss of voting control to others.The existence of authorized but unissued shares of preferred stock will alsoenable our Board of Directors, without stockholder approval, to adopt a “poisonpill” takeover defense mechanism. We have no present plans to issue any sharesof preferred stock.

*Numberof Directors; Removal; Filling Vacancies*

Our certificate ofincorporation and bylaws provides that the number of directors shall be fixedonly by resolution of our Board of Directors from time to time. Our certificateof incorporation provides that directors may be removed by stockholders forcause by the affirmative vote of a majority of the shares entitled to vote.Delaware law provides that vacancies on the Board of Directors may be filledonly by a majority vote of the remaining directors or by the sole remainingdirector.

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*ClassifiedBoard*

Our certificate ofincorporation provides for our board to be divided into three classes, asnearly equal in number as possible, serving staggered terms. Approximatelyone-third of our board will be elected each year. See “Management—Board ofDirectors.” The provision for a classified board could prevent a party whoacquires control of a majority of our outstanding common stock from obtainingcontrol of the board until our second annual stockholders meeting following thedate the acquirer obtains the controlling share interest. The classified boardprovision could have the effect of discouraging a potential acquirer frommaking a tender offer or otherwise attempting to obtain control of us and couldincrease the likelihood that incumbent directors will retain their positions.

*StockholderAction*

Our certificate ofincorporation provides that stockholder action may be taken only at an annualor special meeting of stockholders. This provision prohibits stockholder actionby written consent in lieu of a meeting. Our certificate of incorporation andbylaws further provide that special meetings of stockholders may be called onlyby our Chairman of the Board of Directors, Chief Executive Officer, President,or Secretary, and shall be called by any such person at the request in writingof a majority of the Board of Directors. Stockholders are not permitted to calla special meeting or to require our Board of Directors to call a specialmeeting of stockholders.

The provisions of ourcertificate of incorporation and bylaws prohibiting stockholder action bywritten consent may have the effect of delaying consideration of a stockholderproposal until the next annual meeting unless a special meeting is called asprovided above. These provisions would also prevent the holders of a majorityof the voting power of our stock from unilaterally using the written consentprocedure to take stockholder action. Moreover, a stockholder could not forcestockholder consideration of a proposal over the opposition of the Board ofDirectors by calling a special meeting of stockholders prior to the time ourchairman or a majority of the whole board believes such consideration to beappropriate.

*AdvanceNotice for Stockholder Proposals and Director Nominations*

Our bylaws establish anadvance notice procedure for stockholder proposals to be brought before anyannual or special meeting of stockholders and for nominations by stockholdersof candidates for election as directors at an annual meeting or a specialmeeting at which directors are to be elected. Subject to any other applicablerequirements, including, without limitation, Rule 14a-8 under the ExchangeAct, only such business may be conducted at a meeting of stockholders as hasbeen brought before the meeting by, or at the direction of, our Board ofDirectors, or by a stockholder who has given our Secretary timely writtennotice, in proper form, of the stockholder’s intention to bring that businessbefore the meeting. The presiding officer at such meeting has the authority tomake such determinations. Only persons who are nominated by, or at thedirection of, our Board of Directors, or who are nominated by a stockholderthat has given timely written notice, in proper form, to our Secretary prior toa meeting at which directors are to be elected, are eligible for election asdirectors.

*Amendmentsto Bylaws*

Our certificate ofincorporation provides that only our Board of Directors or the holders of amajority of the shares entitled to vote at an annual or special meeting ofstockholders have the power to amend or repeal our bylaws.

*Amendmentsto Certificate of Incorporation*

Any proposal to amend,alter, change, or repeal any provision of our certificate of incorporationrequires approval by the affirmative vote of a majority of the voting power ofall of the shares of our capital stock entitled to vote on such matters.

*DelawareStatutory Provisions*

Anti-Takeover Provisionof Delaware Law. Under Section 203 of the DGCL, no Delaware corporationshall engage in a “business combination” with an “interested stockholder” for aperiod of three years following the date that the

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stockholder became aninterested stockholder. “Business combination” includes a merger,consolidation, asset sale, or other transaction resulting in financial benefitto the interested stockholder. “Interested stockholder” is a person who,together with affiliates and associates, owns, or within three years, did own15% or more of the corporation’s voting stock. This prohibition does to applyif:

prior to the time that the stockholder became an interestedstockholder, the board of directors of the corporation approved either thebusiness combination or the transaction resulting in the stockholder’s becomingan interested stockholder,

upon consummation of the transaction resulting in the stockholder’sbecoming an interested stockholder, the stockholder owns at least 85% of theoutstanding voting stock of the corporation, excluding voting stock owned bydirectors who are also officers and certain employee stock plans, or

at or subsequent to the time that the stockholder became an interestedstockholder, the business combination is approved by the board and authorizedat an annual or special meeting of stockholders, and not by written consent, bythe affirmative vote of at least two-thirds of the outstanding voting stockthat the interested stockholder does not own.

A Delaware corporationmay elect not to be governed by these restrictions. We have not made suchelection. Although David Zinberg and Marina Zinberg each own more than 15% ofour stock, they are not subject to the restrictions of Section 203.

**Limitationof Liability and Indemnification of Officers and Directors**

Our certificate ofincorporation limits the liability of our directors to the fullest extentpermitted by the DGCL. In addition, our certificate of incorporation and bylawsprovide that we will indemnify our directors and officers to the fullest extentpermitted by law. We have entered into indemnity agreements with our currentdirectors and executive officers and expect to enter into a similar agreementwith any new directors or executive officers.

**Indemnificationfor Securities Act Liabilities**

Insofar asindemnification for liabilities arising under the Securities Act of 1933 may bepermitted for directors, officers, or controlling persons pursuant to theprovisions described in the preceding paragraph, we have been informed that inthe opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is therefore unenforceable.

**TransferAgent and Registrar**

The transfer agent and registrar for ourcommon stock is Continental Stock Transfer & Trust Company. Thetransfer agent’s address is 17 Battery Place, New York, New York 10004 and itstelephone number is (212) 509-4000.

**ITEM 1A.  Risk Factors**

*We believe the risks and uncertainties described below arethe most significant we face. The occurrence of any of the following riskscould harm our business. In that case, the value of our common stock coulddecline, and you may lose part or all of your investment. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also impair our operations.*

***We must continue to generate a high volume of visitortraffic to our website and convert those visitors into buyers***

Our net revenue dependsto a significant extent on the number of customers who visit our website topurchase merchandise and the dollar amount of their purchases. Generatingincreased traffic to our website and converting that traffic into buyersrequires us to achieve effective results from our marketing campaigns; offer awide variety of

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products that ourcustomers can purchase at favorable prices; maintain a user-friendly shoppingexperience; ensure the satisfactory availability, performance, and reliabilityof our website, network infrastructure, and transaction processing systems; andprovide high-quality customer service. Our business will be harmed if we areunable to increase our customer base and the dollar volume of the orderscustomers place with us.

***We do not have a guaranteed supply of jewelry products, andwe have a heavy concentration of inventory purchases from our top two suppliers****.*

The success of ourbusiness depends, in part, on our ability to offer our customers a wide varietyof jewelry that they can purchase at prices that are substantially below thoseof traditional jewelry retailers. We do not have any formal or binding supplyagreements with any of our manufacturers, distributors, or other suppliers forour supply of jewelry products. As a result, we do not have a guaranteed supplyof jewelry products at favorable prices. Our inability to maintain and expandour jewelry supply relationships or the inability of our suppliers to continueto supply us with jewelry products at favorable prices would substantially harmour business and results of operations.

In addition, we have aheavy concentration of inventory purchases from a small number of suppliers.Our top two suppliers accounted for approximately 48.1%, 42.1% and 31.1% of ourtotal purchases in 2004, 2005, and 2006, respectively. In 2006, we purchased26.4% of our merchandise from LA Jewelers, Inc., a jewelry manufacturerand liquidator. We purchased a 4.7% of our merchandise from Dialuck Corp. in2006.

***The satisfactory availability, performance, and reliabilityof our website, network infrastructure, and transaction processing systems arecritical to our ability to attract, retain, and service customers.***

Any problems with theavailability, performance, or reliability of our website, networkinfrastructure, or transaction processing systems could result in decreasedcustomer traffic, reduced orders, reduced order fulfillment performance, andlower net revenue as well as negative publicity and damage to our reputation.In order to remain competitive, we must continually seek to improve and expandthe functionality and features of our website, network infrastructure,transaction processing systems, and delivery and shipping functions toaccommodate any substantial increase in the volume of traffic to and ordersfrom our website. We may not be successful in these efforts, and we may not beable to project accurately the rate or timing of increases, if any, in the useof or sales from our website, or timely expand or upgrade our website,infrastructure, or systems to accommodate any such increases. Additionally, wemay not be able to remedy any such availability, performance, or reliabilityproblems in a timely manner, or at all, because we depend in part on thirdparties for such availability, performance, and reliability.

***Our business and results of operations could be harmed dueto the lack of a comprehensive test bed for quality assurance and softwareapplication implementation***

Our business depends inpart on the efficient and uninterrupted operation of our electronic dataprocessing systems. We do not employ a comprehensive test bed that would ensurehigh quality assurance when implementing changes to our internally developedapplication systems. Any problems with implementing software upgrades withoutgoing through a proper test environment could impact our business by decreasingcustomer traffic, reducing selling prices, reducing order fulfillment, orlowering net revenue and gross margins, all of which could produce negativepublicity and damage our reputation. We plan to build a full featured testenvironment that will support all changes to our production applications. Weare in the process of evaluating and implementing a test and stagingenvironment for validating all changes to our production environment.

***Our business operations could be disrupted due to the lackdocumentation of our internally developed software application systems anddependence on key system developers to maintain the system***

Our business depends inpart on continuous and uninterrupted online availability to our customers. Ourinternally developed software application systems are not fully documented andthis makes it more difficult to locate and trouble shoot problems that mayoccur in our systems. Any delays in resolving system problems will result inlonger disruptions to the service available to our customers and/or prevent ouremployees from performing their functions

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efficiently. Theinternally developed Auction platform, Billing, Shipping, and Inventory Controlsystems are not fully documented. We are dependent on institutional knowledgeof our key system developers to provide ongoing support and functionalenhancements. If we were to lose the services of these key systems supportpersonnel, operations may suffer from system down time that would take longerthan desirable to correct and return to normal operations.

***We may face increasing costs to acquire new customers.***

The acquisition of newcustomers is a key factor in increasing demand for our jewelry products andincreasing our revenue. We currently attract new customers by driving trafficto our website using a marketing and advertising strategy that includestargeted keyword searches, online banner advertising, targeted e-mailadvertising, and participation in affiliate programs. We do not maintainlong-term contracts or arrangements with any companies, including any searchengines, Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. Recently, we haveexperienced significantly higher rates for keyword search advertising. Weexpect that we may have to pay increasing fees to maintain, expand, or enterinto new relationships with third-party search engines, Internet portals, andwebsites. In addition, traffic to our website could decline if our onlinemarketing programs become less effective or the traffic decreases to the searchengines, Internet portals, and websites with which we advertise. Our businesscould be materially and adversely affected if any substantial number ofcompanies on which we advertise experience financial or operationaldifficulties or experience other corporate developments that adversely affecttheir performance. A failure to maintain or expand existing online advertisingrelationships or to establish additional online advertising relationships thatgenerate a significant amount of traffic from other websites could result indecreased sales or limit the growth of our business.

***Competition from online auctioneers and other onlinecompanies with greater brand recognition may adversely affect our sales.***

The market for onlineauctions is rapidly evolving and intensely competitive. We expect competitionto intensify further in the future. Barriers to entry are relatively low, andcurrent and new competitors can launch new websites at relatively low costusing commercially available software.

We currently compete witha number of other companies, and other competitors may appear in the future.Our competitors currently include various online auction services and retailersthat offer jewelry, including eBay, Blue Nile, Overstock, and uBid. We alsoencounter competition from national jewelry retail chains, such as Zales, KayJewelers, and Finlay Fine Jewelry, and mass retailers and other enterprisesthat sell jewelry, such as Wal-Mart, Target, J. C. Penney, Costco, QVC, andHome Shopping Network. Many of our competitors have greater brand recognition,longer operating histories, larger customer bases, and significantly greaterfinancial, marketing, and other resources than we do. Smaller competitors mayenter into strategic or commercial relationships with larger, more established,and well-financed companies. Other competitors may enter into exclusivedistribution agreements with our suppliers that deny us access to suppliers’products. Competitors may also devote greater resources to marketing andpromotional campaigns and to website and systems technology than we do. We maynot be able to compete successfully against current and future competitors oraddress increased competitive pressures. Furthermore, attempts have been madein the past to develop and market synthetic stones and gems to compete in themarket for gemstones and gemstone jewelry. We expect such efforts to continuein the future. If any such efforts are successful in creating widespread demandfor synthetic or alternative gemstone products, demand and price levels for ourproducts could decline and our business and results of operations would besubstantially harmed.

***We rely heavily on the sale of jewelry for our net revenue,and demand for these products could decline.***

Luxury products, such asjewelry, are discretionary purchases for consumers. The volume and dollaramount of such purchases may be affected by adverse trends in the generaleconomy and consumer perceptions of those trends, and purchases maysignificantly decrease during economic downturns. The success of our businessdepends in part on

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macroeconomic factors,such as employment levels, salary levels, tax rates, and credit availability,all of which affect disposable income and consumer spending. Any reduction indisposable income or consumer spending may affect us more significantly thancompanies in other industries.

Our net revenue andresults of operations depend in part on the demand for jewelry. Consumers’tastes are subject to frequent, significant, and sometimes unpredictablechanges. Should prevailing consumer tastes for jewelry change or the demand forjewelry decrease, the sale of our products could decline and our business andresults of operations would suffer.

Furthermore, our abilityto increase our net revenue and enhance our profitability may depend on ourability to expand our product offerings beyond our current offerings. If weoffer new products that are not accepted by customers, our brand and reputationcould be adversely affected, our sales may fall short of expectations, and wemay incur substantial expenses that are not offset by increased sales.

***Because we carry all of our jewelry products in inventory,our net revenue and gross margin may decrease if we are unable to predict andplan for changes in consumer demand.***

We had $31.2 million ininventory and $3.1 million in prepaid inventory as of December 31, 2006. If oursales increase, we will be required to increase our inventory proportionately.Consumer tastes and preferences for jewelry products can change rapidly,thereby exposing us to significant inventory risks. Currently, because theproducts we sell also consist of closeout merchandise from manufacturers,distributors, and other suppliers, we have less control over the specific itemsthat we offer for sale than we would if we primarily ordered goods formanufacture for us. In addition, it is important that we are able to purchasejewelry that we perceive to be in demand. The demand for specific products canchange between the time we order items and when we sell them. As a result, wemay be required to take significant inventory markdowns, which could reduce ourgross margin, if we do not accurately predict these trends or if we overstockunpopular merchandise.

***We rely on suppliers and third-party carriers as part of ourfulfillment process, and these third parties may fail to meet shippingschedules or requirements****.*

We rely on suppliers todeliver our orders promptly, which we then carry in inventory to ensureavailability and expedited delivery to our customers. We also rely onthird-party carriers to ship our products to our customers. As a result, we aresubject to various risks, including employee strikes and inclement weather,associated with the ability of third-party carriers to provide deliveryservices to meet our shipping needs and those of our suppliers. The failure ofour suppliers and third-party carriers to deliver products to us or ourcustomers in a timely manner or otherwise to serve us or our customersadequately would damage our reputation and brand and substantially harm ourbusiness and results of operations.

***Increases in the cost of precious metals and precious andsemi-precious stones would increase the cost of our jewelry products.***

The jewelry industry isaffected by fluctuations in the prices of precious metals and precious andsemi-precious stones. The availability and prices of gold, silver, platinum,and other precious metals and precious and semi-precious stones may beinfluenced by such factors as cartels, political instability in exportingcountries, changes in global demand, and inflation. Shortages of thesematerials or an increase in their prices could reduce the quantity of productswe have available for sale and our ability to sell our products for more thanour cost, causing reduced sales or lower margins.

***Our business and results of operations would be harmed inthe event of any failure of our auction and bidding systems hardware, which islocated at a single third-party co-location facility, or any failure of ourfulfillment and administrative hardware.***

Our business depends inpart on the efficient and uninterrupted operation of our computer andcommunications hardware. The servers and other hardware necessary to operateour website, including our auction and bidding systems, are located at a singlethird-party co-location facility in downtown Los Angeles. We rely on thatfacility to

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provide Internet accesswith the speed, capacity, and reliability we require. Our servers and otherhardware that run our transaction processing, order fulfillment, and officeadministration tasks are located at our headquarters. Our servers and otherhardware are vulnerable to damage or interruption from human error, fire,flood, power loss, telecommunications failure, terrorist attacks, acts of war,break-ins, earthquakes, and similar events. We do not currently have redundantsystems in multiple locations or a formal disaster recovery plan, and ourbusiness interruption insurance may be insufficient to compensate us for anylosses that may occur. In addition, our servers are vulnerable to computerviruses, physical or electronic break-ins, and similar disruptions, which couldlead to interruptions, delays, loss of critical data, the inability to acceptand fulfill customer orders, or the unauthorized disclosure of confidentialcustomer data. System disruptions or failures would also create a large numberof customer questions and complaints that need to be addressed by our customerservice support personnel. The occurrence of any of the foregoing risks couldsubstantially harm our business and results of operations. Our systems arevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures, terrorist attacks, computer viruses, computerdenial-of-service attacks, and similar events.

***We may not be able to increase our capacity or respond torapid technological changes in a timely manner or without serviceinterruptions, which may harm our business.***

We may not be able toaccommodate any substantial growth in traffic or user demand on our website,network infrastructure, and transaction processing systems in a timely manneror without substantial costs. If we are unable to upgrade our existingtechnology, network infrastructure, and transaction processing systems toaccommodate any increased sales volume, our potential customers may bedissatisfied and may purchase merchandise from our competitors. We may alsofail to provide enough capacity in our customer service and sales supportfunctions to provide a high level of customer service. A failure to implementnew systems and increase customer service capacity effectively could adverselyaffect our sales. Enhancement of our website, network infrastructure, andtransaction processing systems will require us to spend a significantly higheramount than we have in the past. Moreover, to date our spending in these areasas a percentage of revenue has been lower than industry averages. We anticipateincreasing our system expenditures to accommodate these needs in the future.

We also intend tointroduce additional or enhanced features and services to retain currentcustomers and attract new customers to our website. We may experience difficultiesthat could delay or prevent us from introducing new features and services. Ifwe introduce a feature or a service that is not favorably received, our currentcustomers may not use our website as frequently and we may not be successful inattracting new customers. These new features or services also may containerrors that are discovered only after their introduction, and we may need tomodify significantly the design of these features or services to correcterrors.

***Our growth will depend on our ability to increase thepopularity of our website, and we may not be able to do so effectively.***

We believe thatcontinuing to increase the popularity of our website will be critical toexpanding our business. Promoting and positioning our website will depend largelyon the success of our marketing efforts and our ability to provide a varietyand sufficient quantity of high-quality products at attractive prices in aconvenient manner. Promoting our website will require us to increase ourmarketing budget and otherwise increase our financial commitment to creatingand maintaining brand loyalty among users. Brand promotion activities may notyield increased revenue, and even if they do, any increased revenue may notoffset the expenses we incur in building our website popularity and our brand.If we do attract new users to our website, they may not conduct transactions ona frequent basis or in sufficient dollar amounts. If we fail to promote andmaintain our website or incur substantial expenses in an unsuccessful attemptto promote and maintain our brand, our business would be harmed.

***We anticipate expanding our international sales activities,causing our business to become increasingly susceptible to numerous risks thatcould affect our profitability.***

In 2005 and 2006, 19.2%and 20.8%, respectively, of our net revenue was generated by shipments tocustomers outside of the United States. We plan, over time, to expand our reachinto international markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities or any website contentlocalized for foreign markets. We cannot be certain that we will be able toexpand our global presence. In addition, there are

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certain risks associatedwith doing business on an international basis, including regulatoryrequirements, legal uncertainty regarding liability, tariffs, and other tradebarriers, longer payment cycles, and potentially adverse tax consequences, anyof which could adversely affect our business. Although our foreign sales historicallyhave been denominated in U.S. dollars, we also may be subject to increasedrisks relating to foreign currency exchange rate fluctuations to the extent wedecide to denominate our sales in foreign currencies.

***Our ability to grow our business will be impaired by delays,interruptions, or failures of the Internet.***

Our success depends onthe continued growth and maintenance of the Internet. The Internet hasexperienced, and is likely to continue to experience, significant growth in thenumbers of users and amount of traffic. If Internet usage continues to grow asanticipated, the infrastructure may not be able to support the level of usageand its performance and reliability may decline. If outages or delays on theInternet increase, overall Internet usage could grow more slowly or decline. Inaddition, the performance of the Internet may be harmed by increased number ofusers or bandwidth requirements or by viruses, worms, and similar issues. TheInternet has experienced a variety of outages and other delays as a result ofdamage to portions of its infrastructure, and it could face outages and delaysin the future. These outages and delays could reduce the level of Internetusage.

***We depend on the continued growth and acceptance of onlinecommerce, and our business will be substantially impaired if the growth ofonline commerce slows or does not grow as expected.***

The business of buyingand selling goods over the Internet is relatively new and dynamic. Our successdepends on the widespread acceptance and use of the Internet as an effectivemedium for commerce by consumers. The acceptance and use of the Internet maynot continue to expand as expected, and a sufficient broad base of consumersnecessary for its continued growth may not adopt the Internet as a medium forcommerce. Consumers who historically have used traditional means of commercemay have concerns about privacy, the inability to physically inspectmerchandise before buying, delivery time, product damage during shipment, andthe costs and inconvenience involved in returning purchased items, which mayinhibit their crossover to e-commerce. In order to expand our user base, wemust appeal to and acquire consumers who historically have used traditionalmeans of commerce to purchase goods. If these new customers execute fewer orlower dollar amounts of orders than our historical users, and we are unable togain efficiencies in our operating costs, including the cost of acquiring newcustomers, our business and profits could be adversely affected.

***Our failure to protect confidential information of ourcustomers and our network against security breaches could damage our reputationand substantially harm our business and results of operations****.*

A significant barrier toonline commerce and communications is the secure transmission of confidentialinformation over public networks. Third parties may have the technology orexpertise to breach the security of customer transaction data. Our securitymeasures may not prevent security breaches that could result in substantialharm to our business and results of operations and damage to our reputation.Currently, a majority of our sales are billed to our customers’ credit cardaccounts directly. Under current credit card practices, we are liable forfraudulent credit card transactions because we do not obtain cardholdersignatures. We rely on encryption and authentication technology licensed fromthird parties to effect secure transmission of confidential information,including credit card numbers. We do not currently carry insurance against thisrisk. Advances in computer capabilities, new discoveries in the field ofcryptography, or other developments may result in a compromise or breach of thetechnology we use to protect customer transaction data. In addition, anyone whois able to circumvent our security measures could misappropriate proprietaryinformation or cause interruptions in our operations. Any such compromise ofour security could damage our reputation and brand and expose us to a risk ofloss or litigation and possible liability, which would substantially harm ourbusiness and results of operations.

***We are vulnerable to fraudulent activities on our website,including unauthorized use of customer information and identity theft by thirdparties****.*

Our network securitymeasures to prevent third parties from penetrating our network and improperlyaccessing our customers’ personal information or credit card information maynot be successful. Although we have not experienced any theft of our customers’credit card information to date, as new discoveries in the field of

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cryptography and advancesin computer capabilities occur, our security measures may not effectivelyprevent others from obtaining improper access to our customer information. Inaddition, third parties may target our customers directly with fraudulentidentity theft schemes designed to appear as legitimate e-mails from us. InMarch 2006, one such third party attempted to solicit customer informationthrough a tactic, commonly known as “phishing,” whereby an e-mail purporting tobe from us solicited customer information from recipients of the e-mail. Anysuch security breach or fraud perpetrated on our customers could expose us toincreased costs and could harm our business and results of operations.

***Increased product returns and the failure to predict productreturns could substantially harm our business and results of operations****.*

As we expand our businessand product offerings, rates of product return may increase. Any significantincrease in product returns above our return assumptions and allowances couldsubstantially harm our business and results of operations.

***Our inventory is vulnerable to damage or loss caused byfire, flood, earthquakes, and similar events, and we face the risk of theft ofour products from inventory or during shipment.***

All our inventory isstored at our warehouse/office facility in Culver City, California.Consequently, our merchandise supply is vulnerable to fire, flood, earthquakes,and similar events that may impact our facility. Any damage to or loss of allor a significant portion of our inventory could cause significant delays inshipment of goods to our customers, resulting in negative publicity about anddiminished customer confidence in our website. In addition, we may experiencetheft of our products while they are being held in inventory or during thecourse of their shipment to our customers by third-party carriers. We haveimplemented security measures to prevent such theft and maintain insurance tocover losses resulting from theft. Nevertheless, we could incur significantlosses from theft, which would substantially harm our business and results ofoperations, if our security measures fail, losses exceed our insurancecoverage, or we are not able to maintain insurance at a reasonable cost.

***Customer complaints or negative publicity about our customerservice could adversely affect our reputation and, as a result, our businesscould suffer.***

Customer complaints ornegative publicity about our customer service could severely diminish consumerconfidence in and the use of our website. Effective customer service requiressignificant personnel expense, and this expense, if not managed properly, couldsignificantly impact our profitability. The failure to manage or train our customerservice representatives properly could compromise our ability to handlecustomer inquiries and complaints effectively. If we do not handle customerinquiries and complaints effectively, we may lose customer confidence. As aresult, our revenue could suffer and our operating margin may decrease.

***Increases in credit card processing fees could increase ourcosts.***

Visa, MasterCard,American Express, and Discover Card could increase the interchange fees thatthey charge for transactions using their cards. Increases in interchange feesmay result in increased operating costs and reduced profit margin.

***Our limited operating history makes it difficult for us toforecast accurately net revenue and appropriately plan our expenses.***

We have a limitedoperating history. As a result, it is difficult to forecast accurately oursales or operating expenses. We base our estimated expense levels on ouroperating forecasts and estimates of future sales. Sales and results ofoperations are difficult to forecast because they generally depend on thenumber, dollar volume, and timing of the orders we receive, which areuncertain. Some of our expenses are fixed, making it difficult to adjust ourspending in a timely manner to take into account any unexpected shortfall in sales.We may also be unable to adjust spending in a timely manner to compensate forany unexpected sales shortfall, which could cause our net income in a givenquarter to be lower than expected.

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***We incurred losses from operations prior to fiscal 2004 andhave accumulated a significant deficit.***

Prior to fiscal year 2004we experienced significant operating losses. At December 31, 2006, we had anaccumulated deficit of $21.6 million. We cannot be certain that theimprovements in our operations resulting since 2004 will continue in thefuture. See “Management’s discussion and analysis of financial condition andresults of operations—Liquidity and Capital Resources.”

***We may default on our obligations, if we are unable togenerate sufficient cash through sales in a timely manner.***

Since our formation, wehave funded our operations through the sale of equity securities and cashgenerated from operations. The working capital characteristics of our businesshave allowed us to collect cash from sales to customers within several businessdays of the related sale, while we typically have extended payment terms withour suppliers. We do not, however, have any formal or binding supply agreementswith any of our suppliers, manufacturers, distributors, or other suppliers or anyother formal agreements with them on payment terms. Accordingly, there is arisk that we may default on our obligations if we are unable to generatesufficient cash through sales in a timely manner or through our creditfacility.

***Seasonal fluctuations in our net revenue could cause ourquarterly results to fluctuate and cause our results of operations to be belowexpectations****.*

Historically, sales inthe jewelry industry are seasonal and have been higher in the fourth quarter ofthe calendar year as a result of higher consumer spending during the Decemberholiday season. Approximately 29.3%, 33.9% and 28.5% of our net revenue in2004, 2005 and 2006, respectively, was generated during the fourth quarter. Aswe continue to grow, we expect to experience more pronounced seasonalfluctuations in our net revenue and anticipate a disproportionate amount of ourrevenue will occur in the fourth quarter. In anticipation of any increasedsales activity during the fourth quarter, we may incur significant additionalexpenses, including higher sales and marketing costs and additional staffing inour fulfillment and customer support operations. If we were to experience lowerthan expected sales during any future fourth quarter, it would have adisproportionately large impact on our results of operations for that year. Inthe future, our seasonal sales patterns may become more pronounced, may strainour personnel and fulfillment activities, and may cause a shortfall in salescompared with expenses in a given period, which would substantially harm ourbusiness and results of operations.

***Sales growth in prior periods may not be indicative of ourfuture growth.***

Our sales have fluctuatedsignificantly in the past, in part, as a result of varying amounts of funds wehave spent on advertising and inventory levels and may fluctuate significantlyin the future because of increasing advertising and inventory costs. Thesefactors may prevent the meaningful use of period-to-period comparisons offinancial results. For these and other reasons, investors should not rely onpast sales growth rates as a prediction of our future sales growth.

***We have grown quickly, and our business will suffer if wefail to manage our growth****.*

We have expanded ouroperations at a rapid pace. This expansion has placed a significant strain onour management, operations, and financial resources. We anticipate addingpersonnel in the future, including managerial, technical, and operationspersonnel. In order to manage any further growth of our operations, we also willbe required to improve existing and implement new transaction-processing,operational and financial systems, procedures, and controls. If we are unableto manage growth effectively, our business and results of operations will beharmed.

***Descriptions of our jewelry items are not guarantees and mayconfuse, mislead, or disappoint our customers****.*

In an effort to provideaccurate descriptions of jewelry posted on our website, we provide appraisalsummaries from third-party gemological laboratories for some of our jewelryitems. All other jewelry and watch descriptions are provided by our full-timeGemological Institute of America, or GIA, trained gemologists and severalexperienced product specialists. Nevertheless, there is a subjective componentinvolved with respect to assessing the clarity,

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color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes oromissions of important information in our descriptions may occur. Even if ourdescriptions are accurate, buying a product online may lead to disappointmentresulting in returned merchandise. For example, a customer may determine that apiece does not have the expected look, feel, and overall appearance of themerchandise that the buyer envisioned from the website photograph.

Additionally, in responseto customer requests and as a courtesy to resellers, we provide “Compare”and/or “Close Now” prices for jewelry items listed on our website. Compare andClose Now prices are not meant to reflect fair market values or manufacturersuggested retail prices, and in fact, may be higher than prices found in localretail stores. As a consequence, perceived misrepresentations in itemdescriptions by disappointed buyers may occur, resulting in negative publicityabout and diminished customer confidence in our website.

***We may not be able to maintain our domain name uniqueness.***

Our Internet domain nameis critical to our success. Under current domain name registration practices,no other entity can obtain an identical domain name, but can obtain a similarname or the identical name with a different suffix, such as “.net” or “.org,”or with a different country designation, such as “jp” for Japan. We have notregistered our domain name with different suffixes nor have we registered ourname in any other jurisdiction. As a result, third parties may use domain namesthat are similar to our domain name, which may result in confusion to potentialcustomers and lost sales. We are aware that other businesses have registeredthe name “bidz” with other suffixes and in other countries.

***We may be unable to protect or enforce our own intellectualproperty rights adequately, and we may become subject to intellectual propertylitigation****.*

We regard the protectionof our trademarks, copyrights, domain name, trade dress, and trade secrets ascritical to our success. We rely on a combination of common law as well astrademark, copyright, trade dress, and trade secret laws to protect ourintellectual property rights. We also have entered into confidentiality andinvention assignment agreements with our employees and relevant contractors andnondisclosure agreements with relevant parties with whom we conduct business inorder to limit access to and disclosure of our proprietary information. Thesecontractual arrangements and other steps we have taken to protect ourintellectual property may not prevent misappropriation of our intellectualproperty or deter independent development of similar intellectual property byothers. We also are pursuing the registration of our domain name, trademarks,and service marks in the United States and internationally. Effectivetrademark, copyright, patent, trade dress, trade secret, and domain nameprotection is very expensive to maintain and may require litigation. We mustprotect our trademarks, copyrights, patents, and domain names in an increasingnumber of jurisdictions, a process that is expensive and may not be successfulin every location.

Third parties may fromtime to time claim that we have infringed their intellectual property relatingto our business model or auction systems. We expect that participants in ourmarket increasingly will be subject to infringement claims as the number ofservices and competitors in our industry segment grows. Any claim like this,whether meritorious or not, could be time-consuming, result in costlylitigation, cause service upgrade delays, or require us to enter into royaltyor license agreements. These royalty or license agreements may not be availableon acceptable terms or at all. As a result, any such claim could harm ourbusiness.

***We may be unable to enforce protection of our intellectualproperty rights under the laws of other countries.***

We anticipate that wewill become increasingly subject to international intellectual property risks,including differing intellectual property laws, which may be insufficient toprotect our intellectual property, unique local laws, and lack of applicablelaw or clear precedent.

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***Various legal rules and regulations related to privacy andthe collection, dissemination, and security of personal information mayadversely affect our marketing efforts.***

We are subject toincreasing regulation at the federal, state, and international levels relatingto privacy and the use of personal user information designed to protect theprivacy of personally identifiable information as well as to protect againstits misuse. These laws include the Federal Trade Commission Act, the CAN-SPAMAct of 2003, the Children’s Online Privacy Protection Act, the Fair CreditReporting Act, the Homeland Security Act, and related regulations. Severalstates have proposed legislation that would limit the use of personalinformation gathered online or require online services to establish privacypolicies. Moreover, proposed legislation in the United States and existing lawsin foreign countries require companies to establish procedures to notify usersof privacy and security policies, obtain consent from users for collection anduse of personal information, and/or provide users with the ability to access,correct, and delete personal information stored by companies. These regulationsand other laws, rules, and regulations enacted in the future may adverselyaffect our ability to collect, disseminate, or share demographic and personalinformation about users and our ability to e-mail or telephone users, whichcould be costly and adversely affect our marketing efforts **.**

***We may be subject to a tax liability for past sales and ourfuture sales may decrease if we are required to collect sales and use taxes onthe products we sell****.*

In accordance withcurrent industry practice and our interpretation of current law, we do notcurrently collect sales or other taxes with respect to shipments of goods intostates other than California. However, one or more states or foreign countriesmay seek to impose sales or other tax obligations on us in the future. Asuccessful assertion by one or more states or foreign countries that we shouldbe collecting sales or other taxes on the sale of our products could result insubstantial tax liabilities for past and future sales, discourage customersfrom purchasing products from us, decrease our ability to compete withtraditional retailers, and otherwise substantially harm our business, financialcondition, and results of operations.

***We may be subject to regulations governing the conduct andliability of auctioneers, which could affect the way in which we conduct ourbusiness or otherwise increase our cost of doing business.***

Numerous states andforeign jurisdictions, including California, where our headquarters is located,have regulations regarding how auctions may be conducted and the liability ofauctioneers in conducting such auctions. No final legal determination has beenmade whether the California regulations apply to our business, and littleprecedent exists in this area. Several states and some foreign jurisdictionshave attempted, and may attempt in the future, to impose regulations that couldaffect us or our users, which could harm our business.

***We are subject to regulations relating to consumer privacy,which could increase the cost of our doing business, expose us to litigationcosts, increase our service or delivery costs, and otherwise harm our business.***

Several states haveproposed, and California, Minnesota, Utah, and Vermont have recently passed,legislation that would limit the uses of personal user information gatheredonline or offline. Many states already have such laws and continually considerstrengthening them, especially against online services. However, the FairCredit Reporting Act, or FCRA, a federal statute enacted in 1970 to protectconsumer privacy, includes a provision preempting conflicting state laws on thesharing of information between corporate affiliates. The preemptive provisionsof FCRA were permanently extended in 2002, thereby ensuring that we are notsubject to the laws of each individual state with respect to matters within thescope of FCRA, but remain subject to the other provisions of FCRA.

The Federal TradeCommission also has settled several proceedings against companies regarding themanner in which personal information is collected from users and provided tothird parties. Specific statutes intended to protect user privacy have beenpassed in many foreign jurisdictions. Compliance with these laws, given thetight integration of our systems across different countries and the need tomove data to facilitate transactions among our users, such as payment companiesand shipping companies, is both necessary and difficult. Failure to comply couldsubject us to lawsuits, fines, criminal penalties, statutory damages, adversepublicity, and other losses that could harm our business. Changes to existinglaws or the passage of new laws intended to address these issues could directlyaffect the way we do business or could create uncertainty on the use of theInternet. This could reduce demand for our

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products, increase thecost of our doing business, expose us to litigation costs, increase our serviceor delivery costs, or otherwise harm our business.

***New and existing regulations could harm our business****.*

We are subject to thesame foreign and domestic laws as other companies conducting both online andoffline business. There are still relatively few laws specifically directedtowards online business. However, due to the increasing popularity and use ofthe Internet and online services, many laws relating to the Internet are beingdebated at all levels of government around the world, and it is possible thatsuch laws and regulations will be adopted. These laws and regulations couldcover issues such as user privacy, freedom of expression, pricing, fraud,content and quality of products and services, taxation, advertising,intellectual property rights, and information security. Applicability to theInternet of existing laws governing issues, such as property ownership,copyrights and other intellectual property issues, taxation, libel anddefamation, obscenity, and personal privacy is uncertain. The vast majority ofthese laws was adopted prior to the advent of the Internet and relatedtechnologies and, as a result, do not contemplate or address the unique issuesof the Internet and related technologies. Those laws that do reference theInternet, such as the U.S. Digital Millennium Copyright Act and the EuropeanUnion’s Directive on Distance Selling and Electronic Commerce, have onlyrecently begun to be interpreted by the courts and implemented by the EuropeanUnion member states, so their applicability and scope remain uncertain. As ouractivities and the types of goods listed on our website expand, regulatoryagencies may claim that we or our users are subject to licensure in theirjurisdiction, either with respect to our business in general, or in order toallow the sale of certain items, such as real estate, event tickets, boats, andautomobiles.

In addition, because ourproducts are available over the Internet in multiple states and because we sellmerchandise to consumers residing in multiple states, we could be required toqualify to do business as a foreign corporation in each state in which ourproducts are available. Our failure to qualify as a foreign corporation in ajurisdiction in which we are required to do so could subject us to penalties.Any new legislation or regulation, or the application of laws or regulationsfrom jurisdictions whose laws do not currently apply to our business could havea material adverse affect on our business.

***We depend to a very significant extent on David Zinberg, ourChairman of the Board, President, and Chief Executive Officer.***

Our performance dependssubstantially upon David Zinberg, our Chairman of the Board, President, andChief Executive Officer, who has extensive experience with the purchase andsale of jewelry. We rely on Mr. Zinberg to make critical operational decisionson a daily basis, such as product offerings and purchases, and to make keystrategic plans. We have an employment agreement with Mr. Zinbergextending through 2009. The loss of the services of Mr. Zinberg wouldadversely affect our business and operations.

***Holders of common stock issued by us in prior offerings areentitled to rescind their purchases.***

From our inception untilmid-2003, we raised over $20.5 million in gross equity capital by sellingshares of our common stock to approximately 830 investors at prices rangingfrom $4.00 to $6.00 per share with a weighted average share price of $4.50. Wealso issued shares of common stock to about 30 persons in exchange for servicesand other non-cash consideration valued in excess of $5.5 million and issuedoptions to purchase common stock to approximately 250 individuals at a weightedaverage exercise price of $4.45. After conducting these sales of oursecurities, we determined that these sales were not exempt from theregistration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

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If we were ordered torescind all purchases of our common stock by stockholders not affiliated withus, we could be required to make an aggregate payment to the holders of theseshares of up to approximately $20.5 million, in addition to statutoryinterest of $11.3 million, as of December 31, 2006. We may also be liable forthe $5.5 million of services rendered and property exchanged inconsideration for the issuance of common stock, in addition to interest ofapproximately $2.9 million through December 31, 2006. In addition, we may beliable for the $1.3 million that we will offer to non-management optioneesas the optionees did not receive information regarding our potential liabilityfor these violations of federal and state securities laws. In addition,regulators could impose monetary fines or other sanctions as provided underthese laws.

Federal securities lawsdo not provide that a rescission offer will terminate a purchaser’s right torescind a sale of stock that was not registered as required or was nototherwise exempt from such registration requirements. If any or all of theofferees reject a rescission offer, we may continue to be liable under federaland state securities laws for up to an amount equal to the value of all optionsand common stock granted or issued since the date of issuance plus anystatutory interest we may be required to pay.

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

We have never declared or paid any cash dividends onour common stock and do not intend to pay dividends on our common stock for theforeseeable future. We intend to invest any future earnings to fund ourbusiness. Therefore, stockholders likely will not receive any dividends on ourcommon stock for the foreseeable future. Investors cannot be certain that theywill receive a positive return on their investment when they sell their sharesor that they will not lose the entire amount of their investment.

***The concentration of our capital stock ownership with ourfounder and executive officers and directors and their affiliates will limityour ability to influence corporate matters.***

Our founder, executiveofficers, and directors together own approximately 35.2% of our common stock asof December 31, 2006. Marina Zinberg, our Vice President, who is the sister ofDavid Zinberg, our Chairman, President and Chief Executive Officer, owns anadditional 33.2% of our common stock.  Asa result, these individuals will have significant influence over our managementand affairs and over all matters requiring stockholder approval, including theelection of directors and the approval of significant corporate transactions,such as a merger or a sale of our company or its assets, for the foreseeablefuture. This concentrated control will limit the ability of other stockholdersto influence corporate matters. Because of this, we may take actions that someof our stockholders do not view as beneficial. As a result, the market price ofour common stock could be adversely affected because stockholders may not viewfavorably the concentration of control in the hands of management.

***Our charter documents and Delaware law could make it moredifficult for a third party to acquire us, and discourage a takeover****.*

On June 22, 2006, wereincorporated in Delaware, and the Delaware certificate of incorporation andthe Delaware General Corporation Law, or DGCL, contain provisions that may havethe effect of making more difficult or delaying attempts by others to obtaincontrol of our company, even when these attempts may be in the best interestsof our stockholders. The Delaware certificate of incorporation also authorizesour Board of Directors, without stockholder approval, to issue one or moreseries of preferred stock, which could have voting and conversion rights thatadversely affect or dilute the voting power of the holders of common stock.Delaware law also imposes conditions on certain business combinationtransactions with “interested stockholders.” The Delaware certificate ofincorporation divides our Board of Directors into three classes, with one classto stand for election each year for a three-year term after the initialelection. The classification of directors tends to discourage a third partyfrom initiating a proxy solicitation or otherwise attempting to obtain controlof our company and may maintain the incumbency of our Board of Directors, asthis structure generally increases the difficulty of, or may delay, replacing amajority of directors. The Delaware bylaws authorize our Board of Directors tofill vacancies or newly created directorships. A majority of the directors thenin office may elect a successor to fill any vacancies or newly createddirectorships.

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**ITEM 1B.  Unresolved StaffComments**

Notapplicable.

**Item2.**           Properties.

We leasea 50,000 square foot facility in Culver City, California, which serves as ourcorporate headquarters and houses our sales, marketing, research anddevelopment, customer service, fulfillment, and warehouse operations. Our leaseexpires in October 2009. We expect that our current facility will satisfyour needs through 2009.

**Item3.**           LegalProceedings

OnNovember 27, 2006, two of our shareholders filed a lawsuit against us and DavidZinberg, our Chief Executive Officer, alleging fraud, rescission breach offiduciary duties and damages in connection with plaintiffs’ purchase of ourcommon stock.  The aggregate purchaseprice for the plaintiffs shares was $60,000. From time to time, we may be involved in litigation relating to claimsrising out of our ordinary course of business. We are not currently a party toany material legal proceedings.

**Item4.**           Submissionof Matters to a Vote of Security Holders

OnDecember 15, 2005, the Company  held its annual meeting ofshareholders, at which time the following directors were elected:  DavidZinberg, Lawrence Kong and Garry Itkin.  The number of votes cast for eachof the directors was 15,155,000, the number of votes against was 0 and thenumber of abstentions and broker non-votes was 0.   EffectiveMarch 15, 2006, the Board was expanded to five (5) members and two(2) additional directors, Peter Hanelt and Man Jit Singh, were appointedto the Board. On December 18, 2006, Garry Itkin resigned as a director.

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**Part II**

**Item5.**                                   Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

There is no establishedpublic trading market for any of the Company’s securities.  As ofDecember 31, 2006, the number of shares of our common stock that issubject to outstanding options or warrants to purchase common stock is8,353,000.  As of December 31, 2006, there were 23,233,904 shares ofcommon stock outstanding.

**Holders**

As of December 31,2006, there were 1,128 holders of record of our common stock. As ofDecember 31, 2006, we had 79 holders of stock options exercisable forshares of our common stock.

**Dividends**

We have never declared orpaid any dividends on our common stock and do not anticipate that we will payany dividends to holders of our common stock in the foreseeable future. Instead,we currently plan to retain any earnings to finance the growth of our business.Payments of any cash dividends in the future will be within the discretion ofour Board of Directors and will depend on our financial condition, results ofoperations, and capital requirements as well as other factors deemed relevantby our Board of Directors.

**EquityCompensation Plan Information**
| ** **                                                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **Number of securities**    | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **remaining available for** | ** ** |
| ** **                                                      | ** ** | **Number of securities**         | ** ** | ** **                        | ** ** | **future issuance under**   | ** ** |
| ** **                                                      | ** ** | **to be issued upon**       | ** ** | **Weighted-average**              | ** ** | **equity compensation**          | ** ** |
| ** **                                                      | ** ** | **exercise of**                       | ** ** | **exercise price of**   | ** ** | **plans (excluding**             | ** ** |
| ** **                                                      | ** ** | **outstanding options,**              | ** ** | **outstanding options,**     | ** ** | **securities reflected in** | ** ** |
| **Plan category**                                          | ** ** | **warrants and rights (1)** | ** ** | **warrants and rights** | ** ** | **column (a))**                  | ** ** |
| **Equity  compensation plans approved by security holders**     | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| 2006 Stock Award Plan                                           |       | 115,000                                    |       | $6.00                             |       | 885,000                               |       |
| 2002 Special Stock Option Plan                                  |       | 1,456,500                                  |       | $3.96                             |       | 43,500                                |       |
|                                                            |       |                                       |       |                              |       |                                  |       |
| **Equity  compensation plans not approved by security holders** | ** ** | ** **                                 | ** ** | ** **                        | ** ** | ** **                            | ** ** |
| 2001 Stock Option Plan                                          |       | 731,500                                    |       | $6.00                             |       | 168,500                               |       |
| Non-statutory Stock Option (2)                                  |       | 6,050,000                                  |       | $6.00                             |       | —                                |       |
|                                                            |       |                                       |       |                              |       |                                  |       |
| **Total**                                                       |       | 8,353,000                                  |       | $5.64                             |       | 1,097,000                             |       |

 

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(1)                                Thetotal number of shares of common stock to be issued upon exercise of alloutstanding stock options, warrants and rights is 8,353,000 as of December 31,2006.

(2)                                Includesa non-statutory stock option to purchase 6,000,000 shares at an exercise priceof $6.00 per share granted to David Zinberg, our President and Chief ExecutiveOfficer.

**Recent Sales of UnregisteredSecurities**

During the past threeyears we have sold the following securities that were not registered under theSecurities Act of 1933.  The shareissuances were undertaken in reliance on the exemption from registration underthe Securities Act of 1933 (the “Act”) set forth in Section 4(2) of the Act orRule 701 under the Act.

In 2006, we issued 10,000shares of our common stock to each of our outside directors, Peter Hanelt andMan Jit Singh, as payment of independent director fees.  We also issued 15,000 and 1,404 shares ofcommon to an employee and independent consultant, respectively, for servicesrendered. The shares of common stock were issued at a price of $6.00 per share.We issued stock options to purchase an aggregate of 235,000 shares of ourcommon stock at an exercise price of $6.00 per share to three of our employeesunder our 2006 Incentive Stock Plan for services rendered to our company.

In 2005, we issued stockoptions to purchase an aggregate of 678,500 shares and 25,000 shares of ourcommon stock at an exercise price of $6.00 per share to, respectively, 44 ofour employees under our 2001 Stock Option Plan and one non-employee in exchangefor services rendered to our company.

In 2004, we issued stockoptions to purchase an aggregate of 137,000 shares and 25,000 shares of ourcommon stock at an exercise price of $6.00 per share to, respectively, 48 ofour employees under our 2001 Stock Option Plan and one non-employee, and issuedto our Chief Executive Officer, David Zinberg, non-plan options to purchase6,000,000 shares of our common stock at an exercise price of $6.00 pershare.  In 2004, we also issued anaggregate of 28,544 shares of our common stock to six individuals in exchangefor asset purchases, services, and other non-cash consideration at a weightedaverage price of $5.00 per share.

**Issuer Purchases of EquitySecurities**

The following tablecontains information about repurchases of our common stock during the fourthquarter of 2006: 
| ** **                               | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|------------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Number**                     | ** ** |
| ** **                               | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                               | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **may**                        | ** ** |
| ** **                               | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                               | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2006**                                 | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program**                    | ** ** |
| October 1 –  October 31   |       | —        |       | —      |       | —                        |       | —                         |       |
| November 1  – November 30 |       | —        |       | —      |       |                          |       |                           |       |
| December 1  – December 31 |       | 15,000        |       | $           | 6.00       |                          | —     |                           | —     |   |
| Total                                    |       | 15,000        |       | $           | 6.00       |                          | —     |                           | —     |   |

 

Pursuant to a Stock VestingAgreement between the Company and Lawrence Kong, our Chief Executive Officer,250,000 shares of common stock previously issued to Mr. Kong and subject tovesting provisions vested on June 30, 2006. Although the Agreement did not allow the Company to withhold any portionof such common stock in order to reimburse us for our income tax withholdingobligations associated with the stock vesting, in September 2006, Mr. Kongvoluntarily surrendered 115,000 shares of common stock to us to reimburse us forsatisfying our tax withholding obligations. In recognition of the loss to Mr. Kong of the opportunity to derive thebenefit of any appreciation of such shares, we issued to Mr. Kong non-qualifiedstock options for an equal number of shares with an exercise price equal to thefair market value of those shares on the date of grant.

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**Postponed Initial Public Offeringand Rescission Offer**

On March 17, 2006, wefiled a registration statement in connection with a planned initial publicoffering of our common stock.  We plannedto conduct a rescission offer following the initial public offering in order toaddress sales of certain of our securities made in violation of certainprovisions of federal and state securities laws.  See, “Risk Factors — *Holders of common stockissued by us in prior offerings are entitled to rescind their purchases.*” In June,2006, our underwriters informed us that they were unable to complete theoffering, primarily because we did not obtain a sufficient number of 180-day “lock-up”agreements from our existing stockholders. Our underwriters have advised us that they are unable to take ourcompany public in the foreseeable future, unless we obtain a sufficient numberof these lock-up agreements. Accordingly, we postponed our plans to conduct the initial publicoffering and the rescission offer, and requested for withdrawal of theregistration statement that was filed.

If we do not have thefinancial resources for a rescission offer, any assertion by our stockholdersof their legal claims against us could have a material and adverse effect onour liquidity, our financial position, results of operations, and cash flows.Moreover, even if we are successful in obtaining the financing necessary toconduct a rescission offer and make such offer to our stockholders, if, priorto the rescission offer, any stockholders who acquired their common stock inour offerings sell their common stock for less than the price at which theypurchased their shares, they will be entitled to recover from us damages equalto the difference between their investment amount plus interest from the dateof issuance and the value or price of the security at the time of its sale.Because these stockholders will no longer own our common stock, we will not beable to extinguish these damage claims by offering to rescind the stockholder’spurchase of our common stock.

The probability thatstockholders would assert a claim against us and the extent of the ourliability, if any, are contingent on a number of factors, including astockholder’s desire to rescind his or her purchase based on the price of our rescissionoffer and the key purchase price of the tender for shares, applicable legalprecedent, and statutes of limitation. As of the date of this filing, two ofour shareholders have filed actions seeking a rescission of their investment inour common stock, which was in the aggregate $60,000, and unspecifieddamages.  Based on current facts known tomanagement at this time, management does not believe that assertion of any suchclaims by the Company’s shareholders in a material amount is probable. Accordingly,no accruals for either potential amounts payable or reserves have been made atthis time.

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**Item6.            Selected Financial Data**

Theselected financial data presented below has been derived from our financialstatements. The statement of operations data for each of the fiscal years endedDecember 31, 2004, 2005, and 2006 and the balance sheet data atDecember 31, 2005 and 2006 are derived from our audited financialstatements that are included in this report. The statement of operations datafor the years ended December 31, 2002 and 2003 and the balance sheet dataat December 31, 2002, 2003 and 2004 are derived from audited financialstatements that are not included in this report. The historical resultspresented below are not necessarily indicative of the results to be expected inany future period.

Youshould read this information together with “Management’s discussion andanalysis of financial condition and results of operations” and our financialstatements and the related notes included elsewhere in this report.
| ** **                                                         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| **Statement  of Operations Data:**                                 |       |                                        |       |   |   |   |   |   |   |   |   |
|                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net Revenue                                                        |       | 34,778                                      |       | 47,665 |   | 65,324 |   | 90,579 |   | 131,823 |   |
| Cost of Revenue                                                    |       | 32,315                                      |       | 42,188 |   | 53,072 |   | 71,257 |   | 100,633 |   |
| Gross Profit                                                       |       | 2,463                                       |       | 5,477 |   | 12,252 |   | 19,322 |   | 31,190 |   |
| Operating Expenses:                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| General & Administrative                                       |       | 10,336                                      |       | 9,259 |   | 8,800 |   | 10,938 |   | 13,853 |   |
| Sales & Marketing                                              |       | 1,071                                       |       | 1,960 |   | 2,542 |   | 5,078 |   | 10,300 |   |
| Rescission and Public Offering Costs                               |       | —                                      |       | — |   | — |   | 442 |   | 1,287 |   |
| Depreciation & Amortization                                    |       | 91                                          |       | 61 |   | 139 |   | 157 |   | 273 |   |
| Total Operating  Expenses                                          |       | 11,498                                      |       | 11,280 |   | 11,481 |   | 16,615 |   | 25,713 |   |
| Profit (Loss) from  Operations                                     |       | (9,035                                      | )          | (5,803 | ) | 771 |   | 2,707 |   | 5,477 |   |
| Interest income  (expense), net                                    |       | (65                                         | )          | (27 | ) | — |   | 22 |   | 32 |   |
| Income taxes                                                       |       | —                                      |       | — |   | — |   | (82 | ) | (120 | ) |
| Net Profit (Loss)                                                  |       | (9,100                                      | )          | (5,830 | ) | 771 |   | 2,647 |   | 5,389 |   |
| Net Profit (Loss) common  share:                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic and diluted                                                  |       | (0.35                                       | )          | (0.21 | ) | 0.03 |   | 0.11 |   | 0.23 |   |
|                                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| ** **                                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash & Cash  Equivalents                                       |       | —                                      |       | 10 |   | 5 |   | 7 |   | 359 |   |
| Working Capital  (Deficit)                                         |       | (1,441                                      | )          | (3,148 | ) | (2,164 | ) | 1,009 |   | 5,974 |   |
| Total Assets                                                       |       | 9,836                                       |       | 7,270 |   | 12,490 |   | 17,746 |   | 38,542 |   |
| Post-dated check  financing                                        |       | 5,135                                       |       | 4,198 |   | 6,503 |   | 5,315 |   | — |   |
| Total Liabilities                                                  |       | 10,765                                      |       | 9,355 |   | 13,570 |   | 15,963 |   | 31,815 |   |
| Total stockholders’ equity (deficit)                          |       | (929                                        | )          | (2,085 | ) | (1,080 | ) | 1,783 |   | 6,727 |   |

 

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**Item 7.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

Youshould read the following discussion and analysis in conjunction with ourfinancial statements and related notes. This discussion containsforward-looking statements that involve risks, uncertainties, and assumptions.Our actual results may differ materially from those anticipated in theseforward-looking statements as a result of a variety of factors, including thoseset forth under “Risk factors” and elsewhere in this prospectus.

**Overview**

We area leading online retailer of jewelry, featuring a live auction format. We haveestablished our retail brand in the online marketplace by offering high-qualitymerchandise, a unique user-friendly shopping experience, and the opportunityfor buyers to achieve significant cost savings versus traditional retailchannels. A key to our success has been our ability to efficiently and costeffectively source jewelry merchandise and rapidly respond to changing consumerdemands for certain jewelry. We offer our products through a continuous liveformat, featuring “no reserve” auctions, a $1 minimum opening bid, and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. The majority of our auctions are short-term, oftenlasting less than one hour, providing immediate gratification to our customersand encouraging frequent visits and active viewing of our website. Our productinventory includes gold, platinum, and silver jewelry set with diamonds,rubies, emeralds, sapphires, and other precious and semi-precious stones; andwatches.

We sellto consumers looking for reliable bargains on jewelry. Because we purchase andretain all of our jewelry inventory onsite, we can provide our customers withtimely service and delivery of their purchases. In addition, each item isinspected by one of our trained product specialists prior to its placement onour website, which assures our customers of the quality of their purchases ofour products. We provide a trustworthy and secure buying environment with a15-day return policy on all merchandise. We believe that some of our customersare resellers intending to sell our goods in secondary markets, such as oneBay, at local auctions, and through other retail channels. These resellershave the opportunity to purchase products at lower prices than they wouldreceive from manufacturers or other distributors. Our auctions are conducted24 hours a day, seven days a week. We also offer daily telephone customersupport, 24-hour online live-help and e-mail customer support.

**Critical Accounting Policies**

Thepreparation of our financial statements requires us to make certain estimatesand judgments that affect amounts reported and disclosed in our financialstatements and related notes. We base our estimates on historical experienceand on other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates. The followingare the critical accounting policies that we believe require significantestimation and judgment.

*Revenue Recognition*

Wederive our revenue from five sources: merchandise sales, shipping revenue,auction transaction fee revenue, commission revenue and advertising revenue. Inaccordance with SAB 104, we recognize revenue from all five sources when thefollowing revenue recognition criteria are met: (1) persuasive evidence ofan arrangement exists; (2) the product has been shipped or the service hasbeen rendered and the customer assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured.

Werecognize merchandise sales upon shipments made to consumers that are fulfilledfrom our warehouse. We generally require online payment by credit card or otherelectronic payment methods at the point of sale. We record amounts received orbilled prior to shipment of goods to customers as deferred revenue. We reducegross sales by returns and charge backs from customers.

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Wereport shipping and handling fees and costs in accordance with Emerging IssuesTask Force (“EITF”) issue No. 00-10, “Accounting for Shipping and HandlingFees and Costs.” As such, in the Statement of Operations all amounts billed tocustomers by us related to shipping and handling are included in “Net revenue”and our shipping and handling costs are included in “Cost of revenue.”

Weinclude auction transaction fee revenue in net revenue. The auction transactionfee is a 3% fee charged to all customers on all payments for merchandise sales.

Wederive commissions revenue from sales of Certified Merchant merchandise that isowned by third parties and recognize that revenue when services have beenrendered. For commission revenue, we recognize as revenue only the commissionportion of the price our customers pay for the purchased products because weare acting as an agent in such transactions. Commissions are also reduced bythe impact of refunds made to customers when the Certified Merchant does notmeet its obligations to the customers.

Werecognize advertising revenue, which consists primarily of pop-unders, when theservices are rendered and the advertising revenue is known and collectible.

*Return and Allowance Reserve*

Weestimate potential future product returns and chargebacks related to currentperiod revenue. We analyze historical returns, and changes in customer demandand acceptance of our products when evaluating the adequacy of the salesreturns reserve and other allowances in any accounting period. If actualreturns are greater than our estimates, we will record additional returns andallowances in addition to our estimates, which will result in lower net revenuerecorded during that period.  Reservesfor returns and chargebacks are included in accrued liabilities.

*Inventory Reserve*

Werecord reserves against our inventory for lower of cost or market equal to thedifference between the cost of inventory and the average selling price. Inaddition, for the year ended December 31, 2006 we record reserves for obsoleteand slow moving inventory of 100% of the value of inventory held for more thanone year. For the year ended December 31, 2005, we record reserves of 50% ofthe value of inventory held for more than six months and 100% of the value ofinventory held for more than one year. If actual market conditions are lessfavorable than those projected by us, specific reserves or additional inventorywrite-downs may be required.

*Prepaid Inventory*

Werecord payments made to our suppliers for merchandise purchases we have yet toreceive. These payments are recorded as prepaid inventory until they are in ourphysical possession and satisfactorily examined; we then categorize them asinventory.

*Deferred Income Tax Allowance*

Werecognize deferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Realization ofthe deferred tax asset depends on generating sufficient taxable income infuture years. We reduce deferred tax assets by a valuation allowance when webelieve it is more likely than not that some portion or all of the deferred taxassets will not be realized.

*Stock-Based Compensation*

Prior to January 1, 2006,we measured compensation expense to employees for our stock option incentiveplans under the recognition and measurement provisions of Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees,*and related interpretations. Utilizing theintrinsic value method prescribed by APB No.

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25, we did not recordcompensation expense when stock options were granted to eligible participantsas long as the exercise price was not less than the fair market value of thestock when the option was granted.

We recorded stock-basedcompensation representing the difference between the option exercise price andthe deemed fair value of our common stock on the grant date for financialreporting purposes. We determined the deemed fair value of our common stockbased upon the most recent third-party sale of our common stock known to us.Had different assumptions or criteria been used to determine the deemed fairvalue of our common stock, different amounts of stock-based compensation couldhave been reported.

In accordance withStatement of Financial Accounting Standards (‘‘SFAS’’) No. 123, ‘‘Accountingfor Stock-Based Compensation,’’ and SFAS No. 148, ‘‘Accounting for Stock-BasedCompensation-Transition and Disclosure,’’ which amended SFAS No. 123, wedisclosed pro forma net income and net income per share as if the fair valuebased method had been applied in measuring compensation expense. The disclosureprovisions of SFAS No. 148 were effective for financial statements for interimperiods beginning after December 15, 2002. We adopted the disclosurerequirements in the first quarter of 2003. This information is contained inNote 1 to our financial statements. The fair values of options and sharesissued pursuant to our option plan at each grant date were estimated using theBlack-Scholes option pricing model. Because there has been no public market forour common stock, we used the minimum value method in determining the expectedvolatility of our common stock was zero. The transition provisions did not havean impact on our financial position or results of operations as we did notelect to adopt the fair value-based method of accounting for stock-basedemployee compensation under SFAS No. 123.

On January 1, 2006, weadopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’)requiring that share-based payment transactions be recognized in the financialstatements based on the fair value of the equity or liability instrumentissued. For the year ended December 31, 2006, we used the Black-Scholes optionpricing model to estimate the value of our options in implementing SFAS 123Rand the calculated method to determine expected volatility, rather than theminimum value method, which we previously used to determine expected volatility.Under SFAS 123R stock-based compensation expense recognized during the periodis based on the value of the portion of stock-based payment awards that isultimately expected to vest. Accordingly, stock-based compensation expenserecognized in the statements of income will be reduced for forfeitures for theyear ended December 31, 2006. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the pro forma information requiredunder SFAS 148 for the period prior to 2006, we did not account forforfeitures, as all options granted were fully vested at the date of grant andwere not subject to any service period conditions. We expensed stock-basedcompensation on the date of grant, as all options granted prior to January 1,2006, vested immediately. In the future, we anticipate that stock-basedcompensation will include vesting provisions and therefore stock-basedcompensation expense in the future will be reduced for forfeitures.

We adopted SFAS 123Rusing the modified prospective method which requires the application of theaccounting standard as of January 1, 2006. Under this transition method, we arerequired to recognize compensation cost beginning January 1, 2006 for theportion of outstanding awards for which the requisite service has beenrendered, based on the grant-date fair value of those awards calculated underSFAS 123 for our pro forma disclosures. As of December 31, 2006, stock optionsto purchase 115,000 shares were not fully vested. For the year ended December31, 2006,  we issued stock options topurchase 235,000 shares of which 120,000 stock options were forfeited . Theadoption of SFAS 123R resulted in a stock-based compensation expense of $16,000for the year ended December 31, 2006. In accordance with the modifiedprospective method, the financial statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS 123R.

We also adopted FASB StaffPosition No. FAS 123(R)-3, **Transition Election Related to Accounting for the TaxEffects of Share-Based Payment Awards** (“FSP 123(R)-3”).Under FSP 123(R)-3, the Company elected to use the short-cut method tocalculate the historical pool of windfall tax benefits. The Company elected touse the tax law ordering approach for purposes of determining whether an excessof tax benefit has been realized.

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**Description of Our Revenue, Costs, and Expenses**

Thefollowing table presents our historical results of operations for the periodsindicated as a percentage of net revenue.
|                                      | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                 |       |                                        |       |   |   |   |   |
| Net Revenue                          |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Gross Profit                         |       | 18.8                                        |       | 21.3 |   | 23.7 |   |
| Operating  Expenses:                 |       |                                        |       |   |   |   |   |
| General & Administrative         |       | 13.5                                        |       | 12.1 |   | 10.5 |   |
| Sales & Marketing                |       | 3.9                                         |       | 5.6 |   | 7.8 |   |
| Rescission and Public Offering Costs |       | 0.0                                         |       | 0.4 |   | 1.0 |   |
| Depreciation & Amortization      |       | 0.2                                         |       | 0.2 |   | 0.2 |   |
| Total Operating  Expenses            |       | 17.6                                        |       | 18.3 |   | 19.5 |   |
| Profit from  Operations              |       | 1.2                                         |       | 3.0 |   | 4.2 |   |
| Interest income  (expense), net      |       | 0.0                                         |       | 0.0 |   | 0.0 |   |
| Income taxes                         |       | 0.0                                         |       | (0.1 | ) | (0.1 | ) |
| Net Profit                           |       | 1.2                                         | %          | 2.9 | % | 4.1 | % |

 

*Net Revenue*

Substantiallyall of our net revenue consists of jewelry sold via the Internet, net of returns.We also generate net revenue from shipping and handling, auction transactionfee revenue, commissions from Certified Merchants, and advertising revenue.

Thefollowing table presents our sources of revenue for the periods indicated as apercentage of net revenue.
|                         | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                    |       |                                       |       |   |   |   |   |
| Net Revenue             |       |                                       |       |   |   |   |   |
| Merchandise sales       |       | 89.5                                       | %          | 88.6 | % | 85.3 | % |
| Shipping & Handling |       | 9.6                                        |       | 10.4 |   | 11.5 |   |
| Transaction Fee         |       | 0.0                                        |       | 0.7 |   | 3.1 |   |
| Commissions             |       | 0.8                                        |       | 0.3 |   | 0.1 |   |
| Advertising             |       | 0.1                                        |       | 0.0 |   | 0.0 |   |
| Total Net Sales         |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

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InNovember 2005, we implemented a 3% transaction fee on all sales.

Netrevenue by geographic area is presented based upon the country of destination.No foreign country accounted for 10% or more of net revenue for any of thefiscal years presented. Net revenue by geographic area for the periodsindicated was as follows:
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except percentages)** | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | ** **                                  | ** ** |
| **Geographic area**                              | ** ** | **Amount**                                  | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States                                         |       | $                                           | 53,986     |   | 82.6 | % | $ | 73,199 |   | 80.8 | % | $ | 104,338 |   | 79.2 | % |
| International                                         |       | 11,338                                      |       | 17.4 |   | 17,380 |   | 19.2 |   | 27,485 |   | 20.8 |   |
| Total                                                 |       | $                                           | 65,324     |   | 100.0 | % | $ | 90,579 |   | 100.0 | % | $ | 131,823 |   | 100.0 | % |

 

*Gross Profit*

Our gross profit consists of net revenue less the costof sales. Our cost of sales consists of the cost of merchandise sold tocustomers, inbound and outbound shipping costs, packaging and shippingsupplies, insurance on shipments, product repair and service costs and creditcard and other transaction fees associated with payments.

*General and Administrative Expenses*

Our general and administrative expenses consistprimarily of payroll and related benefit costs for our employees. Theseexpenses also include fulfillment, customer service, technology, professionalfees, other general corporate expenses, and stock-based compensation,consisting substantially of stock option grants and stock grants to employeesand consultants.

*Sales and Marketing Expenses*

Our marketing expenses consist primarily of costsassociated with paid website search marketing, online banner marketing, e-mailcampaigns, affiliate programs and optimization services. These marketingprograms, which are designed to drive buyers to our website, are the mostimportant factor in increasing demand for our jewelry products and increasingnet revenue.

*Rescission and Public Offering Costs*

These costs consist primarily of regulatory filingfees, accountant fees, legal fees and printing expenses incurred in the plannedinitial public offering.

**Resultsof Operations**

**Comparisonof Year Ended December 31, 2006 with Year Ended December 31, 2005**

*NetRevenue*

Net revenue increased45.5% to $131.8 million in 2006 from $90.6 million in 2005. Thisincrease in net revenue was due to the increase in the number of orders and theaverage selling price per order. The increase in the number of orders wasprimarily the result of the number of new buyers we attracted during 2006. Theincrease in average selling price was due mainly to the purchase of higherpriced inventory.

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*GrossProfit*

Gross profit increased61.4% to $31.2 million in 2006 from $19.3 million in 2005. Grossprofit as a percentage of net revenue increased to 23.7% in 2006 from 21.3% in2005. The increase in gross profit as a percentage of net revenue resultedprimarily from more effective purchasing, implementation of a 3% auctiontransaction fee in November 2005, partially offset by a small decrease in marginon shipping and handling charges.

*Generaland Administrative Expenses*

General andadministrative expenses increased 26.7% to $13.9 million in 2006 from$10.9 million in 2005. The increase in general and administrative expenses in2006 was due primarily to a $1.5 million increase in payroll and payrollrelated expenses and a $701,000 increase in outsourcing expenses. We increasedour personnel from 176 at year end 2005 to 198 at year end 2006. Ouroutsourcing expenses increased in 2006 in the areas of customer service, photoediting, auction uploading and IT support. General and administrative expensesas a percentage of net revenue decreased to 10.5% in 2006 from 12.1% in 2005 aswe continue to leverage on our operational infrastructure.

 *Sales andMarketing Expenses*

Sales and marketingexpenses increased 103% to $10.3 million in 2006 from $5.1 million in2005. This increase resulted primarily from increased marketing campaigns andcost of online advertising to attract new buyers. Sales and marketing expensesas a percentage of net revenue increased to 7.8% in 2006 from 5.6% in 2005. Weexpect our sales and marketing expenses to continue to increase in absolutedollars, as we intend to continue increasing our online marketing campaigns inorder to attract new customers. We do not expect our sales and marketingexpenses as a percentage of revenue to increase.

*Rescissionand Public Offering Costs*

These costs consistprimarily of regulatory filing fees, accountant fees, legal fees and printingexpenses incurred in the planned initial public offering, which amounted to$442,000 and $1.3 million for the years ended December 31, 2005 and2006, respectively. Costs incurred in 2005 relate primarily to rescissionrelated costs of the planned initial public offering whereas costs incurred in2006 relate to the registration statement of the planned initial publicoffering. The capitalized costs of the rescission and initial public offeringwere expensed when the Company determined it was unable to complete theoffering and subsequently requested withdrawal of the registration statement.

**Comparisonof Year Ended December 31, 2005 with Year Ended December 31, 2004**

*NetRevenue*

Net revenue increased38.7% to $90.6 million in 2005 from $65.3 million in 2004. Thisincrease in net revenue was due to the increase in the number of orders,partially offset by a decrease in the average selling price per order. Theincrease in the number of orders was primarily the result of the number of newbuyers we attracted during 2005.

*GrossProfit*

Gross profit increased57.7% to $19.3 million in 2005 from $12.3 million in 2004. Grossprofit as a percentage of net revenue increased to 21.3% in 2005 from 18.8% in2004. The increase in gross profit as a percentage of net revenue resultedprimarily from more effective purchasing, implementation of a 3% auctiontransaction fee in November 2005, and increased margin on shipping andhandling charges.

*Generaland Administrative Expenses*

General andadministrative expenses increased 24.3% to $10.9 million in 2005 from$8.8 million in 2004. The increase in general and administrative expensesin 2005 was due primarily to a $1.5 million increase in payroll and

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payroll related expenses,which included increasing the number of personnel on our technology developmentstaff. General and administrative expenses as a percentage of net revenuedecreased to 12.1% in 2005 from 13.5% in 2004. We intend to continue to enhanceour technology and information systems and expect these expenses to increase inabsolute dollars in future periods.

*Salesand Marketing Expenses*

Sales and marketingexpenses increased 99.8% to $5.1 million in 2005 from $2.5 million in2004. This increase resulted primarily from an increased marketing campaign andcost of online advertising to attract new buyers. Sales and marketing expensesas a percentage of net revenue increased to 5.6% in 2005 from 3.9% in 2004. Weexpect our sales and marketing expenses to continue to increase in absolutedollars, as we intend to continue increasing our online marketing campaign inorder to attract new customers.

*Rescissionand Public Offering Costs*

In 2005, we expensed$442,000, primarily consisting of legal fees in order to resolve issues relatedto the unregistered sales of our common stock prior to effecting an initialpublic offering.

**Quarterly Operations Data**

Thefollowing tables set forth quarterly statements of operations data for theeight quarters ended December 31, 2006, including amounts expressed as apercentage of net revenue. This quarterly information is unaudited, but hasbeen prepared on the same basis as the annual financial statements and, in ouropinion, reflects all adjustments necessary for a fair representation of theinformation for the periods presented. This quarterly statement of operationsdata should be read in conjunction with our audited financial statements andthe related notes included elsewhere in this prospectus. Results of operationsfor any quarter are not necessarily indicative of results for any futureperiod.

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Historically,sales in the jewelry industry are seasonal and have been higher in the fourth quarteras a result of higher consumer spending during the December holiday season.Approximately 29.3%, 33.9%, and 28.5% of our net revenue in 2004, 2005, and2006, respectively, was generated during the fourth quarter. As we continue togrow, we expect to experience more pronounced seasonal fluctuations in our netrevenue and anticipate a disproportionate amount of our revenue in the fourthquarter in the future. Gross profit in the fourth quarter of 2006 declined whenwe offered free shipping promotions to our buyers.  We stopped this promotion after January 2007.
| ** **                                                                 | ** ** | **Quarters ended** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands,**                                                         | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| **except per  share data)**                                      | ** ** | **2005**                | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**         | ** ** |
|                                                                       |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                                                                |       | $                       | 20,720     |   | $ | 18,053 |   | $ | 21,098 |   | $ | 30,708 |   | $ | 34,694 |   | $ | 32,434 |   | $ | 27,061 |   | $ | 37,634 |   |
| Gross profit                                                               |       | 3,745                   |       | 3,624 |   | 4,338 |   | 7,615 |   | 9,178 |   | 7,689 |   | 6,662 |   | 7,661 |   |
| General and administrative                                                 |       | 2,589                   |       | 2,502 |   | 2,430 |   | 3,417 |   | 3,352 |   | 3,443 |   | 3,052 |   | 4,007 |   |
| Sales and  marketing                                                       |       | 875                     |       | 714 |   | 1,163 |   | 2,326 |   | 2,407 |   | 2,838 |   | 2,531 |   | 2,523 |   |
| Rescission and  public offering costs                                      |       | —                  |       | — |   | 442 |   | — |   | — |   | 1,231 |   | — |   | 56 |   |
| Depreciation and  amortization                                             |       | 38                      |       | 38 |   | 40 |   | 41 |   | 54 |   | 67 |   | 74 |   | 78 |   |
| Income from  operations                                                    |       | 243                     |       | 370 |   | 263 |   | 1,831 |   | 3,365 |   | 110 |   | 1,005 |   | 997 |   |
| Net income                                                                 |       | $                       | 243        |   | $ | 370 |   | $ | 244 |   | $ | 1,790 |   | $ | 3,292 |   | $ | 147 |   | $ | 997 |   | $ | 953 |   |
| Net income per  share available to common stockholders – Basic   |       | $                       | 0.01       |   | $ | 0.02 |   | $ | 0.01 |   | $ | 0.08 |   | $ | 0.14 |   | $ | 0.01 |   | $ | 0.04 |   | $ | 0.04 |   |
| Net income per  share available to common stockholders – Diluted |       | $                       | 0.01       |   | $ | 0.02 |   | $ | 0.01 |   | $ | 0.07 |   | $ | 0.14 |   | $ | 0.01 |   | $ | 0.04 |   | $ | 0.04 |   |
| Weighted average  number of shares outstanding – Basic           |       | 27,411                  |       | 23,312 |   | 23,312 |   | 23,312 |   | 23,312 |   | 23,312 |   | 23,311 |   | 23,270 |   |
| Weighted average number  of shares outstanding – Diluted         |       | 27,941                  |       | 23,835 |   | 23,880 |   | 23,829 |   | 23,827 |   | 23,822 |   | 23,801 |   | 23,750 |   |

 
| ** **                            | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2005** | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **Sept. 30,  2006** | ** ** | **Dec. 31,  2006** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **(unaudited)**          | ** ** |
| ** **                            | ** ** | ** **               | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** | ** **               | ** ** | ** **              | ** ** |
| Net revenue                           |       | 100.0                    | %          | 100.0                   | %          | 100.0                    | %          | 100.0                   | %          | 100.0                    | %          | 100.0                   | %          | 100.0                    | %          | 100.0                   | %          |
| Gross profit                          |       | 18.1                     |       | 20.1                    |       | 20.6                     |       | 24.8                    |       | 26.5                     |       | 23.7                    |       | 24.6                     |       | 20.4                    |       |
| General and  administrative           |       | 12.5                     |       | 13.9                    |       | 11.5                     |       | 11.1                    |       | 9.7                      |       | 10.6                    |       | 11.2                     |       | 10.6                    |       |
| Sales and  marketing                  |       | 4.2                      |       | 4.0                     |       | 5.5                      |       | 7.6                     |       | 6.9                      |       | 8.8                     |       | 9.4                      |       | 6.7                     |       |
| Rescission and  public offering costs |       | —                   |       | —                  |       | 2.1                      |       | —                  |       | —                   |       | 3.8                     |       | —                   |       | 0.1                     |       |
| Depreciation and  amortization        |       | 0.2                      |       | 0.2                     |       | 0.2                      |       | 0.1                     |       | 0.2                      |       | 0.2                     |       | 0.3                      |       | 0.2                     |       |
| Operating income                      |       | 1.2                      |       | 2.0                     |       | 1.2                      |       | 6.0                     |       | 9.7                      |       | 0.3                     |       | 3.7                      |       | 2.6                     |       |
| Net income                            |       | 1.2                      | %          | 2.0                     | %          | 1.2                      | %          | 5.8                     | %          | 9.5                      | %          | 0.4                     | %          | 3.7                      | %          | 2.5                     | %          |

 

37

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Additional operatingmetrics:
| ** **                               | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2006**           | ** ** | **2006**          | ** ** | **2006**           | ** ** | **2006**          | ** ** |
| ** **                               | ** ** | **(unaudited)**    | ** ** |
| ** **                               | ** ** | ** **         | ** ** |
| Average selling  price per order (gross) |       | $                  | 106        |              | $          | 106                |       | $                 | 108        |               | $          | 124               |       | $                  | 142        |              | $          | 133 |   | $ | 124 |   | $ | 123 |   |
| Average orders  per day                  |       | 2,285              |       | 2,381             |       | 2,381              |       | 2,953             |       | 2,901              |       | 2,832             |       | 2,587              |       | 3,757             |       |
| Average items  sold per day              |       | 7,923              |       | 6,699             |       | 6,669              |       | 6,901             |       | 7,173              |       | 7,730             |       | 7,293              |       | 9,685             |       |
| Acquisition cost  per new buyer          |       | 34                 |       | 30                |       | 27                 |       | 34                |       | 38                 |       | 49                |       | 51                 |       | 36                |       |
| Number of new buyers                     |       | 25,688             |       | 23,651            |       | 42,875             |       | 68,381            |       | 63,618             |       | 57,520            |       | 49,412             |       | 70,419            |       |
|                                          |            |                    |            |                   |            |                    |            |                   |            |                    |            |                   |            |                    |            |                   |            |  |  |  |  |  |  |  |  |

 

**Liquidityand Capital Resources**

Since inception, we havefunded our operations through the sale of equity securities and cash generatedfrom operations. The significant components of our working capital areinventory and liquid assets such as cash and accounts receivable, reduced bypost-dated check financing, revolving credit line, accounts payable, anddeferred revenue. Our business model contains beneficial working capitalcharacteristics: while we collect cash from sales to customers within severalbusiness days of the related sale, we typically have extended payment terms withour suppliers.

As of December 31,2006, we had a working capital surplus of $6.0 million and have no long-termdebt obligations. The “post-dated check financing” reflected on our balancesheet as of December 31, 2005 results from post-dated checks outstanding. It iscustomary for our vendors to accept checks post-dated by 60 days as extendedpayment for purchase of merchandise. Our post-dated check financing procedureshave changed in the year 2006. In prior years we have recorded post-datedchecks to vendors as though the checks had cleared our bank and thereforereduced outstanding accounts payable. We now employ “positive pay” procedureswith our financial institution, which preclude post-dated checks from clearingprior to the check date. Therefore, post-dated checks to vendors remain inaccounts payable and will not be deducted from accounts payable until the dateof the check. At year end December 31, 2006 all post-dated checks provided tovendors are subject to “positive pay.” As of December 31, 2006, we have $0post-dated check financing and accounts payable of $22.0 million. This compareswith $5.3 million of post-dated check financing and outstanding accountspayable of $7.3 million at December 31, 2005. In 2005, accounts payable haveincreased proportionately as post-dated check financing has decreased.

Net cash provided byoperating activities was $1.5 million in 2006 compared with $199,000 in 2005.Net cash is affected primarily by changes in net income and loss, inventories,post-dated check financing, revolving credit line,  accounts payable and deferred revenue. Werecorded net income of  $771,000 in 2004,$2.6 million in 2005 and $5.4 million in 2006. The improvement inprofitability resulted primarily from the improved gross profit margins of18.8%, 21.3%, 23.7% in 2004, 2005, and 2006, respectively. The implementationof the 3% transaction fee on merchandise sales also contributed to gross profitmargins improvement in 2006. Inventories, and accounts payable generallyincrease in line with sales growth and changes in our inventory strategy. Ourinventory strategy is influenced by our ability to secure inventory that webelieve will improve sales and our gross margins. In 2006, we also startedpurchasing loose diamonds and semi-precious stones and delivering them tomanufacturers to produce into finished jewelry inventory.

The increase in cashprovided by operating activities in 2006 compared with 2005 was $1.3 million.Net income was $5.4 million in 2006 compared with $2.6 million in 2005.Inventories increased by $15.4 million in 2006 compared with an increase of$5.2 million in 2005. Prepaid inventory increased by $3.1 million in 2006compared to none in 2005. Post-dated check financing decreased by $5.3 millionin 2006 compared with a decrease of $1.2 million in

38

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2005. We utilized therevolving credit line in the amount of $3.9 million in 2006 and we had norevolving line of credit in 2005. Accounts payable increased by $14.7 millionin 2006 compared with an increase by $2.4 million in 2005. The increase ininventories and corresponding increases in financing and accounts payable isattributable to our ability to purchase and hold inventory that we believe willimprove sales and our gross margins. Deferred revenue increased by $2.4 millionin 2006 compared to an increase of $518,000 in 2005. The increase in deferredrevenue resulted from ceasing operations at the end of the year to conductannual physical inventory, the extended year-end weekend holidays and higherdaily sales volume that have to be deferred.

Net cash used forinvesting activities was $35,000, $197,000, and $367,000 in 2004, 2005, 2006,respectively, and was primarily related to capital expenditures for our officeequipment and technology system infrastructure, including software.

Net cash used forfinancing activities was $780,000 in 2006. There were no financing activitiesin 2005. Net cash used for financing activities was $138,000 in 2004. Thefinancing activities were primarily related to net cash used for the retirementof common stock and purchase of treasury stock.

InJuly 2006, we entered into a revolving credit line agreement with LaSalle Bank,ABN AMRO, to provide working capital financing secured by inventories andtangible assets. The loan agreement allows for us to initially draw on a lineof credit up to $10 million, with a provision to increase the limit up to $15million with the future consent of the bank’s loan committee. All cash receiptsfrom our revenues are restricted to being deposited into a LaSalle Bankaccount, to be applied to current reported cash disbursements requirements,under a positive pay system, and then to the credit line outstanding balance.The revolving credit line agreement expires in July of 2010. As ofDecember 31, 2006, there was an outstanding balance of $3.9 million under therevolving credit line and remaining availability of $5.1 million afterdeducting reserve of $1.0 million for minimum required excess availability, whichis a reserve of the $10 million credit line that we cannot utilize. There is anunused fee of 0.15% or the unused portion of the revolving credit line.

In December 2006, wereceived a notice of default under the loan agreement for violating twocovenants. We failed to meet the trailing twelve month EBITDA covenant, due inpart to the expensing of rescission and public offering costs of $1.3 millionin 2006, and exceeded the $225,000 capital expenditure covenant with actualexpenditures of $367,000 in 2006. In February 2007, the lender waived thedefault and amended the covenants.

Webelieve that cash and cash equivalents currently on hand, cash flows fromoperations and the availability of our revolving line of credit will besufficient to continue our operations and to pursue our growth strategy for theforeseeable future. Our future capital requirements will depend on manyfactors, including the rate of our revenue growth; the timing and extent ofspending to enhance our website, network infrastructure, and transactionprocessing systems; the extent of our advertising and marketing programs; thelevels of the inventory we carry; and other factors relating to our business.Enhancement of our website, network infrastructure, and transaction processingsystems will require us to spend significantly more than we have in the past.Moreover, to date our spending in these areas has been lower than industryaverages. We anticipate increasing our system expenditures to accommodate theseneeds in the future. We may require additional financing in the future inorder to execute our operating plan. We cannot predict whether this additionalfinancing will be in the form of equity, debt, or a combination of debt orequity. We may not be able to obtain any necessary additional funds on atimely basis, on acceptable terms, or at all.

**AggregateContractual Obligations**

The following tablepresents our contractual obligations as of March 31, 2006, over the nextfive years and thereafter.
| **(in thousands)**     | ** ** | **Payments by Period** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **Total**                        | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **4-5** | ** ** | **After 5** | ** ** |
| **Contractual Obligations** | ** ** | **Amount**                       | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Property lease              |       | $                                | 2,701      |   | $ | 931 |   | $ | 1,770 |   | $ | — |   | $ | — |   |
|                             |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

39

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We lease a 50,000 squarefoot facility in Culver City, California, which serves as our corporateheadquarters and houses our sales, marketing, research and development,customer service, fulfillment, and warehouse operations. Our lease expires inOctober 2009. We expect that our current facility will satisfy our needsthrough 2009.

**Impactof Inflation**

The effect of inflationand changing prices on our operations was not significant during the periodspresented.

**Item7A.**  Quantitative and Qualitative DisclosureAbout Market Risk

Marketrisk represents the risk of loss arising from adverse changes in market ratesand foreign exchange rates. We do not believe that a change in market interestrates would have a material effect on our results of operations or financialcondition. Although we derive a portion of our sales outside of the UnitedStates, all of our sales are denominated in U.S. dollars. We have limitedexposure to financial market risks, including changes in interest rates andforeign currency exchange rates.

**Item8.**           FinancialStatements and Supplementary Data

See Item 15(a)

**Item9.**           Changes inand Disagreements With Accountants on Accounting and Financial Disclosure

None.

**Item9A.**  Controls and Procedures

***Evaluation of Disclosure Controls andProcedures***.

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission.  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were effective.  There were nosignificant changes made in our internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of theirevaluation.

**Item 9B.         OtherInformation**

None.

40

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**Part III**

We have omitted the information required inPart III of this annual report because we intend to include thatinformation in our definitive proxy statement for our 2007 annual meeting ofshareholders, which we expect to file before 120 days after December 31,2006. We incorporate that information in this annual report by reference to our2007 proxy statement.

**Item 10.****    Directors, Executive Officersand Corporate Governance.**

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2007 Annual Meeting of our stockholders.

We have adopted a code of conduct that applies to ourChief Executive Officer, Chief Financial Officer, and to all of our otherofficers, directors, employees and agents. The code of conduct is available atthe Corporate Governance section of the Investor Relations page on our websiteat *www.bidz.com*. We intend to disclosefuture amendments to, or waivers from, certain provisions of our code of ethicson the above website.

**Item 11.****    Executive Compensation.**

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2007 Annual Meeting of our stockholders.

**Item 12.****    Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2007 Annual Meeting of our stockholders.

**Item 13.****    Certain Relationships andRelated Transactions, and Director Independence.**

Information required by this item is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2007 Annual Meeting of our stockholders.

**Item 14.****    Principal Accountant Fees andServices.**

Information required by these items is incorporated byreference from the definitive proxy statement required to be filed pursuant toRegulation 14A for the 2007 Annual Meeting of our stockholders.

**Part IV**

**Item15. Exhibits and Financial Statement Schedules**
|            | The following  documents are filed as part of this report: |
|------------|------------------------------------------------------------|
|       | ** **                                                 | ** ** |
|            | **(a)**                                                    | **Financial  Statements** |
|       |                                                       |   |
|       |                                                       | Report of Independent  Registered Public Accounting Firm |
|       |                                                       | Balance Sheets  as of December 31, 2005 and 2006 |
|       |                                                       | Statements of  Operations for the Years ended December 31, 2004, 2005, and 2006 |
|       |                                                       | Statements of  Changes in Stockholders’ Equity (Deficit) for the Years ended  December 31, 2004, 2005, and 2006 |
|       |                                                       | Statements of Cash  Flows for the Years ended December 31, 2004, 2005, and 2006 |
| ** ** | ** **                                                 | Notes to  Financial Statements |

 

 

 

41

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Report of Independent Registered Public Accounting Firm

Board of Directors and StockholdersBIDZ.com, Inc.

We have audited the accompanying balancesheets of BIDZ.com, Inc. as of December 31, 2006 and 2005, and the relatedstatements of income, changes in stockholders’ equity (deficit), and cash flowsfor each of the three years in the period ended December 31, 2006.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged to perform an audit of the Company’sinternal control over financial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of BIDZ.com, Inc. as of December 31, 2006 and 2005, and the results ofits operations and its cash flows for each of the three years in the periodended December 31, 2006 in conformity with accounting principles generallyaccepted in the United States of America.
| /s/ Stonefield  Josephson, Inc. |   |   |
|---------------------------------|--------|--------|
|                            |
| Irvine, California              |
| March 6, 2007                   |

 

42

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**Bidz.com, Inc.**

** **

**Balance sheets**

 

*(inthousands, except share data)*
| ** **                                                                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **2005**              | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                 |       |                  |       |   |   |
| Cash                                                                                                                                                                                                                            |       | $                     | 7          |   | $ | 359 |   |
| Accounts  receivable                                                                                                                                                                                                            |       | 886                   |       | 1,930 |   |
| Inventories, net  of reserves of $331and $461 at December 31, 2005 and December 31, 2006  respectively                                                                                                                          |       | 15,921                |       | 31,183 |   |
| Prepaid  inventory                                                                                                                                                                                                              |       | —                |       | 3,125 |   |
| Other current  assets                                                                                                                                                                                                           |       | 158                   |       | 1,192 |   |
| Total  current assets                                                                                                                                                                                                           |       | 16,972                |       | 37,789 |   |
| Property and  equipment, net                                                                                                                                                                                                    |       | 384                   |       | 478 |   |
| Intangible asset                                                                                                                                                                                                                |       | 150                   |       | 150 |   |
| Deposits                                                                                                                                                                                                                        |       | 240                   |       | 125 |   |
| Total  assets                                                                                                                                                                                                                   |       | $                     | 17,746     |   | $ | 38,542 |   |
| ** **                                                                                                                                                                                                                      |       |                  |       |   |   |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                                                                                                                                        |       |                  |       |   |   |
| ** **                                                                                                                                                                                                                      |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                            |       |                  |       |   |   |
| Post-dated check  financing (includes related party amounts of $2,184 and $0 at December 31,  2005 and December 31, 2006 respectively)                                                                                          |       | $                     | 5,315      |   | $ | — |   |
| Revolving credit  line                                                                                                                                                                                                          |       | —                |       | 3,941 |   |
| Accounts payable  (includes related party amounts of $2,712 and $4,331 at December 31, 2005 and  December 31, 2006 respectively)                                                                                                |       | 7,297                 |       | 21,987 |   |
| Accrued expenses                                                                                                                                                                                                                |       | 1,774                 |       | 1,952 |   |
| Deferred revenue                                                                                                                                                                                                                |       | 1,577                 |       | 3,935 |   |
| Total  current liabilities                                                                                                                                                                                                      |       | 15,963                |       | 31,815 |   |
|                                                                                                                                                                                                                            |       |                  |       |   |   |
| Commitments and  contingencies                                                                                                                                                                                                  |       | —                |       | — |   |
|                                                                                                                                                                                                                            |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                      |       |                  |       |   |   |
| Preferred stock:  no par value; authorized 4,000,000 shares; none issued and outstanding at  December 31, 2005 and par value $0.001; authorized 4,000,000 shares: none  issued and outstanding at December 31, 2006             |       | —                |       | — |   |
| Common stock: no  par value; authorized 50,000,000 shares; issued and outstanding 23,312,500 at  December 31, 2005 and par value $0.001; authorized 100,000,000 shares; issued  and outstanding 23,233,904 at December 31, 2006 |       | 28,830                |       | 23 |   |
| Additional paid  in capital                                                                                                                                                                                                     |       | —                |       | 28,352 |   |
| Shares held in  treasury, at cost, 15,000 shares at December 31, 2006                                                                                                                                                           |       | —                |       | (90 | ) |
| Deferred  stock-based compensation                                                                                                                                                                                              |       | (100                  | )          | — |   |
| Accumulated  deficit                                                                                                                                                                                                            |       | (26,947               | )          | (21,558 | ) |
| Total  stockholders equity                                                                                                                                                                                                      |       | 1,783                 |       | 6,727 |   |
| ** **                                                                                                                                                                                                                      |       | $                     | 17,746     |   | $ | 38,542 |   |

 

43

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**Bidz.com,Inc.**

**Statementsof operations**

*(inthousands, except share and per share data)*
| ** **                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue:                                                     |       |                                        |       |   |   |   |   |
| Merchandise  sales                                               | ** ** | $                                           | 64,738     |   | $ | 90,309 |   | $ | 131,687 | ** ** |
| Commissions                                                      |       | 549                                         |       | 264 |   | 134 |   |
| Advertising                                                      |       | 37                                          |       | 6 |   | 2 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Total net  revenue                                               |       | 65,324                                      |       | 90,579 |   | 131,823 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Cost of revenue                                                  |       | 53,072                                      |       | 71,257 |   | 100,633 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Gross Profit                                                     |       | 12,252                                      |       | 19,322 |   | 31,190 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Operating expenses:                                              |       |                                        |       |   |   |   |   |
| General and  administrative                                      |       | 8,800                                       |       | 10,938 |   | 13,853 |   |
| Sales and  marketing                                             |       | 2,542                                       |       | 5,078 |   | 10,300 |   |
| Rescission and  public offering costs                            |       | —                                      |       | 442 |   | 1,287 |   |
| Depreciation and  amortization                                   |       | 139                                         |       | 157 |   | 273 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Total operating  expenses                                        |       | 11,481                                      |       | 16,615 |   | 25,713 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Income from operations                                           |       | 771                                         |       | 2,707 |   | 5,477 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Other income - interest  income                                  |       | —                                      |       | 22 |   | 80 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Other expense -  interest (expense)                              |       | —                                      |       | — |   | (48 | ) |
|                                                             |       |                                        |       |   |   |   |   |
| Income before income  tax expense                                |       | 771                                         |       | 2,729 |   | 5,509 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Income tax expense                                               |       | —                                      |       | 82 |   | 120 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Net income                                                       | ** ** | $                                           | 771        |   | $ | 2,647 |   | $ | 5,389 | ** ** |
|                                                             |       |                                        |       |   |   |   |   |
| Net income per share  available to common shareholders - basic   | ** ** | $                                           | 0.03       |   | $ | 0.11 |   | $ | 0.23 | ** ** |
|                                                             |       |                                        |       |   |   |   |   |
| Net income per share  available to common shareholders - diluted | ** ** | $                                           | 0.03       |   | $ | 0.11 |   | $ | 0.23 | ** ** |
|                                                             |       |                                        |       |   |   |   |   |
| Weighted average number  of shares outstanding - basic           |       | 27,466,302                                  |       | 24,337,159 |   | 23,302,036 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Weighted average number of shares outstanding - diluted          |       | 28,014,361                                  |       | 24,858,535 |   | 23,791,368 |   |

 

44

----

**Bidz.com,Inc.**

** **

**Statementsof changes in stockholders’ equity (deficit)**

 

*(in thousands)*
| ** **                                                                     | ** ** | ** **            | ** ** | ** **            | ** ** | **Class B** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Deferred**    | ** ** | ** **       | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------------|------------|-------------|------------|
| ** **                                                                     | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **paid in** | ** ** | **Treasury**   | ** ** | **Stock-based** | ** ** | **Accumulated** | ** ** | **Stockholders** | ** ** |
| ** **                                                                     | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **capital**     | ** ** | **shares**      | ** ** | **Compensation** | ** ** | **Deficit** | ** ** | **Deficit** | ** ** |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Balance at  December 31, 2003                                                  |       | 11,940                |       | $                     | 28,354     |             | 15,535     |           | $          | 426             |       | $               | —     |             | $          | —      |       | $ | (500 | ) | $ | (30,365 | ) | $ | (2,085 | ) |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Issuance of  common stock for asset purchases                                  |       | 25                    |       | 125                   |       | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | 125 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Issuance of  common stock in lieu of refund for merchandise return             |       | 3                     |       | 15                    |       | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | 15 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Issuance of  common stock for service                                          |       | 1                     |       | 5                     |       | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | 5 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Fair value of  options granted to non-employee consultants                     |       | —                |       | 27                    |       | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | 27 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Retirements of  common stock                                                   |       | (47                   | )          | (138                  | )          | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | (138 | ) |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Amortization of  deferred stock-based compensation                             |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | 200              |       | —      |       | 200 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Net income                                                                     |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | —           |       | 771         |       | 771 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Balance at  December 31, 2004                                                  |       | 11,922                |       | $                     | 28,388     |             | 15,535     |           | $          | 426             |       | $               | —     |             | $          | —      |       | $ | (300 | ) | $ | (29,594 | ) | $ | (1,080 | ) |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Conversion of  class B common stock to common stock                            |       | 15,535                |       | 426                   |       | (15,535          | )          | (426           | )          | —          |       | —          |       | —           |       | —      |       | — |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Cancellation of  common stock                                                  |       | (4,145                | )          | —                |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Fair value of options  granted to non-employee consultants                     |       | —                |       | 16                    |       | —           |       | —         |       | —          |       | —          |       | —           |       | —      |       | 16 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Amortization of  deferred stock-based compensation                             |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | 200              |       | —      |       | 200 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Net income                                                                     |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | —           |       | 2,647       |       | 2,647 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Balance at  December 31, 2005                                                  |       | 23,312                |       | $                     | 28,830     |             | —     |           | $          | —          |       | $               | —     |             | $          | —      |       | $ | (100 | ) | $ | (26,947 | ) | $ | 1,783 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Reincorporation  from California (no par value) to Delaware ($0.001 par value) |       | —                |       | (28,807               | )          | —           |       | —         |       | 28,807          |       | —          |       | —           |       | —      |       | — |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Issuance of  common stock for service                                          |       | 37                    |       | —                |       | —           |       | —         |       | 219             |       | —          |       | —           |       | —      |       | 219 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Fair value of  options granted to employee                                     |       | —                |       | —                |       | —           |       | —         |       | 16              |       | —          |       | —           |       | —      |       | 16 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Retirements of  common stock                                                   |       | (115                  | )          | —                |       | —           |       | —         |       | (690            | )          | —          |       | —           |       | —      |       | (690 | ) |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Purchase of  treasury stock                                                    |       | —                |       | —                |       | —           |       | —         |       | —          |       | (90             | )          | —           |       | —      |       | (90 | ) |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Amortization of  deferred stock-based compensation                             |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | 100              |       | —      |       | 100 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Net income                                                                     |       | —                |       | —                |       | —           |       | —         |       | —          |       | —          |       | —           |       | 5,389       |       | 5,389 |   |
|                                                                           |       |                  |       |                  |       |             |       |           |       |            |       |            |       |             |       |        |       |   |   |
| Balance at December 31,  2006                                                  |       | 23,234                |       | $                     | 23         |             | —     |           | $          | —          |       | $               | 28,352     |             | $          | (90         | )          | $ | — |   | $ | (21,558 | ) | $ | 6,727 |   |

 

45

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**Bidz.com,Inc.**

** **

**Statementsof cash flows**

** **

*(inthousands)*

 
| ** **                                                                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Cash flows provided by (used  for) operating activities:**                                      |       |                                        |       |   |   |   |   |
| Net income                                                                                        |       | $                                           | 771        |   | $ | 2,647 |   | $ | 5,389 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Adjustments to reconcile net  income to net cash provided by (used for) operating activities:** | ** ** | ** **                                  | ** ** | ** ** |   |   |   |
| Depreciation and  amortization                                                                    |       | 139                                         |       | 157 |   | 273 |   |
| Change in inventory  reserve                                                                      |       | (198                                        | )          | 22 |   | 130 |   |
| Amortization of  deferred stock-based compensation                                                |       | 200                                         |       | 200 |   | 100 |   |
| Stock-based  compensation                                                                         |       | 32                                          |       | 16 |   | 235 |   |
| **Changes in assets and  liabilities:**                                                           | ** ** | ** **                                  | ** ** | ** ** |   |   |   |
| **(Increase) decrease in assets:**                                                                | ** ** | ** **                                  | ** ** | ** ** |   |   |   |
| Accounts receivable                                                                               |       | 7                                           |       | (325 | ) | (1,044 | ) |
| Inventories                                                                                       |       | (4,944                                      | )          | (5,210 | ) | (15,392 | ) |
| Prepaid Inventory                                                                                 |       | —                                      |       | — |   | (3,125 | ) |
| Other current assets                                                                              |       | (54                                         | )          | (51 | ) | (1,034 | ) |
| Deposits                                                                                          |       | —                                      |       | 350 |   | 115 |   |
| **Increase (decrease) in  liabilities:**                                                          | ** ** | ** **                                  | ** ** | ** ** |   |   |   |
| Post-dated check  financing (restated)                                                            |       | 2,305                                       |       | (1,188 | ) | (5,315 | ) |
| Revolving credit line                                                                             |       | —                                      |       | — |   | 3,941 |   |
| Accounts payable                                                                                  |       | 2,457                                       |       | 2,394 |   | 14,690 |   |
| Accrued expenses                                                                                  |       | (731                                        | )          | 669 |   | 178 |   |
| Deferred revenue                                                                                  |       | 184                                         |       | 518 |   | 2,358 |   |
| Net cash provided by  (used for) operating activities                                             |       | 168                                         |       | 199 |   | 1,499 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Cash flows (used for) investing  activities:**                                                  |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                              |       | (35                                         | )          | (197 | ) | (367 | ) |
| **Cash flows provided by (used  for) financing activities:**                                      |       |                                        |       |   |   |   |   |
| Advance on short-term  loan, shareholder                                                          |       | (173                                        | )          | — |   | — |   |
| Payments from  short-term loan, shareholder                                                       |       | 173                                         |       | — |   | — |   |
| Payments for retirement  of common stock                                                          |       | (138                                        | )          | — |   | (690 | ) |
| Payments for repurchase  of common stock                                                          |       | —                                      |       | — |   | (90 | ) |
| Net cash provided by  (used for) financing activities                                             |       | (138                                        | )          | — |   | (780 | ) |
| ** **                                                                                        |       |                                        |       |   |   |   |   |
| **Net increase (decrease) in cash**                                                               |       | (5                                          | )          | 2 |   | 352 |   |
| **Cash, beginning of period**                                                                     |       | 10                                          |       | 5 |   | 7 |   |
| **Cash, end of period**                                                                           |       | $                                           | 5          |   | $ | 7 |   | $ | 359 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Supplemental disclosure of cash  flow information:**                                            |       |                                        |       |   |   |   |   |
| Interest paid                                                                                     |       | $                                           | —     |   | $ | — |   | $ | 48 |   |
| Income taxes paid                                                                                 |       | $                                           | —     |   | $ | 91 |   | $ | 323 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Supplemental disclosure of non-cash investing  and financing activities:**                      | ** ** | ** **                                  | ** ** | ** ** |   |   |   |
| Disposal of property  and equipment                                                               |       | **$**                                       | **—** |   | $ | 57 |   | $ | 17 |   |
| Stock issued for asset purchased                                                                  |       | $                                           | 125        |   | $ | — |   | $ | — |   |

 

46

----

**Bidz.com,Inc.**

**Notesto financial statements**

**(inthousands, except share and per share amounts)**

**(1)       Summaryof Significant Accounting Policies:**

*Businessand Organization:*

We were formed inNovember 1998 as a California corporation with our principal location ofbusiness in Los Angeles, California. We operate a website located at *www.bidz.com*for the purpose of sellingmerchandise, utilizing our unique online sales auction platform.

We sell ourproducts throughout the United States and in international markets,concentrated mainly in English speaking countries such as Canada, Australia andthe United Kingdom. Revenue generated from the United States accounted forapproximately 82.6%, 80.8%, and 79.2% of net revenue for the years endedDecember 31, 2004, 2005, and 2006, respectively.

*Recent Developments:*

On March 17, 2006,we filed a registration statement in connection with a planned initial publicoffering of our common stock. In June, 2006, our underwriters informed us thatthey were unable to complete the offering, because we did not obtain asufficient number of 180-day “lock-up” agreements from our existing stockholders.  Our underwriters have advised us that theyare unable to take our company public in the foreseeable future, unless weobtain a sufficient number of these lock-up agreements.  Accordingly, we postponed our plans toconduct the initial public offering.

On June 22, 2006 the Company reincorporated in the state of Delaware.In connection with our reincorporation in Delaware, we are authorized to issue100,000,000 shares of common stock, $0.001 par value, and 4,000,000 shares ofundesignated preferred stock, $0.001 par value.

*Useof Estimates:*

Preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities. These estimatesinclude certain reserves for inventories, returns and allowances, valuationallowance for deferred taxes, disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenue andexpenses during the reporting periods. Actual results could differ from thoseestimates.

*FairValue of Financial Instruments:*

The carryingamount of our cash, accounts receivable, accounts payable, deferred revenue andaccrued expenses approximates their estimated fair values as a result of theshort-term maturities of those financial instruments.

*Cashand Cash Equivalents:*

For purposes ofthe statements of cash flows, cash equivalents include all highly liquid debtinstruments with original maturities of three months or less that do not secureany corporate obligation. We had no cash equivalents at December 31, 2005or 2006.

Our credit cardprocessor maintains a security interest in substantially all our bank accounts.

*AccountsReceivable:*

Accounts receivableconsist mainly of amounts due from customer credit card and other electronicpayments billed but not yet received at period end. For the year ended December31, 2006, accounts receivable includes $224,000

47

----

from the sale ofour art and collectible inventory to a certified merchant. We had no allowancefor doubtful accounts at December 31, 2005 or 2006.

*Returnand Allowance Reserve:*

We estimatepotential future product returns and chargebacks  related to current period revenue. We analyzehistorical returns and changes in customer demand and acceptance of ourproducts when evaluating the adequacy of the sales returns reserve and otherallowances in any accounting period. If actual returns are greater than ourestimates, we will record additional returns and allowances in addition to ourestimates, which will result in lower net revenue recorded during that period.Reserves for returns and charge backs are included in accrued liabilities.

*Concentrationof Credit Risk:*

Financial instrumentsthat potentially subject us to significant concentrations of credit riskconsist primarily of cash and receivables. We derive our accounts receivableprimarily from revenue earned from customers located in the United States. Wemaintain an allowance for doubtful accounts based upon the expectedcollectability of accounts receivable. We record an allowance if one isnecessary. No customer accounted for more than 10% of revenue or receivablesduring 2004, 2005, or 2006.

We had aconcentration on two merchandise suppliers during 2004, 2005, and 2006. Inaddition, as more fully described in Note 12, we rely on 60-day paymentterms from most of our inventory vendors to finance our working capital needs.

*Inventories:*

Inventoriesconsist mainly of merchandise purchased for resale and are stated at the lowerof first-in, first-out cost (FIFO) or market. We record reserves against ourinventory for lower of cost or market equal to the difference between the costof inventory and the average selling price. In addition, for the year endedDecember 31, 2006 we recorded reserves for obsolete and slow moving inventoryof 100% of the value of inventory held for more than one year. For the yearended December 31, 2005, we recorded reserves of 50% of the value of inventoryheld for more than six months and 100% of the value of inventory held for morethan one year. If actual market conditions are less favorable than thoseprojected by us, specific reserves or additional inventory write-downs may betaken.

In 2006, we recordedin inventories loose diamonds and semi-previous stones that we purchased anddelivered to manufacturers to produce into finished jewelry inventory toresell.

*PrepaidInventory*

We record paymentsmade to our suppliers for merchandise purchases we have yet to receive.  These payments are recorded as prepaidinventory until they are in our physical possession and satisfactorily examined;we then categorize them as inventory.

*Propertyand Equipment:*

Property andequipment are recorded at cost and depreciated using the straight-line methodover the estimated useful lives of the related assets as follows:
|                         | ** ** | **Years** | ** ** |
|-------------------------|------------|-----------|------------|
| Computer software       |       | 3         |       |
| Computer hardware       |       | 3         |       |
| Furniture and equipment |       | 5         |       |

 

*IntangibleAsset:*

Our intangibleasset consists of the cost to acquire our domain name, which was $150,000 as ofDecember 31, 2005 and 2006. Our domain name has an indefinite life andtherefore is not subject to amortization. We perform an annual evaluation forimpairment on this intangible asset. No impairment existed at December 31,2005 or 2006.

48

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*Long-LivedAssets:*

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” long-lived assets to beheld and used are analyzed for impairment whenever events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable. SFAS No. 144 applies to assets subject to amortization. Wereview property, equipment, and other long-lived assets subject to amortizationfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. We measure recoverabilityby comparing the assets’ carrying amount with future undiscounted net cashflows the assets are expected to generate.

If such assets areconsidered to be impaired, we measure the impairment to be recognized by theamount by which the carrying amount of the assets exceeds the projecteddiscounted future cash flows arising from the assets or their fair values,whichever is more determinable.

*RevenueRecognition:*

We derive ourrevenue from five sources: merchandise sales, shipping charges, auctiontransaction fees, commissions and advertising. In accordance with SAB 104, werecognize revenue from all five sources when the following revenue recognitioncriteria are met: (1) persuasive evidence of an arrangement exists;(2) the product has been shipped or the service has been rendered and thecustomer assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured.

We recognizemerchandise sales upon shipments made to individual consumers and businessesthat are fulfilled from our warehouse. We generally require online payment bycredit card or other electronic payment methods at the point of sale. We recordamounts received or billed prior to shipment of goods to customers as deferredrevenue. We reduce gross sales by returns, charge backs from customers, andother discounts redeemed to obtain such sales.

We report shippingand handling fees and costs in accordance with Emerging Issues Task Force (“EITF”)issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” Assuch, in the Statement of Earnings all amounts billed to customers by usrelated to shipping and handling are included in “Net revenue” and our shippingcosts are included in “Cost of revenue.”

OnNovember 1, 2005 we began charging a 3% auction transaction fee on allsales, excluding sales tax. Auction transaction fee revenue included inmerchandise sales amounted to $0, $0.6 million and $4.1 million in 2004, 2005,and 2006, respectively.

We derivecommission revenue from sales of Certified Merchant merchandise that is ownedby third parties and recognize that revenue when services have been rendered.For commission revenue, we recognize as revenue only the commission portion ofthe price our customers pay for the purchased products because we are acting asan agent in such transactions. Commissions are also reduced by the impact ofreturns and other discounts redeemed to obtain such sales.

We recognizeadvertising revenue, which consists primarily of pop-unders, a form of onlineadvertising on the World Wide Web intended to increase web traffic or captureemail addresses, when the services are rendered and the advertising revenue isknown and collectible.

Outbound shippingcharges to customers are included in merchandise sales and amounted to$6.3 million, $9.4 million and $15.1 million in 2004, 2005, and 2006,respectively.

*Costof Revenue:*

Cost of revenueincludes product costs, inbound and outbound shipping charges, packaging andshipping supplies, insurance on shipments, product repair and service costs,and credit card and other electronic payment fees, and is recorded in the sameperiod in which related revenue have been recorded.

Outbound shippingcosts on merchandise sales totaled $3.8 million, $5.0 million, and$6.9 million in 2004, 2005, and 2006, respectively.

49

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*DeferredRevenue:*

Deferred revenuerepresents cash received and credit card and other electronic paymentreceivables for products that have not yet been shipped.

*IncomeTax Expense:*

We recognizedeferred tax assets and liabilities for the future tax consequences attributableto differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases. We measure deferred taxassets, including tax loss and credit carryforwards and liabilities, usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Werecognize the effect of a change in tax rates on deferred tax assets andliabilities in income in the period that includes the enactment date. Deferredincome tax expense represents the change during the period in the deferred taxassets and deferred tax liabilities. The components of the deferred tax assetsand liabilities are individually classified as current and non-current based ontheir characteristics. Realization of the deferred tax asset depends ongenerating sufficient taxable income in future years. Deferred tax assets arereduced by a valuation allowance when we believe it is more likely than notthat some portion or all of the deferred tax assets will not be realized.

*Stock-BasedCompensation:*

Prior to January1, 2006, we measured compensation expense to employees for our stock optionincentive plans under the recognition and measurement provisions of AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees,*and related interpretations.Utilizing the intrinsic value method prescribed by APB No. 25, we did notrecord compensation expense when stock options were granted to eligibleparticipants as long as the exercise price was not less than the fair marketvalue of the stock when the option was granted.

We recordedstock-based compensation representing the difference between the optionexercise price and the deemed fair value of our common stock on the grant datefor financial reporting purposes. We determined the deemed fair value of ourcommon stock based upon the most recent third-party sale of our common stockknown to us. Had different assumptions or criteria been used to determine thedeemed fair value of our common stock, different amounts of stock-basedcompensation could have been reported.

In accordance withStatement of Financial Accounting Standards (‘‘SFAS’’) No. 123, ‘‘Accountingfor Stock-Based Compensation,’’ and SFAS No. 148, ‘‘Accounting for Stock-BasedCompensation-Transition and Disclosure,’’ which amended SFAS No. 123, wedisclosed pro forma net income and net income per share as if the fair valuebased method had been applied in measuring compensation expense. The disclosureprovisions of SFAS No. 148 were effective for financial statements for interimperiods beginning after December 15, 2002. We adopted the disclosurerequirements in the first quarter of 2003. The fair values of options andshares issued pursuant to our option plan at each grant date were estimatedusing the Black-Scholes option pricing model. Because there has been no publicmarket for our common stock, we used the minimum value method in determiningthe expected volatility of our common stock was zero. The transition provisionsdid not have an impact on our financial position or results of operations as wedid not elect to adopt the fair value-based method of accounting forstock-based employee compensation under SFAS No. 123.

On January 1,2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS123R’’) requiring that share-based payment transactions be recognized in thefinancial statements based on the fair value of the equity or liabilityinstrument issued. For the year ended December 31, 2006, we used theBlack-Scholes option pricing model to estimate the value of our options inimplementing SFAS 123R and the calculated method to determine expectedvolatility, rather than the minimum value method, which we previously used todetermine expected volatility. Under SFAS 123R stock-based compensation expenserecognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Accordingly,stock-based compensation expense recognized in the statements of income will bereduced for estimated forfeitures, which is none or 0% for the year endedDecember 31, 2006. SFAS 123R requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In the pro forma information required under SFAS148 for the period prior to 2006, we did not account for forfeitures, as alloptions granted were fully vested at the date of grant and were not subject toany service period conditions. We expensed stock-based compensation on the dateof grant, as all options granted prior to January 1, 2006, vested

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immediately. Inthe future, we anticipate that stock-based compensation will include vestingprovisions and therefore stock-based compensation expense in the future will bereduced for estimated forfeitures.

We adopted SFAS123R using the modified prospective method which requires the application ofthe accounting standard as of January 1, 2006. Under this transition method, weare required to recognize compensation cost beginning January 1, 2006 for theportion of outstanding awards for which the requisite service has beenrendered, based on the grant-date fair value of those awards calculated underSFAS 123 for our pro forma disclosures. As of December 31, 2006, stock optionsto purchase 115,000 shares were not fully vested. For the year ended December31, 2006, we issued stock options to purchase 235,000 shares and 120,000 stockoptions were subsequently forfeited. The adoption of SFAS 123R resulted in astock-based compensation expense of $16,000 for the year ended December 31,2006. The unamortized stock-based compensation expense as of December 31, 2006is $260,000. In accordance with the modified prospective method, the financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123R.

The pro formainformation for the years ended December 31, 2004 and 2005 required underSFAS No. 123 was as follows (in thousands, except per share amounts):

The followingtable illustrates the effect on net income (loss) and income (loss) per shareif we had applied the fair value recognition provisions of FASB StatementNo. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation (in thousands, except per share data).
|                                                                                                                                         | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income (loss), as reported                                                                                                          |       | $        | 771        |     | $          | 2,647 |   |
| Add: Stock-based employee compensation expense under APB 25,  intrinsic value method, net of related tax effects                        |       | —   |       | —   |       |
| Deduct: Total stock-based employee compensation expense determined  under SFAS 123, fair value based method, net of relaxed tax effects |       | (8,789   | )          | (785     | )          |
| Pro forma net income (loss)                                                                                                             |       | $        | (8,018     | )        | $          | 1,862 |   |

 
|                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Net Income  (loss) per share    |       |     |       |     |       |
| Basic – as reported   |       | $        | 0.03       |     | $          | 0.11 |   |
| Basic – pro forma     |       | $        | (0.29      | )        | $          | 0.07 |   |
| Diluted – as reported |       | $        | 0.03       |     | $          | 0.11 |   |
| Diluted –  pro forma  |       | $        | (0.29      | )        | $          | 0.07 |   |

 

The fair value forthese options under SFAS 123, fair value based method, was estimated onthe date of grant using a Black-Scholes option pricing model with theassumptions discussed in Note 9.

Disclosures forthe current year ended December 31, 2006 are not presented as the amounts arerecognized in the financial statements in accordance with SFAS 123R, asdiscussed above.

*InternalUse Software:*

Pursuant to SOP98-1, we expense all costs incurred for the development of internal usesoftware that relate to the planning and post-implementation phases of thedevelopment and certain maintenance and enhancement costs. We capitalize andamortize direct costs incurred in the application development phase over thesoftware’s estimated useful life of three years. The capitalized software costsof $250,000 was incurred from 2002 to 2004, and have been amortized sinceplaced in use. At December 31, 2005 and 2006, the net unamortized balanceincluded in Property

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and Equipment is$161,000 and $80,000, respectively. We expense research and development costsand other computer software maintenance costs related to software developmentas incurred.

*Basicand Diluted Income Per Share:*

In accordance withSFAS No. 128, “Earnings Per Share,” we compute the basic income (loss) percommon share by dividing net income (loss) available to common stockholders bythe weighted average number of common shares outstanding. We compute dilutedloss per common share similarly to basic income (loss) per common share, exceptthat we increase the denominator to include the number of additional common sharesthat would have been outstanding if the potential common shares had been issuedand if the additional common shares were dilutive. At December 31, 2004,2005, and 2006, we had 7,728,500 shares, 8,342,000 shares, and 8,353,000shares, respectively, of common stock equivalents upon the exercise of theemployee options and non-employee stock options. These common stock equivalentsconsisted of 7,126,500 employee stock options and 602,000 non-employee stockoptions as of December 31, 2004; 7,715,000 employee stock options and627,000 non-employee stock options as of December 31, 2005; and 7,726,000employee stock options and 627,000 non-employee stock options as of December31, 2006. As of December 31, 2004, dilutive common stock equivalents totaled548,059 consisting of 331,934 employee stock options and 216,125 non-employeestock options. As of December 31, 2005, dilutive common stock equivalentstotaled 521,376, consisting of 305,251 employee stock options and 216,125non-employee stock options. As of December 31, 2006, dilutive common stockequivalents totaled 489,342 consisting of 291,716 employee stock options and197,626 non-employee stock options.

The dilutiveeffect of outstanding stock options is reflected in diluted earnings per shareby application of the treasury stock method for the years endedDecember 31, 2004, 2005 and 2006. The following table sets forth thecomputation of basic and diluted net income (loss) per share (in thousands,except share and per share data):
|                                                     | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Basic and  diluted net income per share:            |       |       |       |       |       |       |       |
| Numerator:                                          |       |       |       |       |       |       |       |
| Net income                                          |       | $          | 771        |       | $          | 2,647      |       | $ | 5,389 |   |
| Denominator:                                        |       |       |       |       |       |       |       |
| Weighted average shares of common stock outstanding |       | 27,466,302 |       | 24,337,159 |       | 23,302,026 |       |
| Effect of dilutive securities                       |       | 548,059    |       | 521,376    |       | 489,342    |       |
| Denominator for diluted calculation                 |       | 28,014,361 |       | 24,858,535 |       | 23,791,368 |       |
| Net income per  share, basic                        |       | $          | 0.03       |       | $          | 0.11       |       | $ | 0.23 |   |
| Net income per share,  diluted                      |       | $          | 0.03       |       | $          | 0.11       |       | $ | 0.23 |   |

 

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*AdvertisingExpense:*

We recognizeadvertising expenses in accordance with SOP 93-7, “Reporting on AdvertisingCosts.” As such, we expense the costs of producing advertisements at the timeproduction occurs and we expense the cost of communicating advertisements inthe period during which the advertising space or airtime is used. We recognizeInternet advertising expenses based on the terms of the individual agreements,which are generally (1) during the period customers are acquired;(2) based on the number of clicks generated during a given period over theterm of the contract; or (3) based on the number of e-mails sent during ane-mail distribution campaign. Advertising expenses totaled $2.5 million,$5.1 million, and $10.3 million during the years ended December 31,2004, 2005, and 2006, respectively.

*Reclassification:*

Certain amountsfrom prior years have been reclassified to conform to the current year’spresentation.

*Rescissionand Public Offering Costs:*

These costs consist primarily of regulatory filing fees, accountantfees, legal fees and printing expenses incurred in the planned initial publicoffering, which amounted to $442,000 and $1.3 million for the years endedDecember 31, 2005 and 2006, respectively. Costs incurred in 2005 relateprimarily to rescission related costs of the planned initial public offeringwhereas costs incurred in 2006 relate to the registration statement of theplanned initial public offering. The capitalized costs of the rescission andinitial public offering were expensed when the Company determined it was unableto complete the offering and subsequently requested withdrawal of theregistration statement.

*NewAccounting Pronouncements:*

In September of 2006 the FASB issued SFASB No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement plans-anamendment of FASB Statements No. 87, 88, and 132R.” The statement requiresemployers to account for the over or under funded status of defined benefitpostretirement plans as an asset or liability and recognized changes in thefunded status through comprehensive income.  This statement currently hasno impact on our financial statements.

In September 2006, the FASB issued Statement SFASNo. 157 (“FAS 157”), “*Fair ValueMeasurements*,” which defines fair value, establishes guidelines formeasuring fair value and expands disclosures regarding fair value measurements.FAS 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in various prior accounting pronouncements.SFAS 157 is effective for fiscal years beginning after November 15, 2007.Earlier adoption is permitted, provided the company has not yet issuedfinancial statements, including for interim periods, for that fiscal year. TheCompany is currently evaluating the impact of FAS 157, but does not expect theadoption of FAS 157 to have a material impact on its financial position,results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB*Statement *109*“(“FIN 48”) which clarifies the accounting for uncertainty in incometaxes recognized in accordance with SFAS No. 109, “*Accounting for Income Taxes.”*FIN 48 is a comprehensivemodel for how a company should recognize, measure, present, and disclose in itsfinancial statements uncertain tax positions that the company has taken orexpects to take on a tax return. If an income tax position exceeds a morelikely than not (greater than 50%) probability of success upon tax audit, thecompany will recognize an income tax benefit in its financial statements.Additionally, companies are required to accrue interest and related penalties,if applicable, on all tax exposures consistent with jurisdictional tax laws.This interpretation is effective on January 1, 2007.  This statementcurrently has no impact on our financial statements.

On June 28, 2006 the Board of the FASB ratified theconclusion reached by the EITF and contained therein in Issue No. 06-03. The Task Force reached a conclusion that the presentation of taxes on either agross or net basis is an accounting policy decision that should be disclosedpursuant to Opinion 22.  Currently, the Company presents its sales taxliability on a net basis.  Sales are not grossed up with the attendanttaxes deducted as a separate line item. The EITF becomes effective for interimand annual reporting periods beginning after December 15, 2006.  At suchtime, the Company will disclose this matter in its accounting policies.

In February of 2006, the FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments-an amendment of FASB Statements No.133 and 140.”  The pronouncement, among other things, permits fair valuemeasurements for hybrid financial instruments.  In March of 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendmentof FASB Statement No. 140.”  This pronouncement requires entities torecognize a servicing asset or servicing liability under certain circumstances. Neither of these pronouncements have any impact on our financial statements.

InDecember 2004, the FASB issued SFAS No. 123R (Revised 2004), “Share-BasedPayment” (“SFAS 123R”). This statement addresses the accounting forshare-based payment transactions in which a company receives employee

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services inexchange for the company’s equity instruments or liabilities that are based onthe fair value of the company’s equity securities or may be settled by theissuance of these securities. SFAS 123R eliminates the ability to accountfor share-based compensation using APB 25 and generally requires that suchtransactions be accounted for using a fair value method. The provisions of thisstatement are effective for financial statements issued in the first quarterreporting period commencing after December 15, 2005. Therefore, we haveadopted the provisions of SFAS 123R in our first quarter of 2006.

**(2)       Inventories:**

Inventoriesconsist of the following at December 31, 2005 and 2006 (in thousands):
|                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Fine jewelry,  watches and other         |       | $        | 16,252     |     | $          | 29,511 |   |
| Loose diamonds  and semi-precious stones |       | —   |       | 2,133    |       |
| Product  Inventories                     |       | 16,252   |       | 31,643   |       |
| Less: allowance  for obsolescence        |       | (331     | )          | (461     | )          |
|                                     |       | $        | 15,921     |     | $          | 31,183 |   |

 

As of December 31,2006, all inventories have been pledged as collateral for our revolving creditline with LaSalle Bank, ABN AMRO.

**(3)       Propertyand Equipment:**

Property andequipment consists of the following at December 31, 2005 and 2006 (inthousands):
|                                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Computer  hardware and software                  |       | $        | 231        |     | $          | 581 |   |
| Furniture and  equipment                         |       | 262      |       | 262      |       |
| Internal  developed software                     |       | 250      |       | 250      |       |
|                                             |       | 743      |       | 1,093    |       |
| Less:  accumulated depreciation and amortization |       | 359      |       | 615      |       |
|                                             |       | $        | 384        |     | $          | 478 |   |

 

Depreciation andamortization expense of property and equipment totaled $139,000, $157,000, and$273,000 for the years ended December 31, 2004, 2005, and 2006,respectively.

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As of December 31,2006, all property and equipment have been pledged as collateral for ourrevolving credit line with LaSalle Bank, ABN AMRO.

**(4)     RevolvingCredit Line**

In July 2006, we entered into a revolving credit line agreement withLaSalle Bank, ABN AMRO, to provide working capital financing secured byinventories and tangible assets. The agreement allows for us to initially drawon a line of credit up to $10 million, with a provision to increase the limitup to $15 million with the future consent of the bank’s loan committee. Allcash receipts from our revenues are restricted to being deposited into aLaSalle Bank account, to be applied to current reported cash disbursementsrequirements, under a positive pay system, and then to the credit lineoutstanding balance. The revolving credit line agreement expires in July of2010. As of December 31, 2006, there was an outstanding balance of $3.9million under the revolving credit line and remaining availability of $5.1million after deducting a reserve of $1.0 million for minimum required excessavailability which is a reserve of the $10 million credit line that we cannotutilize. There is an unused fee of 0.25% on the unused portion of the revolvingcredit line.

Day-to-day drawdowns on our credit line are subject to the prevailingprime rate. The interest is calculated on the average outstanding balance andcompound monthly. As of December 31, 2006 our effective interest rate was8.25%.  We have the option to extendedterm advances, for 30, 60, or 90 days that are subject to LIBOR rates. Therates will be a certain percentage above the LIBOR rates and will vary with thematurity term and amount borrowed. Interest is calculated over the stated termat an annual rate. As of December 31, 2006 we had no advances under LIBOR.

In December 2006,we received a notice of default under the Loan Agreement for violating twocovenants. We failed to meet the trailing twelve month EBITDA covenant due inpart to the expensing of rescission and public offering costs of $1.3 millionin 2006. We also failed to meet the capital expenditure covenant which was setat $225,000 compared to actual expenditures of $367,000 in 2006. In February2007, the lender waived the default by deleting the two violated covenants for2006 and replacing with amended covenants for minimum trailing twelve monthEBITDA and capital expenditures effective for 2007. Under the terms andconditions of the revolving credit line agreement, the Company is subject tocertain restrictive covenants including the following restrictive financialcovenants: -

Minimum TTM EBITDA:Actual Trailing Twelve Month (TTM) EBITDA compliance is measured on a monthlybasis, and shall not vary negatively from the Dollar amount for planned LTMEBITDA, set forth in an agreed upon schedule, for the applicable period, and issubject to resetting in Lender’s discretion based upon a business plan forsubsequent periods acceptable to Lender.

CapitalExpenditures: Borrower shall not make capital expenditures in excess of anagreed upon amount for each fiscal year covered by the loan agreement, whichwas $225,000 in 2006 and is $1.2 million in 2007. All capital expenditureslimits are subject to resetting on an annual basis at the Lender’s discretionbased upon a business plan for subsequent periods and are acceptable to the Lender.

Minimum ExcessAvailability: We are to maintain an Excess Availability of (a) $1.0 million,while the Maximum Revolver Amount is $10.0 million, and (b) $1.5 million, ifand after the Maximum Revolver Amount is $15.0 million. This covenant issubject to resetting at the Lender’s discretion based upon a business plan forsubsequent periods and is acceptable to Lender.

**(5)       AccountsPayable and Post-Dated Check Financing:**

As of December 31,2005 there was $7.9 million in post-dated check financing that reduced ourcash balance and accounts payable.

As of December 31,2006 there was no post-dated check financing. During the year ending December31, 2006 we employ “positive pay” procedures with our financial institution bytransmitting check disbursement information to the financial institution toallow for our review and approval of exception transaction prior to them beingposted to our account, which preclude post-dated checks from clearing prior tothe check date. Therefore, post-dated checks to vendors remain in accountspayable until the date of the check when it is then deducted from accountspayable. At year end December 31, 2006 all post-dated checks provided tovendors are subject to “positive pay” which effectively eliminated post-datedcheck financing.

**(6)       AccruedExpenses:**

Accrued expensesconsist of the following at December 31, 2005 and 2006 (in thousands):
|                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Merchandise  purchases                   |       | $        | 489        |     | $          | 115 |   |
| Accrued payroll  and other related costs |       | 387      |       | 920      |       |
| Accrued net  sales returns               |       | 123      |       | 164      |       |
| Other accrued  expenses                  |       | 415      |       | 610      |       |
| Accrued  marketing expenses              |       | 360      |       | 143      |       |
|                                     |       | $        | 1,774      |     | $          | 1.952 |   |

 

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**(7)           Commitments:**

The following tablepresents our contractual obligations at December 31, 2006, over the nextfive years and thereafter (in thousands):
|                                  | ** ** | ** ** | ** ** | **Less**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|----------------------------------|------------|------------|------------|-----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                       | ** ** | **Total**  | ** ** | **Than**        | ** ** | **1-3**    | ** ** | **4-5**    | ** ** | **After 5** | ** ** |
| **Payments by Period** | ** ** | **Amount** | ** ** | **1 Year** | ** ** | **Years**  | ** ** | **Years**  | ** ** | **Years**        | ** ** |
| Property lease                   |       | $          | 2,701      |            | $          | 931        |       | $          | 1,770      |             | $          | — |   | $ | — |   |
|                                  |            |            |            |                 |            |            |            |            |            |                  |            |  |  |  |  |  |

 

We lease a 50,000square-foot office and warehouse space in Culver City, California. The leaseexpires in October 2009. We are obligated to pay real estate taxes,insurance, and maintenance expenses. We expect that, in the normal course ofbusiness, the lease will be renewed or replaced by leases on other propertiesupon termination. Thus, we anticipate that future minimum lease commitmentswill likely be more than the amounts shown for 2006. Rental expenses foroperating leases totaled $837,000, $885,000, and $908,000 for the years endedDecember 31, 2004, 2005, and 2006, respectively.

**(8)           Stockholders’ Equity:**

*DelawareReincorporation*

OnJune 22, 2006 the Company reincorporated in the state of Delaware. Inconnection with our reincorporation in Delaware, we are authorized to issue100,000,000 shares of common stock, $0.001 par value, and 4,000,000 shares ofundesignated preferred stock, $0.001 par value.

*PreferredStock*

Our certificate ofincorporation authorizes our Board of Directors, without any vote or action bythe holders of our common stock, to issue preferred stock from time to time inone or more series. Our Board of Directors will be authorized to determine thenumber of shares and to fix the designations, powers, preferences, and therelative, participating, optional, or other rights of any series of preferredstock. Depending upon the terms of preferred stock established by our Board ofDirectors, any or all series of preferred stock could have preference over thecommon stock with respect to dividends and other distributions and upon ourliquidation. If any shares of preferred stock are issued with voting powers,the voting power of the outstanding common stock would be diluted. No shares ofpreferred stock are presently outstanding, and we have no present intention toissue any shares of preferred stock.

*CommonStock*

The holders of commonstock are entitled to one vote per share on all matters to be voted upon by stockholders.There will be no cumulative voting. Subject to preferences that may beapplicable to any outstanding preferred stock, holders of common stock will beentitled to receive ratably such dividends as may be declared by our Board ofDirectors out of funds legally available for that purpose. In the event of theliquidation, dissolution, or winding up of our company, the holders of commonstock will be entitled to share ratably in all assets remaining after paymentof liabilities and the liquidation preferences of any outstanding preferredstock. The common stock has no preemptive or conversion rights, othersubscription rights, or redemption or sinking fund provisions.

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No dividends have beendeclared or paid on our common stock through December 31, 2006.

In 2005, David Zinbergsurrendered 4,144,689 shares of common stock for cancellation. Also in2005, David Zinberg and Marina Zinberg converted all their Class B commonstock to common stock and after the abovementioned cancellation they own 3,542,343and 7,707,657 shares of common stock respectively.

In 2006, common stockshares totaling 20,000 were issued to independent board members. 15,000 shareswere issued to an employee, and 1,404 shares were issued to a non-employee forservices rendered. We repurchased and retired 115,000 shares from the ChiefFinancial Officer (CFO) and we repurchased 15,000 shares from an employee thatis held in Treasury.

*DeferredStock-Based Compensation*

In connection withcertain stock grants to two employees during the year ended December 31,2001, we recognized $2.0 million in deferred stock-based compensation forthe deemed fair value of common stock at the date of the grant. We include suchamounts as a reduction of stockholders’ equity (deficit). We amortize suchamounts over the vesting period of five years in accordance with FASBInterpretation No. 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans.”

Amortization expensestotaled $200,000, $200,000, and $100,000 during the years endedDecember 31, 2004, 2005, and 2006, respectively. As of December 31, 2006,all existing deferred stock-based compensation grants were fully vested and allassociated costs had been fully amortized.

To meet the statutoryobligation for the applicable income and other employment taxes, 115,000 commonshares were surrendered back to us in the three months ended September 30, 2006and a net-share settlement was effected. Based on a fair market value of $6.00per share on the vesting date as determined based on a combination of factorsthat include recent share transactions between shareholders and an independentvaluation of the Company, the employee’s tax obligations to the taxingauthorities were approximately $690,000. The net-share settlement had the effectof share repurchases by us as it reduced and retired the number of sharesoutstanding and did not represent an expense to the Company. The employeereceived no cash proceeds and taxes were paid directly to the taxingauthorities.  

**(9)           Stock Option Plans:**

We adopted our 2001 StockOption Plan, our 2002 Special Stock Option Plan and our 2006 Award Plan(collectively, the “Plans”), in January 2001, January 2002, and March2006, respectively. Under the Plans, we may issue incentive stock options toour employees and non-qualified stock options to consultants and non-employees.The vesting requirements, performance thresholds and other terms and conditionsof options granted under the Plans will be determined by our CompensationCommittee and Board of Directors. Outstanding options all vest immediatelyprior to 2006 and have a four year vesting period for options granted in 2006.Additional shares may be granted under the Plans. At December 31, 2006,1,097,000 shares were available for future grants under the Plans.

The following is asummary of stock option activity as of December 31, 2006, and changesduring the year ended December, 2006: 

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|                                   | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted**     | ** ** | ** **                | ** ** |
|-----------------------------------|------------|------------|------------|---------------|------------|------------------|------------|---------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **    | ** ** | **Average**      | ** ** | ** **                | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Remaining**    | ** ** | **Aggregate**             | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Average**   | ** ** | **Life of** | ** ** | **Instrinsic**            | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contract**     | ** ** | **Value as of** | ** ** |
| **Options**                       | ** ** | **Shares** | ** ** | **Price**     | ** ** | **(Years)**      | ** ** | **12/31/06**              | ** ** |
| Oustanding at  January 1, 2006    |       | 8,342,000  |       | $             | 5.63       |             |       |                      |       |   |
| Granted                           |       | 235,000    |       | $             | 6.00       |             |       |                      |       |   |
| Exercised                         |       | —     |       | —        |       |             |       |                      |       |
| Forfeited                         |       | (120,000   | )          | $             | 6.00       |             |       |                      |       |   |
| Expired                           |       | (104,000   | )          | 4.81          |       |             |       |                      |       |
| Outstanding at  December 31, 2006 |       | 8,353,000  |       | $             | 5.64       |             | 3.76       |                      | $          | 2,976,750 |   |
| Exercisable at December  31, 2006 |       | 8,238,000  |       | $             | 5.64       |             | 3.75       |                      | $          | ,2,976,750 |   |

 

During the year endedDecember 31, 2006, we issued 235,000 stock options to purchase shares inour common stock of which 120,000 were subsequently forfeited before the yearend. No options were exercised during 2006 and there was no recognized taxbenefit related thereto. Stock-based compensation cost for the year endedDecember 31, 2006, was $16,000. We recognize compensation expense on astraight-line basis over the requisite service period for each stock optiongrant. The stock options were granted at prices equal to the fair market valueof our common stock on the date of grant and have a four year vesting periodwith 25% vesting on each subsequent anniversary of the grant date. The stockoptions expire 5 years from the grant date.

The following is asummary of stock option activity for the years ended December 31, 2004,2005, and 2006. 
| ** **                        | ** ** | **2004**   | ** ** | **2005**           | ** ** | **2006**   | ** ** |
|-----------------------------------|------------|------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted**       | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Average**        | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise ** | ** ** | ** ** | ** ** | **Exercise ** | ** ** | ** ** | ** ** | **Exercise ** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Price**          | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Outstanding at  beginning of year |       | 1,654,500  |       | $                  | 3.95       |       | 7,728,500  |   | $ | 5.59 |   | 8,342,000 |   | $ | 5.63 |   |
| Granted                           |       | 6,162,000  |       | 6.00               |       | 703,500    |       | 6.00 |   | 235,000 |   | 6.00 |   |
| Exercised                         |       | —     |       | —             |       | —     |       | — |   | — |   | — |   |
| Canceled /  forfeited             |       | (88,000    | )          | 3.96               |       | (90,000    | )          | 4.83 |   | (224,000 | ) | 5.45 |   |
| Outstanding at  year-end          |       | 7,728,500  |       | $                  | 5.59       |       | 8,342,000  |   | $ | 5.63 |   | 8,353,000 |   | $ | 5.64 |   |
| Options exercisable at  year-end  |       | 7,728,500  |       | $                  | 5.59       |       | 8,342,000  |   | $ | 5.63 |   | 8,238,000 |   | $ | 5.64 |   |

 

The following tablesummarizes information about stock options outstanding and exercisable atDecember 31, 2006. 
|                                             | ** ** | **Options Outstanding **     | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **and Exercisable at ** | ** ** |
| ** **                                  | ** ** | **December 31, 2006**        | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | **Weighted** | ** ** | **Remaining** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | **Average** | ** ** | **Life of ** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | **Exercise** | ** ** | **Contract** | ** ** |
| **Range of Exercise Prices** | ** ** | **Shares**                             | ** ** | **Price** | ** ** | **(years)** | ** ** |
| $3.01 – $4.00                          |       | 1,056,000                              |       | $ | 3.75 |   | 0.96 |   |
| $4.01 – $5.00                          |       | 400,500                                |       | $ | 4.50 |   | 1.93 |   |
| $5.01 – $6.00                          |       | 6,781,500                              |       | $ | 6.00 |   | 4.30 |   |
|                                        |       | 8,238,000                              |       | $ | 5.64 |   | 3.76 |   |

 

58

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The weighted-averagegrant date fair value of options granted during 2004, 2005, and 2006 was $1.43,$1.14, and $2.40 per share, respectively.

*Stock OptionCompensation*

In connection withcertain stock option grants to employees, consisting of 6,137,000,  678,500, and 235,000 options during the yearsended December 31, 2004, and 2005, and 2006, respectively, we recognizedapproximately $0,  $0, and $16,000,respectively, of employee stock-option compensation.

Options granted in 2006were valued in accordance with SFAS 123R. The fair value of these options wascalculated using a Black-Scholes option pricing model using the followingassumptions: (1) risk-free interest rates of 4.7% to 5.0%, (2) anexpected life of five years, (3) expected volatility of 30% to 37%, (4)expected forfeitures of 0%, and (5) a dividend yield of 0%. Because therewas no public market for our common stock and in accordance with SFAS 123R, weused the calculated method to determine volatility.

Options granted in 2004and 2005 were valued for the excess of deemed fair value of shares of commonstock subject to such options over the exercise price of these options at thegrant date in accordance with APB Opinion No. 25, “Accounting for StockIssued to Employees.”. The options granted in 2004, include a seven-year optiongranted outside of our Plans to Mr. Zinberg for the purchase of 6,000,000shares of common stock at an exercise price of $6.00 per share, whichrepresented the fair value of the stock on the date of the grant.

During the years endedDecember 31, 2004 and 2005, we granted 25,000 and  25,000 options, respectively, to consultantsand non-employees. We recorded stock option compensation expenses of $27,000and $16,000 related to these grants in 2004, and 2005, respectively. The fairvalue for these options was measured on the grant date. At December 31,2004 and 2005, the fair value of these options was calculated using a Black-Scholesoption pricing model using the following assumptions: (1) risk-freeinterest rates of 4.0% to 4.5%, (2) an expected life of three to fiveyears, (3) expected volatility of 0.01%, and (4) a dividend yield of0%. Because there was no public market for our common stock, we used theminimum value method to determine volatility.

**(10)         Income Tax Expense:**

Income tax expenseamounted to $82 and $120 for each of the years ended December 31, 2005 and2006 (an effective rate of 3% for 2005 and 2% for 2006). A reconciliation ofthe provision (benefit) for income tax expense with amounts determined byapplying the statutory U.S. federal income tax rate to income before income taxexpense is as follows (in thousands):   
| ** **                                                                                          | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax  (benefit) at federal statutory rate of 34%                                            |       | $        | 262        |     | $          | 928      |       | $ | 1,873 |   |
| State taxes, net  federal tax benefits                                                              |       | 45       |       | 162      |       | 364      |       |
| Meals and  entertainment                                                                            |       | 15       |       | 22       |       | 26       |       |
| Limitation on  executive compensation—section 162 (m)                                          |       | 47       |       | —   |       | 387      |       |
| Expiration of  state net operating loss                                                             |       | —   |       | —   |       | —   |       |
| Change in  valuation allowance, net of reduction of net operating loss and cancellation  of options |       | (373     | )          | (1,078   | )          | (2,535   | )          |
| Minimum Tax  Credit                                                                                 |       | —   |       | —   |       | 108      |       |
| Excess benefit  of vested stock                                                                     |       | —   |       | —   |       | (170     | )          |
| Other                                                                                               |       | 4        |       | 48       |       | 67       |       |
| Total income tax  provision                                                                         |       | $        | —     |     | $          | 82       |       | $ | 120 |   |

 

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The components of ourdeferred tax assets and liabilities at December 31, 2005 and 2006 were asfollows (in thousands):
| ** **                                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets – net operating loss carryforwards |       | $        | 6,017      |     | $          | 4,499 |   |
| Employee stock  options                                      |       | 930      |       | 912      |       |
| Inventory  reserve                                           |       | 132      |       | 197      |       |
| Minimum tax  credit carryforwards                            |       | 80       |       | 233      |       |
| State Taxes                                                  |       | —   |       | (324     | )          |
| Accrued Expenses                                             |       | —   |       | 79       |       |
| Allowance for  Returns                                       |       | —   |       | 70       |       |
| Excess Benefit  of Vested Stock                              |       | —   |       | 199      |       |
| Other                                                        |       | —   |       | 35       |       |
| Total deferred  tax assets                                   |       | $        | 7,159      |     | $          | 5,900 |   |
| Valuation  allowance                                         |       | $        | (7,159     | )        | $          | (5,900 | ) |
| Net deferred tax assets                                      |       | $        | —     |     | $          | — |   |

 

As a result of ourhistory of losses, a valuation allowance has been provided for the full amountof our net deferred tax assets. It is uncertain when such benefits will berealized.

As of December 31,2006, we had federal and state income tax loss carryforwards of approximately$11.1 million and $7.6 million, respectively, which may be used tooffset future taxable income. The carryforwards expire in years 2013 through2023.

The tax benefits fromshare based compensation awards that are tax deductible in 2006 are included inthe deferred tax assets and subjected to the tax valuation reserve. The actualtax deduction exceeds the compensation cost recognized by the company forfinancial reporting purposes. The excess tax benefits will increase the company’sadditional paid in capital as required by FAS 123R when the company realizesthe tax benefits as the tax net operating losses are utilized.

We also adopted FASBStaff Position No. FAS 123(R)-3, **Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards** (“FSP 123(R)-3”).Under FSP 123(R)-3, the Company elected to use the short-cut method tocalculate the historical pool of windfall tax benefits. The Company elected touse the tax law ordering approach for purposes of determining whether an excessof tax benefit has been realized.

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**(11)         Segment Information:**

Net revenue by geographicarea is presented based upon the country of destination. No foreign countryaccounted for 10% or more of net revenue for any of the fiscal years presented.Net revenue by geographic area was as follows for the years ended December 31,2004, 2005 and 2006 (in thousands): 
|               | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| United States |       | $        | 53,986     |     | $          | 73,199   |       | $ | 104,338 |   |
| International |       | 11,338   |       | 17,380   |       | 27,485   |       |
| Total         |       | $        | 65,324     |     | $          | 90,579   |       | $ | 131,873 |   |

 

Long-lived assets includeproperty and equipment and intangible assets that resided in the United Statesduring the years ended December 31, 2004, 2005, and 2006.

**(12)         Concentrations:**

Purchases of merchandisefrom one of our top two vendors, which is a related party (see Note 14),constituted 33.8%, 37.1%, and 26.4% of total merchandise purchased by us in theyears ending December 31, 2004, 2005, and 2006, respectively. Purchases ofmerchandise from our top two vendors amounted to $22.6 million,$27.8 million, and $34.4 million, representing 48.1%, 42.1%, and31.1%, respectively, of the total purchases during the years endedDecember 31, 2004, 2005, and 2006, respectively.

Outstanding accountspayable to our top two vendors (net of amounts of post-dated checks) totaled$3.2 million and $4.5 million as of December 31, 2005 and 2006,respectively. We have post-dated check financing from these vendors amountingto $2.5 million and $0 as of December 31, 2005 and 2006,respectively. We have “positive pay” which eliminated post-dated checkfinancing from July 17, 2006, as more fully described in Note 5. Loss ofeither of these vendors may have a negative impact on our operations.

**(13)         Contingencies:**

We are subject to variouslegal proceedings and claims that arise in the ordinary course ofbusiness.  Although the Company believes it has defenses to theallegations and intends to pursue them vigorously, currently, management doesnot currently have sufficient information to assess the validity of the claimsor the amount of potential damages.  Company management currentlybelieves, however, that resolution of such legal matters will not have amaterial adverse impact on the Company’s financial position, results ofoperations or cash flows.

*PriorSales of Securities*

From our inception, in1999, and in 2000, 2001, 2002, and mid-2003, we raised $20.5 million ingross equity capital offerings by selling our common stock in the followingapproximate amounts for each year: 
| **Year** | ** ** | **Number of Shares** | ** ** | **Weighted Ave. Price per Share** | ** ** |
|----------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| 1999     |       | 978,070                        |       | $                                                     | 4.00       |   |
| 2000     |       | 1,198,191                      |       | $                                                     | 4.00       |   |
| 2001     |       | 580,621                        |       | $                                                     | 4.47       |   |
| 2002     |       | 1,051,924                      |       | $                                                     | 5.00       |   |
| 2003     |       | 753,262                        |       | $                                                     | 5.26       |   |

 

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We sold these shares toapproximately 830 investors. The persons associated with us who solicited theseinvestors were not licensed as broker-dealers in any state or with the SEC.

We also issued toapproximately 30 persons or entities shares of common stock in exchange forservices and other non-cash consideration valued in excess of $5.5 millionin the following approximate amounts for each year: 
|          | ** ** | **Number of ** | ** ** | **Weighted Ave. Price ** | ** ** |
|----------|------------|--------------------------|------------|-----------------------------------------|------------|
| **Year** | ** ** | **Shares**               | ** ** | **per Share**                      | ** ** |
| 1999     |       | 57,500                   |       | $                                       | 4.00       |   |
| 2000     |       | 100,000                  |       | $                                       | 4.00       |   |
| 2001     |       | 585,700                  |       | $                                       | 4.09       |   |
| 2002     |       | 445,774                  |       | $                                       | 5.00       |   |
| 2003     |       | 18,673                   |       | $                                       | 5.60       |   |
| 2004     |       | 28,544                   |       | $                                       | 5.00       |   |

 

We also issued toapproximately 248 employees or other service providers options to purchasecommon stock in the following amounts for each year: 
|          | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
|----------|------------|--------------------|------------|--------------|------------|
| **Year** | ** ** | **Options**        | ** ** | **Price**    | ** ** |
| 2002     |       | 1,332,000          |       | $            | 3.75       |   |
| 2003     |       | 485,500            |       | $            | 4.50       |   |
| 2004     |       | 6,162,000          |       | $            | 6.00       |   |

 

None of these optionshave been exercised.

These offers and sales ofthe common stock and options to purchase common stock were not registered underthe federal and state securities laws, but were issued in reliance uponexemptions from such registration under Section 4(2) of the Securities Actand Rule 506 of Regulation D promulgated thereunder. Similarly, inemploying persons who were not licensed as broker-dealers, we relied on certainexemptions from the broker-dealer licensing requirements of the Exchange Actand of state securities laws.

After conducting theseoffers and sales of common stock and granting these options to purchase commonstock, we determined that the offers and sales did not comply with theexemptions from registration under the Securities Act and similar provisions oflaws in each state in which our stockholders reside, because certain of ouremployees who solicited investors engaged in a “general solicitation” ofsecurities. In addition, these employees were required to be licensed asbroker-dealers with the SEC and various states, but they were not so licensed.We also determined that because investors did not receive information regardingour potential liability for these violations of federal and state securitieslaws, the common stock was issued to persons who failed to receive adequateinformation under federal and state securities laws. In such situations anumber of remedies may be available to regulatory authorities and the investorswho purchased common stock in those offerings, including, without limitation, aright of rescission, civil penalties, seizure of our assets, a restrainingorder or injunction, and a court order to pay restitution and costs. As aresult, the investors in and other holders of our common stock are entitled toreturn their shares to us and assert a legal claim to receive back from us thefull price they paid, plus interest. In the event that a rescission by all ofour stockholders were to occur, we would be liable for the $20.5 millionwe received in exchange for our common stock, in addition to interest ofapproximately $11.3 million through December 31, 2006. We may also beliable for the $5.5 million of services rendered and property exchanged inconsideration for the issuance of common stock, in addition to interest ofapproximately $2.9 million through December 31, 2006. In addition, wemay be liable for the $1.3 million that we anticipate offering tonon-management optionees in the rescission offer.

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Accordingly, we aresubject to potential liabilities, including penalties and fines, under theSecurities Act, the Exchange Act, the regulations thereunder, and applicablestate securities laws. Both federal and state securities laws also provideremedies to investors for such violations, which remedies include rescission,or a right to recover the investment plus interest from the date of issuance ofthe security, and, if the investor no longer owns the security, damages equalto the difference between the investment amount plus interest from the date ofissuance and the value or price of the security at the time of its sale.

After voluntarilyreporting these violations to the SEC, the SEC staff advised us that it wouldnot undertake an investigation in the matter. However, we have not approachedstate securities commissioners in the states in which our investors reside.Consequently, there is substantial uncertainty concerning what action the stateregulators may take against us and what effect any such action will have on ourbusiness and our ability to obtain additional financing.

On March 17, 2006, we fileda registration statement in connection with a planned initial public offeringof our common stock.  We planned toconduct a rescission offer following the initial public offering in order toaddress sales of certain of our securities made in violation of certainprovisions of federal and state securities laws. In June, 2006, ourunderwriters informed us that they were unable to complete the offering,because we did not obtain a sufficient number of 180-day “lock-up” agreementsfrom our existing stockholders.  Ourunderwriters have advised us that they are unable to take our company public atthis or any other time in the foreseeable future, unless we obtain a sufficientnumber of these lock-up agreements. Accordingly, we postponed our plans to conduct the initial publicoffering and the rescission offer.

If we do not have thefinancial resources for a rescission offer, any assertion by our stockholdersof their legal claims against us could have a material and adverse effect onour liquidity, our financial position, results of operations, and cash flows.Moreover, even if we are successful in obtaining the financing necessary toconduct a rescission offer and make such offer to our stockholders, if, priorto the rescission offer, any stockholders who acquired their common stock inour offerings sell their common stock for less than the price at which theypurchased their shares, they will be entitled to recover from us damages equalto the difference between their investment amount plus interest from the dateof issuance and the value or price of the security at the time of its sale.Because these stockholders will no longer own our common stock, we will not beable to extinguish these damage claims by offering to rescind the stockholder’spurchase of our common stock.

The probability thatstockholders would assert a claim against us and the extent of the ourliability, if any, are contingent on a number of factors, including astockholder’s desire to rescind his or her purchase based on the price of ourrescission offer and the key purchase price of the tender for shares,applicable legal precedent, and statutes of limitation. As of the date of thisfiling, two of our shareholders have filed actions seeking a rescission oftheir investment in our common stock, which was in the aggregate $60,000, andunspecified damages.  Based on currentfacts known to management at this time, management does not believe thatassertion of any such claims by the Company’s shareholders in a material amountis probable. Accordingly, no accruals for either potential amounts payable orreserves have been made at this time.

*Cartierv. Bidz.com*

We are a defendant in alawsuit filed by Cartier, and Cartier International, B.V., in the United StatesDistrict Court Southern District of New York in April 2006. The lawsuitalleges that Cartier has proprietary rights, including trade dress, patents,trademarks, copyrights and others, in watch designs known as a Tank, TankFrancaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and TankDevan, and further alleges that we have infringed upon those rights by sellingwatches bearing copies of one or more of the watch designs. We intend to defendthe lawsuit vigorously. We do not believe the outcome of the case will have amaterially adverse effect on our financial position.  The court has yet to set a trial date.

*YossiGatlin v. Bidz.com*

We are a defendant in alawsuit brought by Yossi Gatlin in October 2005 for an automobilepurchased from us in March 2002 for $28,000. Gatlin alleges that we didnot provide prior registration so that Gatlin was not able to register thevehicle. Gatlin is claiming his payment of $28,000, the value of the automobilerepresented to be $350,000, and loss of the use of the automobile in the amountof $100,000. We have accrued a liability in the amount of $28,000 for thislawsuit.

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*LloydWatnik & Ann Fagelson v. Bidz.com*

Bidz.com and DavidZinberg are defendants in a lawsuit brought by shareholders, Lloyd Watnik andAnn Fagelson, on November 27, 2006. The shareholders, who invested a total of$60,000 or $30,000 each in 2002, are seeking reparations based on allegationsof misrepresentation and breach of fiduciary duties. We do not believe theoutcome of the case will have a materially adverse effect on our financialposition and we intend to defend the lawsuit vigorously.

**(14)         Related Party Transactions:**

We purchasedapproximately 33.8%, 37.1%, and 26.4% of our merchandise in 2004, 2005, and2006, respectively, from a stockholder that beneficially owns 1,200,000 sharesof our common stock as of December 31, 2006, as more fully explained inNote 13.

In 2005, David Zinberg,our President and Chief Executive Officer, purchased an automobile from us for$57,000 which represented the fair market value of the automobile..

OurVice-President of Technology is a major shareholder of Technolect, Inc.which provided technology consulting services to us in the amount of $150,000for the year ended December 31, 2005 and $12,000 for the year endedDecember 31, 2006. We believe that these transactions were on terms noless favorable to us than could have been obtained from unrelated thirdparties. We own 10% of the common stock of Technolect, Inc., which weacquired for nominal consideration at the inception of Technolect, and haveotherwise made no investments in Technolect. As of December 31, 2006, wehave a cost basis of $0 in Technolect.

Marina Zinberg, who is aVice President and owns 33.2% of our outstanding shares, is the sister of DavidZinberg, our President and Chief Executive Officer. During 2006 we paid Ms.Zinberg a salary of $100,000. Ms. Zinberg, was formerly our corporatesecretary and treasurer, reports to David Zinberg.

On October 18, 2006 thecompany sold its entire remaining art inventory to a certified merchant for$335,000 which constitute less than one percent of the 2006 net revenue. Anex-employee of our company is a substantial owner of the certified merchant.

**(15)         Subsequent Events:**

In February 2007, commonstock shares totaling 18,750 were issued to independent board members as partof their annual compensation.

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**(b)           Financial Statement Schedules:**

**Schedule II –Valuation and Qualifying Accounts**

**(in thousands)**
| ** **                                            | ** ** | **Balance at ** | ** ** | ** **          | ** ** | ** **     | ** ** | ** **                   | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|----------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **the**                   | ** ** | **Charged to** | ** ** | ** **     | ** ** | ** **                   | ** ** |
| ** **                                            | ** ** | **Beginning of**     | ** ** | **Revenue,**        | ** ** | ** **     | ** ** | **Balance at the** | ** ** |
| ** **                                            | ** ** | **the**                   | ** ** | **Cost, or**   | ** ** | ** **     | ** ** | **End of the**     | ** ** |
| **Description**                                       | ** ** | **Year**                  | ** ** | **Expenses**        | ** ** | **Deductions** | ** ** | **Year**                     | ** ** |
| **Reserve  deducted from asset to which it applies:** | ** ** | ** **                | ** ** | ** **          | ** ** | ** **     | ** ** | ** **                   | ** ** |
| Year ended  December 31, 2005                    |       |                      |       |                |       |           |       |                         |       |
| Reserve for  inventory                                |       | $                         | 309        |                | $          | 314            |       | $                            | 292        |   | $ | 331 |   |
| Reserve for  sales returns                            |       | —                    |       | 408                 |       | (285           | )          | 123                          |       |
| Reserve for  chargebacks                              |       | —                    |       | 30                  |       | —         |       | 30                           |       |
|                                                  |       |                      |       |                |       |           |       |                         |       |
| Year ended  December 31, 2006                    |       |                      |       |                |       |           |       |                         |       |
| Reserve for  inventory                                |       | $                         | 331        |                | $          | 259            |       | $                            | 129        |   | $ | 461 |   |
| Reserve for  sales returns                            |       | 123                       |       | 300                 |       | (259           | )          | 164                          |       |
| Reserve for chargebacks                               |       | 30                        |       | —              |       | (5             | )          | 25                           |       |

 

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**(c)           Exhibits**

The following exhibits are incorporated by reference or filed herewith
| Exhibit    | ** ** | ** **                                                                                                                                                          |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Exhibits**                                                                                                                                                        |
|       |       |                                                                                                                                                                |
| 2.1        |       | Agreement and Plan of Merger, dated as of March 15,  2006, by and between Bidz.com, Inc., a Delaware corporation, and Bidz.com,  Inc., a California corporation (1) |
| 3.1        |       | Certificate of Incorporation of the Registrant (2)                                                                                                                  |
| 3.2        |       | Bylaws of the Registrant (3)                                                                                                                                        |
| 10.1       |       | 2001 Stock Option Plan(4)                                                                                                                                           |
| 10.2       |       | 2002 Stock Option Plan(5)                                                                                                                                           |
| 10.3       |       | 2006 Stock Award Plan (6)                                                                                                                                           |
| 10.4       |       | Employment Agreement, dated as of June 6, 2006,  between Bidz.com, Inc. and David Zinberg (7)                                                                       |
| 10.4.1     |       | Employment Agreement, dated as of November 1, 2002,  between Bidz.com, Inc. and David Zinberg (8)                                                              |
| 10.5       |       | Employment Agreement, dated as of June 6, 2006, between  Bidz.com, Inc. and Lawrence Y. Kong (9)                                                               |
| 10.6       |       | Stock Vesting Agreement, dated as of June 30, 2001,  between Bidz.com, Inc. and Lawrence Y. Kong (10)                                                               |
| 10.7       |       | Form of Indemnification Agreement between Bidz.com,  Inc. and each officer and director (11)                                                                        |
| 10.7.1     |       | Indemnification Agreement, dated as of November 1,  2002, between Bidz.com, Inc. and David Zinberg (12)                                                        |
| 10.8       |       | Lease, between Bidz.com, Inc. and PAS Trust, dated  as of April 15, 2003, and Addendum No. 2, dated as of March 3,  2004(13)                         |
| 10.9       |       | Client Service Agreement  dated January 2, 2006 between Bidz.com, Inc. and Administaff  Companies II, L.P. (14)                                           |
| 10.10      |       | Loan and Security Agreement by Bidz.com, Inc. and  LaSalle Retail Finance, dated July 12, 2006   (15)                                                          |
| 10.11      |       | Employment Agreement, dated as of March 1, 2007  between Bidz.com, Inc. and Leon Kuperman.                                                                          |
| 10.12      |       | Employment Agreement, dated as of February 21, 2007  between Bidz.com, Inc. and Claudia Liu.                                                                        |
| 31.1       |       | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                    |
| 31.2       |       | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                    |
| 32         |       | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  (16)                                   |

 

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(1)                  Incorporated by reference to Exhibit 2.1 ofRegistrant’s Form S-1 (File No. 333-132545).

(2)                  Incorporated by reference to Exhibit 3.1 ofRegistrant’s Form S-1 (File No. 333-132545).

(3)                  Incorporated by reference to Exhibit 3.2 ofRegistrant’s Form S-1 (File No. 333-132545).

(4)                  Incorporated by reference to Exhibit 10.1 ofRegistrant’s Form 10 (File No. 000-51257).

(5)                  Incorporated by reference to Exhibit 10.2 ofRegistrant’s Form 10 (File No. 000-51257).

(6)                  Incorporated by reference to Exhibit 10.3 ofRegistrant’s Form S-1 (File No. 333-132545).

(7)                  Incorporated by reference to Exhibit 10.4 ofRegistrant’s Form S-1 (File No. 333-132545).

(8)                  Incorporated by reference to Exhibit 10.3 ofRegistrant’s Form 10 (File No. 000-51257).

(9)                  Incorporated by reference to Exhibit 10.5 ofRegistrant’s Form S-1 (File No. 333-132545).

(10)            Incorporated by reference to Exhibit 10.6 ofRegistrant’s Form S-1 (File No. 333-132545).

(11)         Incorporated by reference to Exhibit 10.7 ofRegistrant’s Form S-1 (File No. 333-132545).

(12)            Incorporated by reference to Exhibit 10.4 ofRegistrant’s Form 10 (File No. 000-51257).

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(13)            Incorporated by reference to Exhibit 10.5 ofRegistrant’s Form 10 (File No. 000-51257).

(14)            Incorporated by reference to Exhibit 10.9 ofRegistrant’s Form S-1 (File No. 333-132545).

(15)            Incorporated by reference to Exhibit 10.10 ofRegistrant’s Form 10 (File No. 000-51257)

(16)            The certification attached as Exhibit 32 thataccompanies this Annual Report on Form 10-K is not deemed filed with theSecurities and Exchange Commission and is not to be incorporated by referenceinto any filing of Bidz.com, Inc. under the Securities Act of 1933 or theSecurities Exchange Act of 1934, whether made before or after the date of thisAnnual Report on Form 10-K, irrespective of any general incorporation languagecontained in such filing.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or Section 15(d) of the Securities Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                        | BIDZ.COM, INC. |
|------------------------|---------------------|
|                   |                |
|                   |                |
|                   | By:                 | /s/ DAVID  ZINBERG |
|                   |                |   |
|                   | ** **          | **David  Zinberg** |
|                   | ** **          | **President  and Chief Executive Officer** |
|                   |                |   |
| Dated: March 12,  2007 |                |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signature            | ** ** | **Title**                            | ** ** | **Date**       |
|----------------------|------------|--------------------------------------|------------|----------------|
|                 |       |                                 |       |           |
| /s/ DAVID ZINBERG    |       | Chairman of the Board, President and |       | March 12, 2007 |
| David Zinberg        |       | Chief Executive Officer (Principal   |       |           |
|                 |       | Executive Officer)                   |       |           |
|                 |       |                                 |       |           |
| /s/ LAWRENCE Y. KONG |       | Chief Financial Officer and          |       | March 12, 2007 |
| Lawrence Y. Kong     |       | Director (Principal Financial and    |       |           |
|                 |       | Accounting Officer)                  |       |           |
|                 |       |                                 |       |           |
| /s/ PETER G. HANELT  |       | Director                             |       | March 12, 2007 |
| Peter G. Hanelt      |       |                                 |       |           |
|                 |       |                                 |       |           |
| /s/ MAN JIT SINGH    |       | Director                             |       | March 12, 2007 |
| Man Jit Singh        |       |                                 |       |           |

 

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