**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the quarterly period ended  June 30, 2008**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                             |
| **o**      | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                         |
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the transition  period                 to** |

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **95-4728109**          |
|----------------------------------|------------|-------------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer       |
| incorporation  or organization)  |       | Identification  Number) |

 

**3562 Eastham Drive****Culver City, California90232**

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for thepast 90 days.     Yes x   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non accelerated filer. See definition of “acceleratedfiler and large filer” in Rule 12b-2 of the Exchange Act). (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

o  Yes    x  No

 

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as of July 31,2008: 23,605,516

 

 

 

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**TABLE OF CONTENTS**

 
| PART I. FINANCIAL INFORMATION | 3                                                                                                                        |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                       | Financial Statements                                                                                                     | 3 |
|                               | Condensed Balance Sheets as of  December 31, 2007 and June 30, 2008 (unaudited)                                | 3 |
|                               | Condensed Statements of  Income for the three month and six month periods ended June 30, 2007 and  2008 (unaudited) | 4 |
|                               | Condensed Statements of Cash  Flows for the six month periods ended June 30, 2007 and 2008 (unaudited)              | 5 |
|                               | Notes to Financial  Statements (unaudited)                                                                               | 6 |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 11 |
| Item 3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 17 |
| Item 4.                            | Controls and  Procedures                                                                                                 | 17 |
|                               |                                                                                                                     |   |
| PART II. OTHER INFORMATION    | 18                                                                                                                       |
| Item 1.                            | Legal Proceedings                                                                                                        | 18 |
| Item 1.A.                          | Risk Factors                                                                                                             | 18 |
| Item 2.                            | Unregistered  Sales and Purchases of Equity Securities                                                                   | 28 |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                                                     | 28 |
| Item 6.                            | Exhibits                                                                                                                 | 29 |
|                               |                                                                                                                     |   |
| SIGNATURES                         | 29                                                                                                                       |

 

Thisquarterly report includes forward looking statements. All statements other thanstatements of historical facts contained in this registration statement,including statements regarding our future financial position, business strategyand plans and objectives of management for future operations, are forwardlooking statements. The words “believe,” “may,” “will,” “estimate,” “continue,”“anticipate,” “intend,” “expect” and similar expressions, as they relate to us,are intended to identify forward looking statements. We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends that we believe may affect our financialcondition, results of operations, business strategy and financial needs. Theseforward looking statements are subject to a number of risks, uncertainties andassumptions discussed throughout this filing.

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets**

 

*(In thousands, except share and per sharedata)*

 
| ** **                                                                                                                                                                       | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** **            | ** ** | **(Unaudited)**   | ** ** |
| **Assets**                                                                                                                                                                       | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                                                  |       |                  |       |              |       |
| Cash                                                                                                                                                                             |       | $                     | 4,808      |              | $          | 618 |   |
| Accounts receivable                                                                                                                                                              |       | 2,275                 |       | 1,452             |       |
| Inventories, net of reserves of $1,075 and  $509 at December 31, 2007 and June 30, 2008, respectively                                                                  |       | 56,686                |       | 54,732            |       |
| Other current assets                                                                                                                                                             |       | 5,958                 |       | 4,118             |       |
| Total current assets                                                                                                                                                             |       | 69,727                |       | 60,920            |       |
| Property and equipment, net                                                                                                                                                      |       | 1,323                 |       | 1,401             |       |
| Intangible asset                                                                                                                                                                 |       | 161                   |       | 161               |       |
| Deposits                                                                                                                                                                         |       | 104                   |       | 104               |       |
| Total assets                                                                                                                                                                     |       | $                     | 71,315     |              | $          | 62,586 |   |
| ** **                                                                                                                                                                       | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                    | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                                                                             |       |                  |       |              |       |
| Revolving credit line                                                                                                                                                            |       | $                     | 5,924      |              | $          | 5,597 |   |
| Accounts payable (includes related party  amounts of $5,050 and $2,336 at December 31, 2007 and June 30,  2008, respectively)                                          |       | 26,400                |       | 18,362            |       |
| Accrued expenses                                                                                                                                                                 |       | 4,509                 |       | 3,421             |       |
| Deferred revenue                                                                                                                                                                 |       | 2,900                 |       | 1,663             |       |
| Total current liabilities                                                                                                                                                        |       | 39,733                |       | 29,043            |       |
|                                                                                                                                                                             |       |                  |       |              |       |
| Commitments and contingencies (note 10)                                                                                                                                          |       |                  |       |              |       |
|                                                                                                                                                                             |       |                  |       |              |       |
| Stockholders’ equity:                                                                                                                                                       |       |                  |       |              |       |
| Preferred stock: par value $0.001;  authorized 4,000,000 shares; none issued and outstanding at December 31,  2007 and June 30, 2008, respectively                     |       | —                |       | —            |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 24,556,354 and 23,708,057 at  December 31, 2007 and June 30, 2008, respectively |       | 25                    |       | 25                |       |
| Additional paid in capital                                                                                                                                                       |       | 35,875                |       | 29,232            |       |
| Shares held in treasury, at cost; 100,000  and 54,000 shares at December 31, 2007 and June 30, 2008,  respectively                                                     |       | (886                  | )          | (502              | )          |
| Retained earnings (accumulated deficit)                                                                                                                                          |       | (3,432                | )          | 4,788             |       |
| Total stockholders’ equity                                                                                                                                                  |       | 31,582                |       | 33,543            |       |
|                                                                                                                                                                             |       |                  |       |              |       |
|                                                                                                                                                                             |       | $                     | 71,315     |              | $          | 62,586 |   |

 

The accompanying notesform an integral part of these condensed financial statements.

 

3

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**Bidz.com, Inc.**

 

**Condensed Statements of Income(Unaudited)**

 

*(In thousands, except share and per share data)*

 
| ** **                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net revenue:                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Merchandise sales                                                | ** ** | $                                                   | 39,049     |                                              | $          | 54,815 |   | $ | 83,688 |   | $ | 116,626 |   |
| Other revenue                                                    |       | 74                                                  |       | 171                                               |       | 159 |   | 289 |   |
|                                                             |       | 39,123                                              |       | 54,986                                            |       | 83,847 |   | 116,915 |   |
| Cost of revenue                                                  |       | 28,249                                              |       | 39,668                                            |       | 61,845 |   | 83,561 |   |
| Gross profit                                                     |       | 10,874                                              |       | 15,318                                            |       | 22,002 |   | 33,354 |   |
| Operating expenses:                                              |       |                                                |       |                                              |       |   |   |   |   |
| General and administrative                                       |       | 4,985                                               |       | 5,680                                             |       | 9,828 |   | 11,587 |   |
| Sales and marketing                                              |       | 2,019                                               |       | 3,131                                             |       | 4,619 |   | 7,330 |   |
| Depreciation and amortization                                    |       | 113                                                 |       | 172                                               |       | 187 |   | 334 |   |
| Total operating expenses                                         |       | 7,117                                               |       | 8,983                                             |       | 14,634 |   | 19,251 |   |
| Income from operations                                           |       | 3,757                                               |       | 6,335                                             |       | 7,368 |   | 14,103 |   |
| Other income - interest income                                   |       | 3                                                   |       | 10                                                |       | 4 |   | 23 |   |
| Other expense - interest (expense)                               |       | (82                                                 | )          | (80                                               | )          | (164 | ) | (91 | ) |
| Income before income tax expense                                 |       | 3,678                                               |       | 6,265                                             |       | 7,208 |   | 14,035 |   |
| Income tax expense                                               |       | 763                                                 |       | 2,650                                             |       | 858 |   | 5,815 |   |
| Net income                                                       | ** ** | $                                                   | 2,915      |                                              | $          | 3,615 |   | $ | 6,350 |   | $ | 8,220 |   |
|                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net income per share available to common  shareholders - basic   | ** ** | $                                                   | 0.13       |                                              | $          | 0.15 |   | $ | 0.27 |   | $ | 0.34 |   |
| Net income per share available to common  shareholders - diluted | ** ** | $                                                   | 0.12       |                                              | $          | 0.14 |   | $ | 0.27 |   | $ | 0.32 |   |
| Weighted average number of shares  outstanding - basic           |       | 23,272,386                                          |       | 23,828,186                                        |       | 23,259,260 |   | 24,183,225 |   |
| Weighted average number of shares  outstanding - diluted         |       | 24,147,118                                          |       | 25,739,058                                        |       | 23,892,554 |   | 25,822,351 |   |

 

The accompanying notes form an integral part of thesecondensed financial statements.

 

4

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**Bidz.com, Inc.**

 

**Condensed Statements of Cash Flows (Unaudited)**

 

*(Inthousands)*

 
| ** **                                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2007**                                          | ** ** | **2008** | ** ** |
|                                                                                              |       |                                              |       |   |   |
| **Cash flows provided by (used for) operating  activities:**                                      |       |                                              |       |   |   |
| Net income                                                                                        |       | $                                                 | 6,350      |   | $ | 8,220 |   |
|                                                                                              |       |                                              |       |   |   |
| **Adjustments to reconcile net income to net  cash provided by (used for) operating activities:** |       |                                              |       |   |   |
| Depreciation and amortization                                                                     |       | 187                                               |       | 334 |   |
| Change in inventory reserve                                                                       |       | 329                                               |       | (566 | ) |
| Stock-based compensation                                                                          |       | 250                                               |       | 534 |   |
| **Changes in assets and liabilities:**                                                            |       |                                              |       |   |   |
| **(Increase) decrease in assets:**                                                                |       |                                              |       |   |   |
| Accounts receivable                                                                               |       | 413                                               |       | 823 |   |
| Inventories                                                                                       |       | 8,832                                             |       | 2,520 |   |
| Other current assets                                                                              |       | 231                                               |       | 1,840 |   |
| **Increase (decrease) in liabilities:**                                                           |       |                                              |       |   |   |
| Accounts payable                                                                                  |       | (8,893                                            | )          | (8,038 | ) |
| Accrued expenses                                                                                  |       | 427                                               |       | (1,088 | ) |
| Deferred revenue                                                                                  |       | (2,125                                            | )          | (1,237 | ) |
| Net cash provided by operating activities                                                         |       | 6,001                                             |       | 3,342 |   |
|                                                                                              |       |                                              |       |   |   |
| **Cash flows provided by (used for) investing  activities:**                                      |       |                                              |       |   |   |
| Capital expenditures                                                                              |       | (1,019                                            | )          | (431 | ) |
| Disposal of fixed assets                                                                          |       | —                                            |       | 19 |   |
| Net cash (used for) investing activities                                                          |       | (1,019                                            | )          | (412 | ) |
| **Cash flows provided by (used for) financing  activities:**                                      |       |                                              |       |   |   |
| Revolving credit line                                                                             |       | (3,625                                            | )          | (327 | ) |
| Repurchase of common stock                                                                        |       | —                                            |       | (6,965 | ) |
| Proceeds from exercise of stock options                                                           |       | 67                                                |       | 130 |   |
| Tax benefit from exercise of stock options                                                        |       | —                                            |       | 42 |   |
| Net cash (used for) financing activities                                                          |       | (3,558                                            | )          | (7,120 | ) |
|                                                                                              |       |                                              |       |   |   |
| **Net increase (decrease) in cash**                                                               |       | 1,424                                             |       | (4,190 | ) |
| **Cash, beginning of period**                                                                     |       | 359                                               |       | 4,808 |   |
| **Cash, end of period**                                                                           |       | $                                                 | 1,783      |   | $ | 618 |   |
|                                                                                              |       |                                              |       |   |   |
| **Supplemental disclosure of cash flow  information:**                                            |       |                                              |       |   |   |
| ** **                                                                                        |       |                                              |       |   |   |
| Interest paid                                                                                     |       | $                                                 | 164        |   | $ | 91 |   |
|                                                                                              |       |                                              |       |   |   |
| Income taxes paid                                                                                 |       | $                                                 | 492        |   | $ | 6,472 |   |

 

The accompanying notes form an integral part of thesecondensed financial statements.

 

5

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**BIDZ.COM, INC.**

**NOTES TOFINANCIAL STATEMENTS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDEDJUNE 30, 2007 AND 2008**

**(UNAUDITED)**

 

**1.****                                      Basisof Presentation and Nature of Business Operations**

 

**Basis of Presentation**

 

The accompanying condensed balance sheet as of December 31,2007, which has been derived from audited financial statements, and theunaudited financial statements included herein have been prepared in accordancewith the instructions to Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  Thesefinancial statements and related notes should be read in conjunction with theCompany’s audited financial statements for the fiscal year ended December 31,2007 filed in the Annual Report on Form 10-K by the Company on March 12,2008 with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of June 30, 2008 and the results ofoperations for the three month and six month periods ended June 30, 2007and 2008 and the cash flows for the three month and six month periods ended June 30,2007 and 2008.  The results of operations for the six months ended June 30,2008 are not necessarily indicative of the results which may be expected forthe entire fiscal year.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results coulddiffer from those estimates. We have made estimates for return and allowance reserve, inventoryreserve, inventory vendor marketing reserves, deferred tax assets, accruedexpenses, stock price volatility, stock option forfeiture rate, and expectedstock option term.

 

**Nature of Business Operations**

 

Bidz.com, Inc.was founded in November of 1998 as a California corporation with itsprincipal location of business in Los Angeles, California. In June 2006,we reincorporated in Delaware. and with our principle location of business inLos Angeles. We operate a website located at www.bidz.com and www.buyz.com forthe purpose of selling merchandise, utilizing our unique sales auction andfixed price platforms.

 

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia. Revenuegenerated from the United States accounted for approximately 77.3% and 74.9% ofnet revenue for the three months ended June 30, 2007 and 2008,respectively and 78.5% and 75.7% of net revenue for the six months ended June 30,2007 and 2008, respectively.

 

**Recent Developments**

 

OnJune 27, 2008, we were added to the Russell 2000, 3000, Microcap and GlobalIndices.

 

In June 2008,we announced that we plan to launch our website translated into Arabic in thethird quarter of 2008 to complement the English and Spanish language versionsof our website. In April 2008, we announced the launch of our online retailstore, Buyz.com, which offers jewelry at a fixed price.

 

In February 2008, our Board ofDirectors authorized an increase in the open market stock buyback program of itsoutstanding common stock to $20 million from $5 million. The stock buyback willbe at prices deemed appropriate by management over a 24 month period. As of July 31, 2008,we have purchased a cumulative total of 1,024,000 shares for $8.8 million, and983,000 shares have been retired which reduced our number of sharesoutstanding.

 

**Recent Accounting Pronouncements**

 

In February 2007, the FASBissued Statement No. 159 (“FAS 159”) which expanded FAS No. 157, “*Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 159 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. FAS 159 is effective for fiscalyears beginning after November 15, 2007. The adoption of FAS 159 did nothave a material impact on our financial statements.

 

6

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In September 2006, the FASBissued Statement SFAS No. 157 (“FAS 157”), “ *Fair Value Measurements*,” which definesfair value, establishes guidelines for measuring fair value and expandsdisclosures regarding fair value measurements. FAS 157 does not require any newfair value measurements but rather eliminates inconsistencies in guidance foundin various prior accounting pronouncements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007. The adoption of FAS 159 did nothave a material impact on our financial statements.

 

**2.****             Earnings Per Common Share**

 

Inaccordance with SFAS No. 128, “Earnings Per Share,” the basic earnings percommon share is calculated by dividing net income available to commonstockholders less preferred dividends by the weighted average number of commonshares outstanding. Diluted earnings per common share is computed similarly tobasic earnings per common share, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif potential common shares had been issued and if the additional common shareswere not anti-dilutive.

 

Thedilutive effect of outstanding stock options is reflected in diluted earningsper share by application of the treasury stock method excluding the impact of pro forma deferredtax benefits for the three month and six month periods ended June 30,2007 and including the impact of pro forma deferred tax benefits for the threemonth and six month periods ending June 30, 2008.  The followingtable sets forth the computation of basic and diluted net income per share.

 

*(Inthousands, except share and per share data)*

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                    |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted net income per share: |       |                                            |       |                                          |       |   |   |   |   |
| Numerator:                              |       |                                            |       |                                          |       |   |   |   |   |
| Net income                              |       | $                                               | 2,915      |                                          | $          | 3,615 |   | $ | 6,350 |   | $ | 8,220 |   |
| Denominator:                            |       |                                            |       |                                          |       |   |   |   |   |
| Weighted common shares outstanding      |       | 23,272,386                                      |       | 23,828,186                                    |       | 23,259,260 |   | 24,183,225 |   |
| Effect of dilutive securities           |       | 874,732                                         |       | 1,910,872                                     |       | 633,294 |   | 1,639,126 |   |
| Denominator for diluted calculation     |       | 24,147,118                                      |       | 25,739,058                                    |       | 23,892,554 |   | 25,822,351 |   |
| Net income per share, basic             |       | $                                               | 0.13       |                                          | $          | 0.15 |   | $ | 0.27 |   | $ | 0.34 |   |
| Net income per share, diluted           |       | $                                               | 0.12       |                                          | $          | 0.14 |   | $ | 0.27 |   | $ | 0.32 |   |

 

**3**.             **Inventories**

 

Inventories, which arepledged as collateral for our revolving line of credit, consist of thefollowing *(In thousands)*:

 
| ** **                              | ** ** | **December 31, 2007** | ** ** | **June 30, 2008 (unaudited)** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|----------------------------------------------|------------|
|                                    |       |                            |       |                                         |       |
| Fine jewelry, watches and other         |       | $                               | 53,054     |                                         | $          | 53,817 |   |
| Loose diamonds and semi-precious stones |       | 4,392                           |       | 1,157                                        |       |
| Prepaid inventory                       |       | 94                              |       | 218                                          |       |
| Inventory with manufacturing vendors    |       | 221                             |       | 49                                           |       |
| Product inventories                     |       | 57,761                          |       | 55,241                                       |       |
| Less: Inventory reserve                 |       | (1,075                          | )          | (509                                         | )          |
|                                    |       | $                               | 56,686     |                                         | $          | 54,732 |   |

 

**4.             Revolving Credit Line**

 

In July 2006, we entered into arevolving credit line agreement with LaSalle Bank (Bank of America) to provideworking capital financing secured by inventories and tangible assets. Theagreement allowed for us to initially draw on a line of credit up to $10million. During the first quarter of 2008 we successfully increased the limitto $25 million. The revolving credit line agreement expires in July of2010. As of June 30, 2008, there was $5.6 millionoutstanding balance under the revolving credit line. Under the terms andconditions of the revolving credit line agreement, the Company is subject tocertain restrictive covenants for which it is in compliance at June 30,2008.

 

7

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** **

**5.****             StockBased Compensation**

 

In December 2004, the FASB issued SFAS No. 123R,“Share Based payment: An Amendment of FASB Statements No. 123 and 95.”This statement requires that we recognize in our financial statements the costresulting from all share-based payment transactions. In addition, in March 2005the Securities and Exchange Commission (“SEC”) released SEC Staff AccountingBulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides theSEC staff’s position regarding the application of SFAS 123R and certain SEC rules andregulations, and also provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. On January 1, 2006,we adopted SFAS 123R, which eliminates our ability to account for share-basedcompensation transactions, as we formerly did, using the intrinsic value methodas prescribed by APB 25 and generally requires that we recognize in ourstatements of income all share-based payments to employees, including grants ofstock options based on their fair values.

 

The Company adopted SFAS 123R using the modifiedprospective method which requires the application of the accounting standard asof January 1, 2006. The Company’s financial statements as of and for thethree months and six months ended June 30, 2007 and 2008, respectively,reflect the impact of adopting SFAS 123R.

 

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. Compensationexpense for the stock-based payment awards granted subsequent to December 31,2005, will be based on the grant date fair value estimated in accordance withSFAS 123R. As stock-based compensation expense recognized in the statements ofincome is based on awards ultimately expected to vest, it will be reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

Under SFAS 123R, we will continue to use theBlack-Scholes model to estimate the fair value of options. Our assessment ofthe estimated compensation charges will be affected by our stock price as wellas assumption regarding a number of subjective variables and the related taximpact. These variables include, but are not limited to, our stock pricevolatility, forfeiture rates and employee stock option exercise behaviors (orexpected term).

 

**Stock Awards**

 

Weawarded and issued as director compensation a total of 18,750 shares of commonstock for the six months ended June 30, 2007. Two of our non-employeedirectors, Man Jit Singh and Peter Hanelt, received stock awards of 8,750 and10,000 shares, respectively. The fair market value of the shares granted was$6.00 per share, which was determined based on a combination of factors thatincluded recent share transactions between shareholders and an independentvaluation of the Company. No stock awards were granted in the three monthsended June 30, 2007 and 2008 and in the six months ended June 30,2008. The stock-based expense from stock award grants for the three monthsended June 30, 2007 and 2008 totaled $0 and $0, respectively, and in thesix months ended June 30, 2007 and 2008 totaled $112,000 and $0,respectively.

 

**Restricted Shares**

 

The restricted stock awards areexpensed pro rata over the vesting period based upon the market value of theawards at the time of grant. Stock-based compensation from restricted stockawards totaled $11,000 and  $88,000 forthe three months ended June 30, 2007 and 2008, respectively, and totaled$11,000 and $176,000 in the six months ended June 30, 2007 and 2008,respectively. The unamortized stock-based expense for restricted stock awardswas $964,000 at June 30, 2008.

 

A summary of all restricted stockactivity during the six months ended June 30, 2008 is as follows:

 
| Restricted shares outstanding, December 31, 2007 |   | 126,000 |   |
|-------------------------------------------------------|--------|---------|--------|
| Shares granted                                        |   | —  |   |
| Shares vested                                         |   | (27,500 | )      |
| Shares forfeited                                      |   | —  |   |
| Restricted shares outstanding, June 30, 2008     |   | 98,500  |   |

 

**Stock Options**

 

We adopted our 2001 Stock Option Plan, our 2002Special Stock Option Plan and our 2006 Award Plan (collectively, the ‘‘Plans’’),in January 2001, January 2002, and March 2006, respectively. The2006 Plan provides for the granting of awards in the form of incentive stockoptions, nonqualified stock options, stock appreciation rights, shares ofrestricted common stock, bonus stock in lieu of obligations, or otherstock-based awards to employees, directors, and independent contractors whoprovide valuable services to our company.  The vesting requirements,performance thresholds and other terms and conditions of options granted underthe Plans will be determined by our Compensation Committee and Board of Directors.

 

8

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Thefollowing is a summary of stock option activity as of June 30, 2008, andchanges during the six months ended June 30, 2008.

 
| **Options**                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| Outstanding at December 31, 2007         |       | 8,131,300  |       | 6.20                                             |       | 3.3                                                      |       | 22,983,000                               |       |
| Granted                                       |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Exercised                                     |       | (21,000    | )          | 6.21                                             |       |                                                     |       |                                     |       |
| Forfeited                                     |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Expired                                       |       | —     |       | —                                           |       |                                                     |       |                                     |       |
| Outstanding at June 30, 2008             |       | 8,110,300  |       | 6.20                                             |       | 2.8                                                      |       | 20,948,763                               |       |
| Vested and Exercisable at June 30,  2008 |       | 7,274,050  |       | 5.99                                             |       | 2.7                                                      |       | 19,902,850                               |       |

 

The following table summarizes information about stock optionsoutstanding and exercisable at June 30, 2008.

 
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Options Outstanding and Exercisable** | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|--------------------------|------------|------------|------------|------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **as of June 30, 2008**            | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Options Outstanding**                           | ** ** | **Options Exercisable** | ** ** |
| ** **               | ** ** | ** ** | ** ** | ** **                   | ** ** | **Weighted**                                           | ** ** | **Weighted**                 | ** ** | ** **                   | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** ** | ** ** | **Number**                   | ** ** | **Average**                                            | ** ** | **Average**                  | ** ** | **Number**                   | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | ** ** | ** ** | **Outstanding**              | ** ** | **Remaining**                                          | ** ** | **Exercise**                 | ** ** | **Exercisable**              | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | ** ** | ** ** | **As of 06/30/08** | ** ** | **Contractual**                                        | ** ** | **Price**                    | ** ** | **As of 06/30/08** | ** ** | **Exercise Price** | ** ** |
| $4.01                    |       | $5.00      |       | 392,300                      |       | 0.43                                                   |       | $                            | 4.50       |                         | 392,300    |   | $ | 4.50 |   |
| $5.01                    |       | $6.00      |       | 6,735,000                    |       | 2.83                                                   |       | $                            | 6.00       |                         | 6,648,750  |   | $ | 6.00 |   |
| $6.01                    |       | $7.00      |       | 473,000                      |       | 3.69                                                   |       | $                            | 6.50       |                         | 105,500    |   | $ | 6.50 |   |
| $9.01                    |       | $10.00     |       | 510,000                      |       | 3.96                                                   |       | $                            | 9.90       |                         | 127,500    |   | $ | 9.90 |   |
| $4.01                    |       | $10.00     |       | 8,110,300                    |       | 2.83                                                   |       | $                            | 6.20       |                         | 7,274,050  |   | $ | 5.99 |   |

 

The stock-based compensation expense from stockoptions in the three months ended June 30, 2007 and  2008 totaled $95,000 and $179,000,respectively and in the six months ended June 30, 2007 and 2008 totaled$127,000 and $358,000, respectively. The unamortized stock-based compensationexpense from stock options as of June 30, 2008 is $2.0 million.

 

No stock options were granted in the six months ended June 30,2008 and the weighted-average grant date fair value of options granted duringthe six months ended June 30, 2007 was $2.59. The fair value of theseoptions was calculated using a Black-Scholes option pricing model using thefollowing assumptions: (1) risk-free interest rates of 4.3%-4.9%, (2) anexpected life of four to five years, (3) expected volatility of 31%-33%, (4) expectedforfeitures of 0%, and (5) a dividend yield of 0%.

 

**6.****             Segment Information**

 

Net revenue by geographic area is presented based uponthe country of destination. No foreign country represented 10% or more of netrevenue for three month and six month periods ended June 30, 2007 and2008. Net revenue by geographic area was as follows:

 

*(In thousands, except percentage data)*

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **Geographic** | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| **area**       | ** ** | **Amount**                       | ** ** | **Percent**                    | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States  |       | $                                | 30,245     |                           | 77.3       | % | $ | 41,167 |   | 74.9 | % | $ | 65,819 |   | 78.5 | % | $ | 88,492 |   | 75.7 | % |
| International  |       | 8,878                            |       | 22.7                           | %          | 13,819 |   | 25.1 | % | 18,028 |   | 21.5 | % | 28,423 |   | 24.3 | % |
| Total          |       | $                                | 39,123     |                           | 100.0      | % | $ | 54,986 |   | 100.0 | % | $ | 83,847 |   | 100.0 | % | 116,915 |   | 100.0 | % |
|                |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**7.****                                      Concentrations**

 

Purchases from two vendors amounted to $5.5 million and $5.4 millionrepresenting 30.6% and 9.4% of the total purchases during the three monthsended June 30, 2007 and 2008, respectively, and $10.1 million and$6.9 million representing 23.2% and 9.0% of the total purchases during the sixmonths ended June 30, 2007 and 2008, respectively. Outstandingaccounts payable to the two vendors totaled $1.8 million and $486,000****as of December 31, 2007 and June 30, 2008,respectively. Loss of either of these vendors is not expected to have asignificant negative impact on the operations of the Company.

 

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**8.****                                      Related PartyTransaction**

 

During thethree months ended June 30, 2007 and 2008, we purchased approximately22.5% and 4.2%, respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholderwho beneficially owns 1,228,000 shares of our common stock as of June 30,2008.  Duringthe six months ended June 30, 2007 and 2008, we purchased approximately13.3% and 3.9%, respectively. In the three months and six months ended June 30,2008 we earned approximately $131,000 and $613,000, respectively from LAJewelers relating to co-op marketing contributions and $93,000 was unamortizedas of June 30, 2008.

 

In May, 2007we entered into an understanding with LA Jewelers whereby they will guaranteethat we will earn a certain minimum gross profit margin on their merchandise.This agreement provides that in the event of a gross profit margin shortfall wewill be compensated for the difference between our actual gross profit marginand the guaranteed minimum gross profit margin. In the three months and sixmonths ended June 30, 2008, we recognized $81,000 and $222,000,respectively under this agreement and $16,000 was outstanding and accrued at June 30,2008.

 

**9.****             Income Tax — FIN 48**

 

Weadopted the provisions of FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes*, on January 1, 2007.Previously, we had accounted for tax contingencies in accordance with Statementof Financial Accounting Standards 5, *Accountingfor Contingencies*. As required by Interpretation 48, which clarifiesStatement 109, *Accounting for Income Taxes*, werecognize the financial statement benefit of a tax position only after determiningthat the relevant tax authority would more likely than not sustain the positionfollowing an audit. For tax positions meeting the more-likely-than-not**threshold, the amount recognized in the financialstatements is the largest benefit that has a greater than 50 percent likelihoodof being realized upon ultimate settlement with the relevant tax authority. Atthe adoption date, we applied Interpretation 48 to all tax positions for whichthe statute of limitations remained open. Our preliminary analysis of theimplementation of Interpretation 48 reveals that there is no material effect onour financial statements.

 

Weare subject to income taxes in the U.S. federal jurisdiction and California.Tax regulations within each jurisdiction are subject to the interpretation ofthe related tax laws and regulations and require significant judgment to apply.With few exceptions, we are no longer subject to U.S. federal and Californiaexaminations by tax authorities for the years before 2003.

 

Wehad been under examination by the Internal Revenue Service for the 2004, 2005and 2006 tax years. Theexamination was concluded as of December 31, 2007 and final settlement wasapproximately $35,000, including interest and penalties.

 

**10.          Contingencies**

 

We are subject to various legal proceedings and claims that arise inthe ordinary course of business.  Although the Company believes it hasdefenses to the allegations and intends to pursue them vigorously, managementdoes not currently have sufficient information to assess the validity of theclaims or 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.

 

*Cartier v. Bidz.com*

 

We area defendant in a lawsuit filed by Cartier, and Cartier International, B.V., inthe United States District Court Southern District of New York in April 2006.The lawsuit alleges that Cartier has proprietary rights, including trade dress,patents, trademarks, copyrights and others, in watch designs known as a Tank,Tank Francaise, 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 set a trial date in September 2008.

 

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**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read in conjunction withthe financial statements and related notes which appear elsewhere in this form.This discussion contains forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of various factors, including various risks and uncertaintiesdiscussed below and throughout this report.*

 

**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 closeout and regular jewelry merchandise, and rapidlyrespond to changing consumer demands for certain jewelry. We offer our productsthrough a continuous live format, featuring a $1 minimum opening bid, and aunique 15-second auction extension period that allows our auctions to continueuntil all bids are received. On select auctions we maintain a reserve pricethat must be met before a sale will be consummated. The majority of ourauctions are short-term, often lasting less than one hour, providing immediategratification to our customers and encouraging frequent visits and activeviewing of our website.

 

Inaddition to our auction site we have a fixed pricing format that offers similarmerchandise as those listed for auction. This online store provides us access to different types of consumers andwe will plan to offer customers the ability to design their own jewelryincluding diamond earrings and rings in the near future.

 

Ourproduct inventory includes gold, platinum, and silver jewelry set withdiamonds, rubies, emeralds, sapphires, and other precious and semi-preciousstones; and watches. We believe we are the second largest online retailer ofjewelry based on revenue and the largest online jewelry auction site based onweb traffic.

 

Wesell to consumers looking for reliable bargains on jewelry. Because we purchaseand retain all of our jewelry inventory onsite, we can provide our customerswith timely 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 operate in a highly competitive market with low barriers toentry. By selling our own merchandise, we provide a buying environment in whichwe minimize fraudulent activity and questionable product quality frequentlyassociated with purchase transactions from third-party sellers. We also providea 15-day return policy on all merchandise. We believe that many of ourcustomers resell merchandise that they purchase from our auctions on eBay, atlocal auctions, and through other retail channels. Our auctions and fixed pricesales are conducted 24 hours a day, seven days a week. We also offer dailytelephone customer support, 24-hour online live-help and e-mail customersupport.

 

In line with our growth plans, we have completed a major upgrade of ourauction platform at the end of 2007. The new auction LiveBid system supports abroad range of leading browser software including Microsoft Internet Explorer,FireFox and Safari. The new system touts high availability, faster end-userresponse time and greater scalability among the key features delivered in thisrelease. We have leveraged this new software solution to launch additional sitefeatures and the new online retail store. We have launched the Spanish versionof our website in the second quarter of 2008 and will plan on launching moresite features and foreign language versions of our website in the future.

 

**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 four sources: merchandise sales, which includewholesale merchandise sales, shipping revenue, auction transaction fee revenueand other revenue. In accordance with SAB 104, we recognize revenue from allfour sources when the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped or theservice has been rendered and the customer takes ownership and assumes the riskof loss; (3) the selling price is fixed or determinable; and (4) collectionof the resulting receivable is reasonably assured.

 

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Forsales through our website, we recognize merchandise sales upon shipments madeto consumers that are fulfilled from our warehouse. We require payment beforewe ship and the payment is generally made online by credit card or otherelectronic payment methods. We record amounts received or billed prior toshipment of goods to customers as deferred revenue. We reduce gross sales byreturns and chargebacks from customers. For wholesale merchandise sales, werecognize sales when the merchandise is delivered to the customer and creditterms may be offered to such customers.

 

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 Statements of Income all amounts billed tocustomers by us related to shipping and handling are included in “Net revenue”and our shipping costs are included in “Cost of revenue.”

 

Weinclude auction transaction fee revenue in net revenue. The 3% auctiontransaction fee is applied to all merchandise sales, including shipping andhandling, but not to sales tax.

 

Otherrevenue consists primarily of commissions we derive from hosting sales ofCertified Merchant merchandise that is owned by third parties and we recognizeonly the commission portion of the price our customers pay for the purchasedproducts because we are acting as an agent in such transactions.

 

We present sales tax liability on a net basis inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 06-03. Sales are not grossed up with the attendant taxes and deducted as a separateline item. The EITF becomes effective for interim and annual reporting periodsbeginning after December 15, 2006.

 

*Cost of Revenue*

 

Cost of revenue includes product costs, inbound and outbound shippingcharges, packaging and shipping supplies, insurance on shipments, productrepair and service costs, and credit card and other electronic payment fees,and is recorded in the same period in which related revenue has been recorded.The cost of revenue is reduced by amortized co-op marketing contributions fromour vendors.

 

Outbound shipping costs on merchandise sales totaled $2.1 millionand $2.6 million in the three months ended June 30, 2007 and 2008,respectively, and $4.3 million and $5.6 million in the six months ended June 30,2007 and 2008, respectively.

 

*Returns and Allowances 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 and chargebacks are greater than our estimates, we will recordadditional returns and allowances in addition to our estimates, which willresult in lower net revenue recorded during that period. Reserves for returnsand chargebacks are included in accrued liabilities.

 

*Inventories*

 

Inventoriesconsist mainly of merchandise purchased for resale and are stated at the lowerof first-in, first-out (FIFO) cost or market.

 

*Inventory Reserve*

 

The unique nature of our business model where customers set the pricesthey are willing to pay may result in items selling below our cost, and weprovide reserves against our inventory based on the difference between theaverage selling price and the cost of inventory if the average selling price islower than the cost of inventory. We also provide reserves for obsolescence andslow moving inventory.

 

*Inventory Co-op Marketing Contributions*

 

# In the thirdquarter of 2007, we started to bill and collect from our inventory vendorsco-op marketing contributions as an incentive for us to market and sell theirmerchandise on the Bidz website. In accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain ConsiderationReceived from a Vendor, the co-op marketing contributions that  cannot be identified specifically to benefitthe vendors are a reduction in cost of sales and will result in an increase ingross profit. We cannot specifically identify the benefits to each vendor,consequently, co-op marketing contributions are charged against inventory as areduction of costs and amortized as a reduction of cost of sales. In the threemonths and six months ended June 30, 2008, we have recognized $2.8 millionand $6.7 million, respectively, of co-op marketing contributions. Approximately$3.5 million remain unamortized and is included as an offset to inventory at June 30,2008. Receivable from 

 

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# vendors for co-opmarketing contributions, less allowance for doubtful accounts, is included in othercurrent assets and amounted to $1.2 million at June 30, 2008.

#  

*Stock-Based Compensation*

 

On January 1, 2006, we adopted SFAS No. 123(revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’) requiring thatshare-based payment transactions be recognized in the financial statementsbased on the fair value of the equity or liability instrument issued. We usethe Black-Scholes option pricing model to estimate the value of our options inimplementing SFAS 123R and the calculated method 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 estimatedforfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

Thefollowing table presents our historical results of operations for the periodsindicated as a percentage of net revenue.

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net Sales                            |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Gross Profit                         |       | 27.8                                                |       | 27.9                                              |       | 26.2 |   | 28.5 |   |
| Operating Expenses:                  |       |                                                |       |                                              |       |   |   |   |   |
| General & Administrative    |       | 12.7                                                |       | 10.3                                              |       | 11.7 |   | 9.9 |   |
| Sales & Marketing           |       | 5.2                                                 |       | 5.7                                               |       | 5.5 |   | 6.3 |   |
| Depreciation & Amortization |       | 0.3                                                 |       | 0.3                                               |       | 0.2 |   | 0.3 |   |
| Total Operating Expenses             |       | 18.2                                                |       | 16.3                                              |       | 17.4 |   | 16.5 |   |
| Profit from Operations               |       | 9.6                                                 |       | 11.6                                              |       | 8.8 |   | 12.0 |   |
| Interest income                      |       | 0.0                                                 |       | 0.0                                               |       | 0.0 |   | 0.0 |   |
| Interest expense                     |       | 0.2                                                 |       | 0.1                                               |       | 0.2 |   | 0.1 |   |
| Income tax expense                   |       | 2.0                                                 |       | 4.9                                               |       | 1.0 |   | 4.9 |   |
| Net Income                           |       | 7.4                                                 | %          | 6.6                                               | %          | 7.6 | % | 7.0 | % |

 

*Net Revenue*

 

Substantiallyall of our net revenue consists of jewelry sold via the Internet, net ofreturns. We also generate net revenue from wholesale merchandise sales,shipping and handling, auction transaction fee and other revenue. We havecommenced making wholesale merchandise sales in the first quarter of 2008.

 

Thefollowing table presents our sources of revenue for the periods indicated as apercentage of net revenue.

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Merchandise sales            |       | 83.9                                                | %          | 70.9                                              | %          | 85.0 | % | 74.8 | % |
| Wholesale merchandise sales  |       | —                                              |       | 15.3                                              |       | — |   | 10.8 |   |
| Shipping & handling |       | 12.8                                                |       | 10.9                                              |       | 11.7 |   | 11.4 |   |
| Transaction fee              |       | 3.1                                                 |       | 2.6                                               |       | 3.1 |   | 2.8 |   |
| Other revenue                |       | 0.2                                                 |       | 0.3                                               |       | 0.2 |   | 0.2 |   |
| Total net revenue            |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |

 

*Gross Profit*

 

Our gross profit consistsof net revenue less the cost of revenue. Our cost of revenue consists of thecost of merchandise sold to customers, amortized co-op marketing contributionsfrom vendors, inbound and outbound shipping costs, packaging and 

 

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shipping supplies,insurance on shipments, product repair and service costs, and credit card andother transaction fees associated with payments.

 

*General and Administrative Expenses*

 

Our general andadministrative expenses consist primarily of payroll and related benefit costsfor our employees. These expenses also include fulfillment, customer service,technology, professional fees, other general corporate expenses, andstock-based compensation, consisting substantially of stock option grants andstock grants to employees and consultants.

 

*Sales and Marketing Expenses*

 

Our marketing expensesconsist primarily of costs associated with paid website search marketing,online banner marketing, e-mail campaigns, affiliate programs and optimizationservices. These marketing programs, which are designed to drive buyers to ourwebsite, are the most important factors in increasing demand for our jewelryproducts and increasing net revenue.

 

**Comparison of Three Months Ended June 30, 2007 to ThreeMonths Ended June 30, 2008**

 

Netincome in the three months ended June 30, 2008 was $3.6 million, or $0.15and $0.14 per basic and diluted share, respectively, and net income in thethree months ended June 30, 2007 was $2.9 million, or $0.13 and $0.12 perbasic and diluted share, respectively. Net revenue increased by 40.5% in thethree months ended June 30, 2008 compared to the three months ended June 30,2007 while the net income increased by 24.0% over the same period. The increasein net income was due primarily to the increase in revenue and gross profitoffset by a higher operating and income tax expenses.

 

*Net Revenue*

 

Net revenue increased 40.5% to$55.0 million in the three months ended June 30, 2008 from$39.1 million in the three months ended June 30, 2007. Thisincrease in net revenue was due primarily to the growth in demand for ourjewelry products, the increase in average sales amount per order and thewholesale merchandise sales in the three months ended June 30, 2008 whichaccounted for $8.4 million in revenue.

 

We expect thatsignificant wholesale activities will become a regular part of our ongoingbusiness, particularly in the current economy where we are likely to bepresented with opportunities in the wholesale market. We have recently providedin a press release, revenue guidance of $55 million to $58 million for thethird quarter 2008, which will include significant wholesale merchandise sales.

 

*Gross Profit*

 

Gross profit increased by$4.4 million or 40.9% to $15.3 million in the three months ended June 30,2008 from $10.9 million in the three months ended June 30, 2007. Theincrease in gross profit resulted from the increase in sales revenue which roseby 40.5% for the three months ended June 30, 2008 compared to the threemonths ended June 30, 2007. Gross profit benefited from the amortizedco-op marketing contributions that reduced our cost of sales by $2.8 million or5.2% of net revenue in the three months ended June 30, 2008.

 

Grossprofits on wholesale merchandise sales typically generate lower gross marginscompared to online merchandise sales. Projected gross profit margins for wholesale merchandise sales are generallysignificantly lower than for online merchandise sales.  However, the net operating margincontribution from wholesale merchandise sales is advantageous because operatingexpenses associated with wholesale transactions are minimal.

 

*General andAdministrative Expenses*

 

General and administrativeexpenses increased $695,000 or 13.9% to $5.7 million in the three months ended June 30,2008 from $5.0 million in three months ended June 30, 2007. Theincrease in general and administrative expenses was due to our overall growthand includes increases in payroll and payroll related expenses andadministrative expenses. General and administrative expenses as a percentage ofnet revenue decreased to 10.3% in the three months ended June 30, 2008from 12.7% in the three months ended June 30, 2007.

 

*Sales &Marketing Expenses*

 

Sales and marketing expensesincreased by $1.1 million or 55.1% to $3.1 million in the three months ended June 30,2008 from $2.0 million in the three months ended June 30, 2007. Sales andmarketing expenses as a percentage of net revenue increased to 5.7% in thethree months ended June 30, 2008 from 5.2% in the three months ended June 30,2007.

 

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*Income TaxExpense*

 

Incometax expense increased to $2.7 million in the three months ended June 30,2008 from $763,000 in the three months ended June 30, 2007 and theeffective tax rate increased to 42.3% from 20.7%. During 2007, we utilized allof our loss carryforwards and therefore became fully taxable in 2008.

 

**Comparison of Six Months Ended June 30,2007 to Six Months Ended June 30, 2008**

 

Net income in the sixmonths ended June 30, 2008 was $8.2 million and net income per basic anddiluted share was $0.34 and $0.32, respectively. In the six months ended June 30,2007, net income was $6.3 million, or $0.27 per basic and diluted share. Netrevenue increased by 39.4% in the six months ended June 30, 2008 comparedto the six months ended June 30, 2007 while the net income increased by29.4% over the same period. The increase in net income was due primarily to theincrease in net revenue and higher gross profit margins offset by a higheroperating and income tax expense.

 

*NetRevenue*

 

Netrevenue increased by $33.1 million or 39.4% to $116.9 million in the sixmonths ended June 30, 2008 from $83.8 million in the six months endedJune 30, 2007. This increase in net revenue was due primarily to thegrowth in demand for our jewelry products, the increase in average dollaramount per order and the wholesale merchandise sales in the six months ended June 30,2008 which accounted for $12.6 million in revenue.

 

*Gross Profit*

 

Gross profit increased by $11.3 million or 51.6% to $33.3 millionin the six months ended June 30, 2008 from $22.0 million in the sixmonths ended June 30, 2007. The increase in gross profit resulted from theincrease in gross profit as a percentage of net sales to 28.5% for the sixmonths ended June 30, 2008 compared to 26.2% for the six months ended June 30,2007 and from the increase in net revenue which rose by $33.1 million for thesame period. Gross profit benefited from the amortized co-op marketingcontributions that reduced our cost of sales by $6.7 million or 5.7% of netrevenue in the six months ended June 30, 2008.

 

*General and Administrative Expenses*

 

General andadministrative expenses increased by $1.8 million or 17.9 % to$11.6 million in the six months ended June 30, 2008 from$9.8 million in the six months ended June 30, 2007. The increase ingeneral and administrative expenses was primarily due to the increase inpayroll and payroll related expenses and administrative expenses. General andadministrative expenses as a percentage of net revenue decreased to 9.9% in thesix months ended June 30, 2008 from 11.7% in the six months ended June 30,2007.

 

*Sales & Marketing Expenses*

 

Salesand marketing expenses increased by $2.7 million or 58.7 % to $7.3 million inthe six months ended June 30, 2008 from $4.6 million in the sixmonths ended June 30, 2007. Sales and marketing expenses as apercentage of net revenue increased to 6.3% in the six months ended June 30,2008 from 5.5% in the six months ended June 30, 2007. We continue toexpect our sales and marketing expenses to increase in absolute dollars infuture periods, as we intend to continue increasing our online marketingcampaigns in order to attract new customers.

 

*Income Tax Expense*

 

Incometax expense increased to $5.8 million in the six months ended June 30,2008 from $858,000 in the six months ended June 30, 2007 and the effectivetax rate increased to 41.4% from 11.9%. During 2007, we utilized all of ourloss carryforwards and therefore became fully taxable in 2008.

 

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**Additional Quarterly Data**

 
| ** **                              | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2007**               | ** ** | **2007** | ** ** | **2008** | ** ** | **2008** | ** ** |
|                                    |       |                   |       |   |   |   |   |   |   |
| Average selling price per order (gross) |       | $                      | 154        |   | $ | 171 |   | $ | 182 |   | $ | 183 |   |
| Average orders per day                  |       | 3,317                  |       | 2,678 |   | 3,734 |   | 3,023 |   |
| Average items sold per day              |       | 9,482                  |       | 8,678 |   | 12,186 |   | 10,082 |   |
| Acquisition costs per new buyer         |       | $                      | 45         |   | $ | 38 |   | $ | 50 |   | $ | 48 |   |
| Number of new buyers                    |       | 58,056                 |       | 53,637 |   | 83,179 |   | 64,882 |   |

 

Wholesalemerchandise sales are excluded in computing additional quarterly data.

 

**Liquidity and Capital Resources**

 

Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by revolving credit line,accounts payable, accrued expenses and deferred revenue. Our business modelcontains beneficial working capital characteristics: while we collect cash fromsales to customers within several business days of the related online payment,we typically have extended payment terms with our suppliers.

 

As of June 30,2008, we had a working capital surplus of $31.9 million and have no long-termdebt obligations. Net cash provided by operating activities was $3.3 million inthe six months ended June 30, 2008 compared to net cash provided of $6.0million in the six months ended June 30, 2007. Cash in the six monthsended June 30, 2008 was primarily affected by changes in net income,inventories and accounts payable and in the six months ended June 30, 2007was primarily affected by changes in net income, inventories, accounts payableand deferred revenue.

 

Werecorded net income of $8.2 million in the six months ended June 30, 2008compared to $6.3 million in the six months ended June 30, 2007. Cash flowsfrom net income were used to meet our working capital requirements. In the sixmonths ended June 30, 2008, inventories decreased by $2.5 million andaccounts payable decreased by $8.0 million. In the six months ended June 30,2007, inventories decreased by $8.8 million, accounts payable decreased by $8.9million and deferred revenue decreased by $2.1 million. Inventories andaccounts payable is affected by our revenue growth and changes in our inventorystrategy. Our inventory strategy is influenced by our ability to secureinventory that we believe will improve our margins and the current revenuetrend; and the need to manage our inventory more efficiently.

 

Netcash used in investing activities was $412,000 in the six months ended June 30,2008 compared to $1.0 million in the six months ended June 30, 2007.During the six months ended June 30, 2007 and 2008, respectively, net cashused for investing activities related mainly to capital expenditures for officeand computer equipment and software.

 

In thesix months ended June 30, 2008, net cash of $7.1 million were used infinancing activities when $7.0 million was used to repurchase our common stockshares. In the six months ended June 30, 2007, $3.6 million were usedfor financing activities when $3.6 million was used to repay our revolvingcredit line.

 

Webelieve that cash and cash equivalents currently on hand, cash flows fromoperations and the availability of a $25 million revolving line of credit willbe sufficient to continue our operations and to pursue our growth strategy forthe foreseeable 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; acquisition and relocation to a new corporateoffice; and other factors relating to our business. Enhancement of our website,network infrastructure, and transaction processing systems will require us tospend significantly more than we have in the past. Moreover, to date ourspending in these areas has been lower than industry averages. We anticipateincreasing our system expenditures to accommodate these needs in the future. Wemay require additional financing in the future in order to execute ouroperating plan and we may not be able to obtain such financing. We cannotpredict whether this additional financing will be in the form of equity,debt, or a combination of debt and equity.

 

**LeaseObligations**

 

Thefollowing table presents our contractual obligations at December 31, 2007,over the next five years and thereafter (in thousands):

 

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| ** **                       | ** ** | **Total**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------|------------|
| **Payments by Period** | ** ** | **Amount** | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Years**        | ** ** |
| Property lease                   |       | $          | 2,576      |       | $          | 1,128      |       | $          | 987        |       | $          | 173        |       | $                | 173        |   | $ | 115 |   | $ | — |   |
|                                  |            |            |            |            |            |            |            |            |            |            |            |            |            |                  |            |  |  |  |  |  |  |  |

 

We areobligated for the lease of our office and warehouse space. We lease a 50,000square-foot office and warehouse and a separate 12,000 square-foot warehousespace in Culver City, California. The leases expire in October 2009 and August 2012,respectively.

 

**Reclassification**

 

Certainamounts from prior years have been reclassified to conform to the current year’spresentation.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT 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.

 

**ITEM 4. 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) and 15d-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report.  Disclosure controls and procedures are the controls andother procedures that we designed to ensure that we record, process, summarizeand report in a timely manner the information we must disclose in reports thatwe file with or submit to the Securities and Exchange Commission.  Basedon this evaluation, our Chief Executive Officer and our Chief Financial Officerconcluded that, as of the date of their evaluation, our disclosure controls andprocedures were effective.

 

***Report ofManagement on Internal Control over Financial Reporting***

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) of the 1934 Act.Our internal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. Internal control over financial reportinginclude those policies and procedures that (1) pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect ourtransactions and dispositions of our assets; (2) provide reasonableassurance that our transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with appropriate authorizations; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on ourfinancial statements.

 

We assessed theeffectiveness of our internal control over financial reporting as of June 30,2008, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — IntegratedFramework. Based on this assessment, management has concluded that our internalcontrol over financial reporting was effective as of June 30, 2008.

 

***Changes inInternal Control Over Financial Reporting***

 

There were no changes in our internal control overfinancial reporting during the quarter ended June 30, 2008, that ourcertifying officers concluded materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

***Limitations on Controls***

 

Management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide onlyreasonable, not absolute, assurance that its objectives will be met. Further,no evaluation of controls can provide absolute assurance that misstatements dueto error or fraud will not occur or that all control issues and instances offraud, if any, within the Company have been detected. Also, projections of anyevaluation of effectiveness to 

 

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future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

*Cartier v. Bidz.com*

 

We area defendant in a lawsuit filed by Cartier, and Cartier International, B.V., inthe United States District Court Southern District of New York in April 2006.The lawsuit alleges that Cartier has proprietary rights, including trade dress,patents, trademarks, copyrights and others, in watch designs known as a Tank,Tank Francaise, 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 set a trialdate in September 2008.

 

We arefrom time to time subject to various other legal proceedings and claims arisingin the ordinary course of business.  Wedo not expect that the outcome in any currently ongoing legal proceedings,individually or collectively, will have a material adverse effect on theCompany’s financial condition, results of operations, or cash flow.

 

**ITEM 1.A. 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 have established a public market for our common stock on the NASDAQCapital Market; our stock is subject to short selling and trading in our commonstock may be volatile.***

 

Since November 2007,we have been included by Nasdaq on the Regulation SHO Threshold Security List,which may be indicative of a significant amount of naked shorting in our commonstock.  As defined in Rule 203(c)(6) ofRegulation SHO, a “threshold security” is any equity security of any issuerthat is registered under Section 12 of the Exchange Act, or that isrequired to file reports under Section 15(d) of the Exchange Act(commonly referred to as reporting securities), where, for five consecutivesettlement days: (i) there are aggregate fails to deliver at a registeredclearing agency of 10,000 shares or more per security; the level of fails isequal to at least one-half of one percent of the issuer’s total sharesoutstanding; and the security is included on a list published by aself-regulatory organization (SRO). A security ceases to be a thresholdsecurity if it does not exceed the specified level of fails for fiveconsecutive settlement days. Short selling and possible market pricemanipulation of our common stock has a negative effect on the trading price ofour common stock and may cause trading in our common stock to be volatile.

 

***The trading price in our common stock may be volatile and you may loseall or part of your investment.***

 

Themarket price of our common stock has been subject to significant fluctuationsand these fluctuations could continue. Some factors that could affect themarket price of our common stock are as follows:

 

·                  actual oranticipated changes in our operating results,

·                  changes inresearch analysts recommendations or estimates of financial performance,

·                  changes inmarket valuation of similar companies, economic and general market conditions,

·                  announcements ofsignificant contracts, company developments, commercial relationships, bankingcredit facilities, capital commitments, acquisitions or joint ventures,

·                  issuance ofadditional shares of common stock or other securities, and

·                  intellectualproperty or litigation developments.

 

Tradingin our common stock may experience significant price and volume fluctuationsand adversely affect the trading price of our common stock. Following periodsof volatility in the market price of a public company’s securities, securitiesclass action litigation has often been instituted against that company. Suchlitigation could result in substantial cost and a diversion of management’sattention and resources.

 

***We must continue to generate a highvolume of visitor traffic to our website and convert those visitors intobuyers.***

 

Ournet revenue depends to a significant extent on the number of customers whovisit our website to purchase merchandise 

 

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andthe dollar amount of their purchases. Generating increased traffic to ourwebsite and converting that traffic into buyers requires us to achieveeffective results from our marketing campaigns; offer a wide variety ofproducts that our customers can purchase at favorable prices; maintain auser-friendly shopping experience; ensure the satisfactory availability,performance, and reliability of our website, network infrastructure, andtransaction processing systems; and provide high-quality customer service. Ourbusiness will be harmed if we are unable to increase our customer base and thedollar volume of the orders customers place with us.

 

***We are subject to “prank” bidding by persons whoare not required to provide their identification.***

 

Presently,we do not require new users to our site to provide their identification uponregistration. Consequently, from time to time we are subject to “prank” bidderswho may win auctions but do not intend to purchase our merchandise.  Although the Company reauctions merchandisenot purchased by such bidders, a large number of failed auctions in whichwinning bidders do not complete their purchases could adversely affect ourresults of operations.

 

***We may face increasing costs toacquire new customers.***

 

Theacquisition of new customers is a key factor in increasing demand for ourjewelry products and increasing our revenue. We currently attract new customersby driving traffic to our website using a marketing and advertising strategythat includes targeted keyword searches, online banner advertising, targetede-mail advertising, 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. In addition, trafficto our website could decline if our online marketing programs become lesseffective or the traffic decreases to the search engines, Internet portals, andwebsites with which we advertise. Our business could be materially andadversely affected if any substantial number of companies on which we advertiseexperience financial or operational difficulties or experience other corporatedevelopments that adversely affect their performance. A failure to maintain orexpand existing online advertising relationships or to establish additionalonline advertising relationships that generate a significant amount of trafficfrom other websites could result in decreased sales or limit the growth of ourbusiness.

 

***Our growth will depend on ourability to increase the popularity of our website, and we may not be able to doso effectively.***

 

Webelieve that continuing to increase the popularity of our website will becritical to expanding our business. Promoting and positioning our website willdepend largely on the success of our marketing efforts and our ability toprovide a variety and sufficient quantity of high-quality products atattractive prices in a convenient manner. Promoting our website will require usto increase our marketing budget and otherwise increase our financialcommitment to creating and maintaining brand loyalty among users. Brandpromotion activities may not yield increased revenue, and even if they do, anyincreased revenue may not offset the expenses we incur in building our websitepopularity and our brand. If we do attract new users to our website, they maynot conduct transactions on a frequent basis or in sufficient dollar amounts.If we fail to promote and maintain our website or incur substantial expenses inan unsuccessful attempt to promote and maintain our brand, our business wouldbe harmed.

 

***We anticipate expanding ourinternational sales activities, causing our business to become increasinglysusceptible to numerous risks that could affect our profitability.***

 

In2006 and 2007, 20.8% and 22.3%, respectively, of our net revenue was generatedby shipments to customers outside of the United States. We plan, over time, toexpand our reach into international markets. We do not, however, currently haveany overseas fulfillment, distribution, or server facilities. We cannot becertain that we will be able to expand our global presence. In addition, thereare certain risks associated with doing business on an international basis,including regulatory requirements, legal uncertainty regarding liability,tariffs, and other trade barriers, longer payment cycles, and potentiallyadverse tax consequences, any of which could adversely affect our business.Although our foreign sales historically have been denominated in U.S. dollars,we also may be subject to increased risks relating to foreign currency exchangerate fluctuations to the extent we decide to denominate our sales in foreigncurrencies.

 

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

 

Customercomplaints or negative publicity about our customer service could severelydiminish consumer confidence in and the use of our website. Effective customerservice requires significant personnel expense, and this expense, if notmanaged properly, could significantly impact our profitability. The failure tomanage or train our customer service representatives properly could compromiseour ability to handle customer inquiries and complaints effectively. If we donot handle customer inquiries and complaints effectively, we may lose customerconfidence. As a result, our revenue could suffer and our operating margin maydecrease.

 

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***Our limited operating history makes it difficult forus to forecast accurately net revenue and appropriately plan our expenses.***

 

Wehave a limited operating history. As a result, it is difficult to forecastaccurately our sales or operating expenses. We base our estimated expenselevels on our operating forecasts and estimates of future sales. Sales andresults of operations are difficult to forecast because they generally dependon the number, 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 insales. We may also be unable to adjust spending in a timely manner to compensatefor any unexpected sales shortfall, which could cause our net income in a givenquarter to be lower than expected.

 

***Quarterly financial results may not be consistentand impact our stock price.***

 

Thereare numerous influences on our quarterly financial results that extend beyondthe normal seasonal trends. Fluctuations that are under our control include:our ability to influence the timing and quantity of items we place for auction;our decision to acquire merchandise at favorable prices; our expenditures onmarketing and our ability to attract customer visits to our website.Fluctuations that are not under our control that may directly impact ourquarterly financial results include: changes in market price for preciousmetals and gems; changes in consumers’ discretionary income and demand for ourproducts; and changes in fashion trends.

 

***We may be at risk to accurately report financialresults or detect fraud if we fail to maintain an effective system of internalcontrols.***

 

As directed by Section 404of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commissionadopted rules requiring public companies to include a report that containsan assessment by management on the company’s internal control over financialreporting in their annual reports on Form 10-K. In addition, theindependent registered public accounting firm auditing the company’s financialstatements must attest to and report on our assessment of the effectiveness ofthe internal controls over financial reporting. While we are consistentlyworking on improvements and conducting rigorous reviews of our internalcontrols over financial reporting, our independent auditors may interpret Section 404requirements and apply related rules and regulations differently. If ourindependent auditors are not satisfied with our internal control over financialreporting or with the level at which it is documented, operated or reviewed,they may decline to attest to management’s assessment or issue a qualifiedreport. Additionally, if we are not able to meet all the requirements of Section 404in a timely manner or with adequate compliance, we might be subject tosanctions or investigation by regulatory authorities, such as the Securitiesand Exchange Commission.

 

Futurechanges in our accounting, financial reporting, and regulatory environment maycreate new areas of risk exposure. Failure to modify our existing controlenvironment accordingly may impair our controls over financial reporting andcause our investors to lose confidence in the reliability of our financialreporting, which may adversely affect our stock price.

 

***We do not have a guaranteed supplyof jewelry products, and we have a concentration of inventory purchases fromour top two suppliers****.*

 

Thesuccess of our business depends, in part, on our ability to offer our customersa wide variety of jewelry that they can purchase at prices that aresubstantially below those of traditional jewelry retailers. We do not have anyformal or binding supply agreements with any of our manufacturers, distributors,or other suppliers for our supply of jewelry products. As a result, we do nothave a guaranteed supply of jewelry products at favorable prices. Our inabilityto maintain and expand our jewelry supply relationships or the inability of oursuppliers to continue to supply us with jewelry products at favorable priceswould substantially harm our business and results of operations.

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top two suppliers accounted for approximately 42.1%, 31.1% and24.0 % of our total purchases in 2005, 2006, and 2007, respectively. In thethree months ended June 30, 2007 and 2008, our top two suppliers accountedfor approximately 30.6% and 9.4% of our total purchases for the quarters,respectively, and approximately 23.2% and 9.0% of the total purchases during the sixmonths ended June 30, 2007 and 2008, respectively

 

***We may give substantial deposits ofinventory to our manufacturing vendors to produce finished jewelry products.***

 

We maybe at risk of loss for the diamonds, precious and semi-precious gems that wehave given to our manufacturing vendors to produce into finished jewelryproducts. If the businesses of the vendors fail, the diamond inventory is lostor stolen, the vendors do not have adequate insurance coverage or if thevendors fail to produce and deliver finished jewelry 

 

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products,we would incur substantial losses that would have a material impact on our netincome and financial position.

 

***Competition from online auctioneersand other online companies with greater brand recognition may adversely affectour sales.***

 

Themarket for online auctions is rapidly evolving and intensely competitive. Weexpect competition to intensify further in the future. Barriers to entry arerelatively low, and current and new competitors can launch new websites atrelatively low cost using commercially available software.

 

Wecurrently compete with a number of other companies, and other competitors mayappear in the future. Our competitors currently include various online auctionservices and retailers that offer jewelry, including eBay, Blue Nile,Overstock, and uBid. We also encounter competition from national jewelry retailchains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and massretailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J.C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial, marketing, and other resources than we do.Smaller competitors may enter into strategic or commercial relationships withlarger, more established, and well-financed companies. Other competitors mayenter into exclusive distribution agreements with our suppliers that deny usaccess to suppliers’ products. Competitors may also devote greater resources tomarketing and promotional campaigns and to website and systems technology thanwe do. We may not be able to compete successfully against current and futurecompetitors or address increased competitive pressures. Furthermore, attemptshave been made in the past to develop and market synthetic stones and gems tocompete in the market for gemstones and gemstone jewelry. We expect suchefforts to continue in the future. If any such efforts are successful increating widespread demand for synthetic or alternative gemstone products,demand and price levels for our products could decline and our business andresults of operations would be substantially harmed.

 

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

 

Luxuryproducts, such as jewelry, are discretionary purchases for consumers. Thevolume and dollar amount of such purchases may be affected by adverse trends inthe general economy and consumer perceptions of those trends, and purchases maysignificantly decrease during economic downturns. The success of our businessdepends in part on macroeconomic factors, such as employment levels, salarylevels, tax rates, and credit availability, all of which affect disposableincome and consumer spending. Any reduction in disposable income or consumerspending may affect us more significantly than companies in other industries.

 

Ournet revenue and results of operations depend in part on the demand for jewelry.Consumers’ tastes are subject to frequent, significant, and sometimesunpredictable changes. Should prevailing consumer tastes for jewelry change orthe demand for jewelry decrease, the sale of our products could decline and ourbusiness and results of operations would suffer.

 

Furthermore,our ability to increase our net revenue and enhance our profitability maydepend on our ability to expand our product offerings beyond our currentofferings. If we offer new products that are not accepted by customers, ourbrand and reputation could be adversely affected, our sales may fall short ofexpectations, and we may incur substantial expenses that are not offset byincreased sales.

 

***Because we carry all of our jewelryproducts in inventory, our net revenue and gross margin may decrease if we areunable to predict and plan for changes in consumer demand.***

 

Ifour sales increase, we will be required to increase our inventoryproportionately. Consumer tastes and preferences for jewelry products canchange rapidly, thereby exposing us to significant inventory risks. Currently,because the products 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 may be subject to a tax liabilityfor past sales and our future sales may decrease if we are required to collectsales and use taxes on the products we sell.***

 

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California and New York. However, additionalstates or foreign countries may seek to impose sales or other tax obligationson us in the future. A successful assertion by one or more states or foreigncountries that we should be collecting sales or other taxes on the sale of ourproducts could result in 

 

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substantialtax liabilities for past and future sales, discourage customers from purchasingproducts from us, decrease our ability to compete with traditional retailers,and otherwise substantially harm our business, financial condition, and resultsof operations.

 

***We rely on suppliers and third-partycarriers as part of our fulfillment process, and these third parties may failto meet shipping schedules or requirements****.*

 

Werely on suppliers to deliver our orders promptly, which we then carry in inventoryto ensure availability 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 preciousmetals and precious and semi-precious stones would increase the cost of ourjewelry products.***

 

Thejewelry industry is affected by fluctuations in the prices of precious metalsand precious and semi-precious stones. The availability and prices of gold,silver, platinum, and other precious metals and precious and semi-preciousstones may be influenced by such factors as cartels, political instability inexporting countries, changes in global demand, and inflation. Shortages ofthese materials or an increase in their prices could reduce the quantity ofproducts we have available for sale and our ability to sell our products formore than our cost, causing reduced sales or lower margins compared to ourhistorical and expected sales and margins.

 

***The satisfactory availability,performance, and reliability of our website, network infrastructure, andtransaction processing systems are critical to our ability to attract, retain,and service customers.***

 

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and wemay not be able to project accurately the rate or timing of increases, if any,in the use of or sales from our website, or timely expand or upgrade ourwebsite, infrastructure, or systems to accommodate any such increases. Additionally,we may 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 operationswould be harmed in the event of any failure of our auction and bidding systemshardware, which is located at a single third-party co-location facility, or anyfailure of our fulfillment and administrative hardware.***

 

Ourbusiness depends in part on the efficient and uninterrupted operation of ourcomputer and communications hardware. The servers and other hardware necessaryto operate our website, including our auction and bidding systems, are locatedat a single third-party co-location facility in El Segundo, CA. We rely on thatfacility to provide Internet access with the speed, capacity, and reliabilitywe require. Our servers and other hardware that run our transaction processing,order fulfillment, and office administration tasks are located at ourheadquarters. Our servers and other hardware are vulnerable to damage orinterruption from human error, fire, flood, power loss, telecommunicationsfailure, terrorist attacks, acts of war, break-ins, earthquakes, and similarevents. We do not currently have redundant systems in multiple locations or aformal disaster recovery plan, and our business interruption insurance may beinsufficient to compensate us for any losses that may occur. In addition, ourservers are vulnerable to computer viruses, physical or electronic break-ins,and similar disruptions, which could lead to interruptions, delays, loss ofcritical data, the inability to accept and fulfill customer orders, or theunauthorized disclosure of confidential customer data. System disruptions orfailures would also create a large number of customer questions and complaintsthat need to be addressed by our customer service support personnel. Theoccurrence of any of the foregoing risks could substantially harm our businessand results of operations. Our systems are vulnerable to damage or interruptionfrom earthquakes, floods, fires, power loss, telecommunication failures,terrorist attacks, computer viruses, computer denial-of-service attacks, andsimilar events.

 

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***Our failure toprotect confidential information of our customers and our network againstsecurity breaches could damage our reputation and substantially harm ourbusiness and results of operations.***

 

A significant barrier to online commerce and communications is thesecure transmission of confidential information over public networks. Thirdparties may have the technology or expertise to breach the security of customertransaction data. Our security measures may not prevent security breaches thatcould result in substantial harm to our business and results of operations anddamage to our reputation. Currently, a majority of our sales are billed to ourcustomers’ credit card accounts directly. Under current credit card practices,we are liable for fraudulent credit card transactions because we do not obtaincardholder signatures. We rely on encryption and authentication technologylicensed from third parties to effect secure transmission of confidentialinformation, including credit card numbers. We do not currently carry insuranceagainst this risk. Advances in computer capabilities, new discoveries in thefield of cryptography, or other developments may result in a compromise orbreach of the technology we use to protect customer transaction data. In addition,anyone who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. Any suchcompromise of our security could damage our reputation and brand and expose usto a risk of loss or litigation and possible liability, which wouldsubstantially harm our business and results of operations.

 

***We are vulnerable tofraudulent activities on our website, including unauthorized use of customerinformation and identity theft by third parties****.*

 

Our network security measures to prevent third parties from penetratingour network and improperly accessing our customers’ personal information orcredit card information may not be successful. Although we have not experiencedany theft of our customers’ credit card information to date, as new discoveriesin the field of cryptography and advances in computer capabilities occur, oursecurity measures may not effectively prevent others from obtaining improperaccess to our customer information. In addition, third parties may target ourcustomers directly with fraudulent identity theft schemes designed to appear aslegitimate e-mails from us. In March 2006, one such third party attemptedto solicit customer information through a tactic, commonly known as “phishing,”whereby an e-mail purporting to be from us solicited customer information fromrecipients of the e-mail. Any such security breach or fraud perpetrated on ourcustomers could expose us to increased costs and could harm our business andresults of operations.

 

***Our ability to growour business will be impaired by delays, interruptions, or failures of theInternet.***

 

Our success depends on the continued growth and maintenance of theInternet. The Internet has experienced, and is likely to continue to experience,significant growth in the numbers of users and amount of traffic. If Internetusage continues to grow as anticipated, the infrastructure may not be able tosupport the level of usage and its performance and reliability may decline. Ifoutages or delays on the Internet increase, overall Internet usage could growmore slowly or decline. In addition, the performance of the Internet may beharmed by increased number of users or bandwidth requirements or by viruses,worms, and similar issues. The Internet has experienced a variety of outagesand other delays as a result of damage to portions of its infrastructure, andit could face outages and delays in the future. These outages and delays couldreduce the level of Internet usage.

 

***We depend on thecontinued growth and acceptance of online commerce, and our business will besubstantially impaired if the growth of online commerce slows or does not growas expected.***

 

Our success depends on the widespread acceptance and use of theInternet as an effective medium for commerce by consumers. The acceptance anduse of the Internet may not continue to expand as expected, and a sufficientbroad base of consumers necessary for its continued growth may not adopt theInternet as a medium for commerce. Consumers who historically have usedtraditional means of commerce may have concerns about privacy, the inability tophysically inspect merchandise before buying, delivery time, product damageduring shipment, and the costs and inconvenience involved in returningpurchased items, which may inhibit their crossover to e-commerce. In order toexpand our user base, we must appeal to and acquire consumers who historicallyhave used traditional means of commerce to purchase goods. If these newcustomers execute fewer or lower dollar amounts of orders than our historicalusers, and we are unable to gain efficiencies in our operating costs, includingthe cost of acquiring new customers, our business and profits could beadversely affected.

 

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

 

As we expand our business and product offerings, rates of productreturn may increase. Any significant increase in product returns above ourreturn assumptions and allowances could substantially harm our business andresults of operations.

 

***Our inventory isvulnerable to damage or loss caused by fire, flood, earthquakes, and similarevents, and we face the risk of theft of our products from inventory or duringshipment.***

 

Our inventory is stored at our warehouse/office facility in CulverCity, California. Consequently, our merchandise supply is vulnerable to fire,flood, earthquakes, and similar events that may impact our facility. Any damageto or loss of all or a significant portion of our inventory could causesignificant delays in shipment of goods to our customers, resulting in 

 

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negative publicity about and diminished customer confidence in ourwebsite. In addition, we may experience theft of our products while they arebeing held in inventory or during the course of their shipment to our customersby third-party carriers. We have implemented security measures to prevent suchtheft and maintain insurance to cover losses resulting from theft.Nevertheless, we could incur significant losses from theft, which wouldsubstantially harm our business and results of operations, if our securitymeasures fail, losses exceed our insurance coverage, or we are not able to maintaininsurance at a reasonable cost.

 

***Increases in creditcard processing fees could increase our costs.***

 

Visa, MasterCard, American Express, and Discover Card could increasethe interchange fees that they charge for transactions using their cards.Increases in interchange fees may result in increased operating costs andreduced profit margin.

 

***We may default onour obligations, if we are unable to generate sufficient cash through sales ina timely manner.***

 

Since our formation, we have funded our operations through the sale ofequity securities and cash generated from operations. The working capitalcharacteristics of our business have allowed us to collect cash from sales tocustomers within several business days of the related sale, while we typicallyhave extended payment terms with our suppliers. We do not, however, have anyformal or binding supply agreements with any of our suppliers, manufacturers,distributors, or other suppliers or any other formal agreements with them onpayment terms. Accordingly, there is a risk that we may default on ourobligations if we are unable to generate sufficient cash through sales in atimely manner or through our credit facility.

 

***Seasonalfluctuations in our net revenue could cause our quarterly results to fluctuateand cause our results of operations to be below expectations.***

 

Historically, sales in the jewelry industry are seasonal and have beenhigher in the fourth quarter of the calendar year as a result of higherconsumer spending during the December holiday season. Approximately 33.9%,28.5% and 33.8% of our net revenue in 2005, 2006 and 2007, respectively, wasgenerated during the fourth quarter. As we continue to grow, we expect toexperience more pronounced seasonal fluctuations in our net revenue andanticipate a disproportionate amount of our revenue will occur in the fourthquarter. In anticipation of any increased sales activity during the fourthquarter, we may incur significant additional expenses, including higher salesand marketing costs and additional staffing in our fulfillment and customersupport operations. If we were to experience lower than expected sales duringany future fourth quarter, it would have a disproportionately large impact onour results of operations for that year. In the future, our seasonal salespatterns may become more pronounced, may strain our personnel and fulfillmentactivities, and may cause a shortfall in sales compared with expenses in agiven period, which would substantially harm our business and results ofoperations.

 

***Sales growth inprior periods may not be indicative of our future growth.***

 

Our sales have fluctuated significantly in the past, in part, as aresult of varying amounts of funds we have spent on advertising and inventorylevels and may fluctuate significantly in the future because of increasingadvertising and inventory costs. These factors may prevent the meaningful useof period-to-period comparisons of financial results. For these and otherreasons, investors should not rely on past sales growth rates as a predictionof our future sales growth.

 

***We have grownquickly, and our business will suffer if we fail to manage our growth.***

 

We have expanded our operations at a rapid pace. This expansion hasplaced a significant strain on our management, operations, and financialresources. We anticipate adding personnel in the future, including managerial,technical, and operations personnel. In order to manage any further growth ofour operations, we also will be required to improve existing and implement newtransaction-processing, operational and financial systems, procedures, andcontrols. If we are unable to manage growth effectively, our business andresults of operations will be harmed.

 

As we continue to grow we will need to expand our physical office andwarehouse space facilities.  Inconjunction with the expiration of our property lease in Culver City,California in October, 2009, we have begun seeking alternative real estateoptions that may require us to relocate our operations.  In managing this transition, our operationscould be interrupted and we could experience increased employee turnover, orboth.

 

***Descriptions of ourjewelry items are not guarantees and may confuse, mislead, or disappoint ourcustomers.***

 

In an effort to provide accurate descriptions of jewelry posted on ourwebsite, we provide appraisal summaries from third-party gemologicallaboratories for some of our jewelry items. All other jewelry and watchdescriptions are provided by our full-time Gemological Institute of America, orGIA, trained gemologists and several experienced product specialists.Nevertheless, there is a subjective component involved with respect toassessing the clarity, color, and carat characteristics of diamonds and othergemstones. In addition, mistakes or omissions of important information in ourdescriptions may occur. Even if our descriptions are accurate, buying a productonline may lead to disappointment resulting in returned merchandise. Forexample, a customer may determine that a piece does not have the expected look,feel, and overall appearance of the 

 

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merchandise that the buyer envisioned from the website photograph.

 

Additionally, in response to customer requests and as a courtesy toresellers, we provide “Compare,” “Retail” and/or “Close Now” prices for jewelryitems listed on our website. Compare and Close Now prices are not meant toreflect fair market values or manufacturer suggested retail prices, and infact, may be higher than prices found in local retail stores. As a consequence,perceived misrepresentations in item descriptions by disappointed buyers mayoccur, resulting in negative publicity about and diminished customer confidencein our website.

 

***We may unknowingly be involved in “conflict”diamond purchases that result in a negative public relationship impact.***

 

There has been an increase in attention to “conflict” diamondsoriginating out of war-torn regions of Africa. The proceeds from the sale of “conflict”diamonds have been used to fund the ongoing aggression and terrorist activatesthroughout the world. We make every effort to evaluate our vendor sources toensure they are not a dealer in “conflict” diamonds. In addition we haveimplemented an anti-money laundering program to guard against both illicitpurchase and sales activities. If these risks were to occur, we may face anegative public reaction to our brand name resulting in loss of sales.

 

***We may not be ableto maintain our domain name uniqueness.***

 

Our Internet domain name is critical to our success. Under currentdomain name registration practices, no other entity can obtain an identicaldomain name, but can obtain a similar name or the identical name with adifferent suffix, such as “.net” or “.org,” or with a different countrydesignation, such as “jp” for Japan. We have not registered our domain namewith different suffixes nor have we registered our name in any otherjurisdiction. As a result, third parties may use domain names that are similarto our domain name, which may result in confusion to potential customers andlost sales. We are aware that other businesses have registered the name “bidz”with other suffixes and in other countries.

 

***We may be subject to assertions by thirdparties for infringement on their intellectual property rights.***

 

Third parties may in the future assert that we have infringed on theirintellectual property rights as we self-develop our auction platform, salestransaction system, and inventory control system.  We have a larger exposure of being accused ofintellectual property rights infringements than if we had purchased ourtechnology off the shelf. We also may be at risk for selling items thatinfringe on other third party trade dress rights, copyright, or patent rightsthat may cause the offended party to bring action against us. In either eventof alleged infringement, we would face substantial litigation cost to defendourselves and utilization of our management and personnel resources.

 

***We may be unable to protect or enforce ourown intellectual property rights adequately, and we may become subject tointellectual property litigation.***

 

We regard the protection of our trademarks, copyrights, domain name,trade dress, and trade secrets as critical to our success. We rely on acombination of common law as well as trademark, copyright, trade dress, andtrade secret laws to protect our intellectual property rights. We also haveentered into confidentiality and invention assignment agreements with ouremployees and relevant contractors and nondisclosure agreements with relevantparties with whom we conduct business in order to limit access to anddisclosure of our proprietary information. These contractual arrangements andother steps we have taken to protect our intellectual property may not preventmisappropriation of our intellectual property or deter independent developmentof similar intellectual property by others. We also are pursuing theregistration of our domain name, trademarks, and service marks in the UnitedStates and internationally. Effective trademark, copyright, patent, tradedress, trade secret, and domain name protection is very expensive to maintainand may require litigation. We must protect our trademarks, copyrights,patents, and domain names in an increasing number of jurisdictions, a processthat is expensive and may not be successful in every location.

 

Third parties may from time to time claim that we have infringed theirintellectual property relating to our business model or auction systems. Weexpect that participants in our market increasingly will be subject toinfringement claims as the number of services and competitors in our industrysegment grows. Any claim like this, whether meritorious or not, could betime-consuming, result in costly litigation, cause service upgrade delays, orrequire us to enter into royalty or license agreements. These royalty orlicense agreements may not be available on acceptable terms or at all. As aresult, any such claim could harm our business.

 

***We may be unable toenforce protection of our intellectual property rights under the laws of othercountries.***

 

We anticipate that we will become increasingly subject to internationalintellectual property risks, including differing intellectual property laws,which may be insufficient to protect our intellectual property, unique locallaws, and lack of applicable law or clear precedent.

 

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***Various legal rules andregulations related to privacy and the collection, dissemination, and securityof personal information may adversely affect our marketing efforts.***

 

We are subject to increasing regulation at the federal, state, andinternational levels relating to privacy and the use of personal userinformation designed to protect the privacy of personally identifiable informationas well as to protect against its misuse. These laws include the Federal TradeCommission Act, the CAN-SPAM Act of 2003, the Children’s Online PrivacyProtection Act, the Fair Credit Reporting Act, the Homeland Security Act, andrelated regulations. Several states have proposed legislation that would limitthe use of personal information gathered online or require online services toestablish privacy policies. Moreover, proposed legislation in the United Statesand existing laws in foreign countries require companies to establishprocedures to notify users of privacy and security policies, obtain consentfrom users for collection and use of personal information, and/or provide userswith the ability to access, correct, and delete personal information stored bycompanies. These regulations and other laws, rules, and regulations enacted inthe future may adversely affect our ability to collect, disseminate, or sharedemographic and personal information about users and our ability to e-mail ortelephone users, which could be costly and adversely affect our marketingefforts**.**

 

***We may be subject toregulations governing the conduct and liability of auctioneers, which couldaffect the way in which we conduct our business or otherwise increase our costof doing business.***

 

Numerous states and foreign jurisdictions, including California, whereour headquarters are located, have regulations regarding how auctions may beconducted and the liability of auctioneers in conducting such auctions. Nofinal legal determination has been made whether the California regulationsapply to our business, and little precedent exists in this area. Several statesand some foreign jurisdictions have attempted, and may attempt in the future,to impose regulations that could affect us or our users, which could harm ourbusiness.

 

***We are subject toregulations relating to consumer privacy, which could increase the cost of ourdoing business, expose us to litigation costs, increase our service or deliverycosts, and otherwise harm our business.***

 

Several states have proposed, and California, Minnesota, Utah, andVermont have recently passed, legislation that would limit the uses of personaluser information gathered online or offline. Many states already have such lawsand continually consider strengthening them, especially against onlineservices. However, the Fair Credit Reporting Act, or FCRA, a federal statuteenacted in 1970 to protect consumer privacy, includes a provision preemptingconflicting state laws on the sharing of information between corporateaffiliates. The preemptive provisions of FCRA were permanently extended in2002, thereby ensuring that we are not subject to the laws of each individualstate with respect to matters within the scope of FCRA, but remain subject to theother provisions of FCRA.

 

The Federal Trade Commission also has settled several proceedingsagainst companies regarding the manner in which personal information iscollected from users and provided to third parties. Specific statutes intendedto protect user privacy have been passed in many foreign jurisdictions.Compliance with these laws, given the tight integration of our systems acrossdifferent countries and the need to move data to facilitate transactions amongour users, such as payment companies and shipping companies, is both necessaryand difficult. Failure to comply could subject us to lawsuits, fines, criminalpenalties, statutory damages, adverse publicity, and other losses that couldharm our business. Changes to existing laws or the passage of new laws intendedto address these issues could directly affect the way we do business or couldcreate uncertainty on the use of the Internet. This could reduce demand for ourproducts, increase the cost of our doing business, expose us to litigation costs,increase our service or delivery costs, or otherwise harm our business.

 

***New and existingregulations could harm our business.***

 

We are subject to the same foreign and domestic laws as other companiesconducting both online and offline business. There are still relatively fewlaws specifically directed towards online business. However, due to theincreasing popularity and use of the Internet and online services, many lawsrelating to the Internet are being debated at all levels of government around theworld, and it is possible that such laws and regulations will be adopted. Theselaws and regulations could cover issues such as user privacy, freedom ofexpression, pricing, fraud, content and quality of products and services,taxation, advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such asproperty ownership, copyrights and other intellectual property issues,taxation, libel and defamation, obscenity, and personal privacy is uncertain.The vast majority of these laws was adopted prior to the advent of the Internetand related technologies and, as a result, do not contemplate or address theunique issues of the Internet and related technologies. Those laws that do referencethe Internet, such as the U.S. Digital Millennium Copyright Act and theEuropean Union’s Directive on Distance Selling and Electronic Commerce, haveonly recently begun to be interpreted by the courts and implemented by theEuropean Union member states, so their applicability and scope remainuncertain. As our activities and the types of goods listed on our websiteexpand, regulatory agencies may claim that we or our users are subject tolicensure in their jurisdiction, either with respect to our business ingeneral, or in order to allow the sale of certain items, such as real estate,event tickets, boats, and automobiles.

 

In addition, because our products are available over the Internet inmultiple states and because we sell merchandise to 

 

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consumers residing in multiple states, we could be required to qualifyto do business as a foreign corporation in each state in which our products areavailable. Our failure to qualify as a foreign corporation in a jurisdiction inwhich we are required to do so could subject us to penalties. Any newlegislation or regulation, or the application of laws or regulations fromjurisdictions whose laws do not currently apply to our business could have amaterial adverse affect on our business.

 

***We depend to a verysignificant extent on David Zinberg, our Chairman of the Board, President, andChief Executive Officer.***

 

Our performance depends substantially upon David Zinberg, our Chairmanof the Board, President, and Chief Executive Officer, who has extensiveexperience with the purchase and sale of jewelry. We rely on Mr. Zinbergto make critical operational decisions on a daily basis, such as productofferings and purchases, and to make key strategic plans. We have an employmentagreement with Mr. Zinberg extending through 2009. The loss of theservices of Mr. Zinberg would adversely affect our business andoperations.

 

***Holders of commonstock issued by us in prior offerings may be entitled to rescind theirpurchases.***

 

From ourinception until mid-2003, we raised over $20.5 million in gross equity capitalby selling shares of our common stock to approximately 830 investors at pricesranging from $4.00 to $6.00 per share with a weighted average share price of$4.50. We also issued shares of common stock to about 30 persons in exchangefor services and other non-cash consideration valued in excess of $5.5 millionand issued approximately 250 stock option grants to purchase common stock at aweighted average 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, because certainof our employees who solicited investors engaged in a “general solicitation” ofsecurities. In addition, these employees received compensation for selling ourcommon stock and were required to be licensed as broker-dealers with theSecurities and Exchange Commission, or SEC, and various state authorities, butthey were not so licensed. In such situations, a number of remedies may beavailable to regulatory authorities and the investors who purchased commonstock in those offerings, including a right of rescission, civil penalties, arestraining order or injunction, and a court order to pay restitution andcosts.

 

***We do not intend topay dividends on our common stock, and, consequently, your only opportunity toachieve a return on your investment is if the price of our common stockappreciates.***

 

We havenever declared or paid any cash dividends on our common stock and do not intendto pay dividends on our common stock for the foreseeable future. We intend toinvest any future earnings to fund our business. Therefore, stockholders likelywill not receive any dividends on our common stock for the foreseeable future.Investors cannot be certain that they will receive a positive return on theirinvestment when they sell their shares or that they will not lose the entireamount of their investment.

 

***The concentration ofour capital stock ownership with our founder and executive officers anddirectors and their affiliates will limit your ability to influence corporatematters.***

 

Our founder, executive officers, and directors together ownapproximately 34.4% of our common stock as of June 30, 2008. MarinaZinberg, our Vice President, who is the sister of David Zinberg, our Chairman,President and Chief Executive Officer, owns an additional 31.1% of our commonstock.  As a result, these individualswill have significant influence over our management and affairs and over allmatters requiring stockholder approval, including the election of directors andthe approval of significant corporate transactions, such as a merger or a saleof our company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporatematters. Because of this, we may take actions that some of our stockholders donot view as beneficial. As a result, the market price of our common stock couldbe adversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

***Our charterdocuments and Delaware law could make it more difficult for a third party toacquire us, and discourage a takeover.***

 

On June 22, 2006, we reincorporated in Delaware, and the Delawarecertificate of incorporation and the Delaware General Corporation Law, or DGCL,contain provisions that may have the effect of making more difficult ordelaying attempts by others to obtain control of our company, even when theseattempts may be in the best interests of our stockholders. The Delawarecertificate of incorporation also authorizes our Board of Directors, without stockholderapproval, to issue one or more series of preferred stock, which could havevoting and conversion rights that adversely affect or dilute the voting powerof the holders of common stock. Delaware law also imposes conditions on certainbusiness combination transactions with “interested stockholders.” The Delawarecertificate of incorporation divides our Board of Directors into three classes,with one class to stand for election each year for a three-year term after theinitial election. The classification of directors tends to 

 

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discourage a third party from initiating a proxy solicitation orotherwise attempting to obtain control of our company and may maintain theincumbency of our Board of Directors, as this structure generally increases thedifficulty of, or may delay, replacing a majority of directors. The Delawarebylaws authorize our Board of Directors to fill vacancies or newly createddirectorships. A majority of the directors then in office may elect a successorto fill any vacancies or newly created directorships.

 

**ITEM 2. UNREGISTERED SALES AND PURCHASESOF EQUITY SECURITIES**

 

No stock awards and stock options were granted during the three monthsended June 30, 2008.

 

**Issuer Purchases of Equity Securities**

 

As of June 30, 2008, wehave purchased a cumulative total of 923,000 shares for $7.9 million. Thefollowing table contains information about purchases of our common stock duringthe three months ended June 30, 2008:

 
| ** **                        | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|-----------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar Value**          | ** ** |
| ** **                        | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                        | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                        | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                        | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2008**                          | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program (1)**           | ** ** |
| April 1 – April 30 |       | 297,200       |       | $           | 8.93       |                          | 869,297    |                           | $          | 12,650,992 |   |
| May 1 – May 31     |       | 6,300         |       | $           | 9.98       |                          | 875,597    |                           | $          | 12,588,092 |   |
| June 1 – June 30   |       | 47,700        |       | $           | 9.20       |                          | 923,297    |                           | $          | 12,149,112 |   |
| Total                             |       | 351,200       |       |        |       |                          |       |                           |       |
|                                   |            |               |            |             |            |                               |            |                                |            |  |  |  |

 

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(1)                                 InJune 2007, we authorized the stock buyback program for up to $5 million ofour outstanding common stock to be repurchased through the open market atprices deemed appropriate by management. In February 2008, weauthorized an increase in the stock buyback program to $20 million from $5million. The stock buyback will be at prices deemed appropriate by managementover a 24 month period.

 

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

 

On June 25, 2008, we held our Annual Meeting of Shareholders.  We solicited proxies for the Annual Meetingpursuant to Regulation 14A under the Securities Exchange Act of 1934, asamended.  There was no solicitation inopposition to the two nominees of the Board of Directors listed in our ProxyStatement, dated June 5, 2008, and both nominees were elected.

 

The following matters were acted upon by our shareholders at the AnnualMeeting, at which approximately 12,715,726 shares of common stock, or 53.1% ofthe shares of common stock outstanding and entitled to vote at the AnnualMeeting, were present in person or by proxies:

 

1.                                       Electionof Directors,   The Board of Directorsnominated two persons for election as Class II directors, each to holdoffice for three-year terms.  Eachnominee was an incumbent director, no other person was nominated, and each nomineewas elected.  The votes cast for, orwithheld or abstained with respect to, each nominee were as follows:  Man Jit Singh—12,590,783 for, 124,943withheld, and Lawrence Y. Kong—12,567,580 for, 148,146 withheld.

 

2.                                       Proposalto Approve Amendment to 2006 Stock Award Plan. The Board of Directors submitted a resolution that the shareholdersapprove an amendment to our 2006 Stock Award Plan to increase by 500,000 sharesof common stock, from 1,000,000 to 1,500,000 shares, the total number of sharesof common stock reserved and available in connection with awards under the 2006Plan.  There were 12,142,763 sharesvoting in favor of, 540,564 shares voting against, the resolution.  The holders of 32,399 shares abstained, andthere were no “broker non-votes.”  Theresolution, having received the affirmative vote of the holders of a majorityof the shares of common stock outstanding and entitled to vote at the AnnualMeeting, was adopted.

 

3.                                       Ratificationof Appointment of Independent Auditor. The Board of Directors submitted a resolution that the shareholdersratify the action of the Audit Committee in selecting and appointing the firmof Stonefield Josephson, Inc. as the Company’s independent registeredpublic accounting firm for the year ending December 31, 2008.  There were 12,677,921 shares voting in favorof, 13,180 shares voting against, the resolution.  The holders of 24,625 shares abstained, andthere were 

 

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no “broker non-votes.”  Theresolution, having received the affirmative vote of the holders of a majorityof the shares of common stock outstanding and entitled to vote at the AnnualMeeting, was adopted.

 

**ITEM 6. EXHIBITS**

 
| 31.1   |   | Principal Executive Officer Certification Pursuant  to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                   |
| 31.2   |   | Principal Financial Officer Certification Pursuant  to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|   |   |                                                                                                                   |
| 32.1   |   | Certifications Pursuant to  Rule 13a-14(b) of the Securities Exchange Act of 1934                            |

 

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this registration statement 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** |
|                       |       |                                       |
|                       | By:        | /s/ LAWRENCE  KONG                         |
|                       |       |                                       |
| ** **                 | ** ** | **Lawrence  Kong**                         |
| ** **                 | ** ** | **Principal  Accounting Officer**          |
|                       |       |                                       |
| Dated: August 5, 2008 |       |                                       |

 

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