**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 March 31, 2007**                                                                                      |
| ** ** | ** **                                                                                                                             |
| **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) |

** **

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

(Address,including zip code, of principal executive office)

** **

**(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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non accelerated filer. Seedefinition of “accelerated filer and large filer” in Rule 12b-2 of theExchange Act). (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|--------------------------------|--------------------------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

o  Yes    x  No

Numberof shares outstanding of Registrant’s common stock, $0.001 par value, as ofApril 30, 2007: 23.252,654

 

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**TABLE OF CONTENTS**
| PART I. FINANCIAL  INFORMATION |
|-------------------------------------|
| Item 1.                        | Financial  Statements |   | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2006 and March 31, 2007 (unaudited) |   | 3 |
|                                | Condensed  Statements of Income for three month periods ended March 31, 2006 and 2007  (unaudited) |   | 4 |
|                                | Condensed  Statements of Cash Flows for three month periods ended March 31, 2006 and  2007 (unaudited) |   | 5 |
|                                | Notes  to Financial Statements (unaudited) |   | 6 |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 13 |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk |   | 17 |
| Item 4.                             | Controls and  Procedures |   | 17 |
| Item 4T                             | Controls and  Procedures |   | 18 |
|                                |   |   |   |
| PART II. OTHER  INFORMATION    | 18 |
| Item 1.                             | Legal Proceedings |   | 18 |
| Item 1A                             | Risk  Factors |   | 18 |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 28 |
| Item 6.                             | Exhibits |   | 29 |
| SIGNATURES                          |   |   | 30 |
|                                     |  |  |  |  |

 

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 ourfinancial condition, results of operations, business strategy and financialneeds. These forward looking statements are subject to a number of risks,uncertainties and assumptions 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 data)*
| ** **                                                                                                                                                                     | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                                                                     | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                                                     |       |                  |       |               |       |
| Current assets:                                                                                                                                                                |       |                  |       |               |       |
|  Cash                                                                                                                                                                     |       | $                     | 359        |               | $          | 174 |   |
|  Accounts receivable                                                                                                                                                      |       | 1,930                 |       | 1,395              |       |
|  Inventories, net of reserves of $461 and  $543  at December 31, 2006 and March 31, 2007 respectively                                                                     |       | 31,183                |       | 31,422             |       |
|  Prepaid inventory                                                                                                                                                        |       | 3,125                 |       | 1,296              |       |
|  Other current assets                                                                                                                                                     |       | 1,192                 |       | 938                |       |
| Total current  assets                                                                                                                                                          |       | 37,789                |       | 35,225             |       |
| Property and  equipment, net                                                                                                                                                   |       | 478                   |       | 631                |       |
| Intangible asset                                                                                                                                                               |       | 150                   |       | 150                |       |
| Deposits                                                                                                                                                                       |       | 125                   |       | 125                |       |
| Total assets                                                                                                                                                                   |       | $                     | 38,542     |               | $          | 36,131 |   |
| ** **                                                                                                                                                                     |       |                  |       |               |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                 |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                           |       |                  |       |               |       |
|  Revolving credit line                                                                                                                                                    |       | 3,941                 |       | 7,662              |       |
|  Accounts payable (includes related party  amounts of $4,331 and $1,751  at December 31, 2006 and March 31, 2007 respectively                                             |       | 21,987                |       | 14,450             |       |
|  Accrued expenses                                                                                                                                                         |       | 1,952                 |       | 1,743              |       |
|  Deferred revenue                                                                                                                                                         |       | 3,935                 |       | 1,970              |       |
| Total current  liabilities                                                                                                                                                     |       | 31,815                |       | 25,825             |       |
|                                                                                                                                                                           |       |                  |       |               |       |
| Commitments and  contingencies                                                                                                                                                 |       | —                |       | —             |       |
|                                                                                                                                                                           |       |                  |       |               |       |
| Stockholders’ equity:                                                                                                                                                     |       |                  |       |               |       |
|  Preferred stock: par value $0.001;  authorized 4,000,000 shares; none issued  and outstanding at December 31, 2006 and March 31, 2007, respectively                      |       | —                |       | —             |       |
|  Common stock: par value $0.001; authorized  100,000,000 shares; issued and  outstanding 23,233,904 and 23,252,654 at December 31, 2006 and  March 31, 2007, respectively |       | 23                    |       | 23                 |       |
|  Additional paid in capital                                                                                                                                               |       | 28,352                |       | 28,496             |       |
|  Shares held in treasury, at cost, 15,000  shares at March 31, 2007                                                                                                       |       | (90                   | )          | (90                | )          |
|  Accumulated deficit                                                                                                                                                      |       | (21,558               | )          | (18,123            | )          |
| Total  stockholders equity                                                                                                                                                     |       | 6,727                 |       | 10,306             |       |
| ** **                                                                                                                                                                     |       | $                     | 38,542     |               | $          | 36,131 |   |

 

The accompanying notes form an integral part of thesecondensed 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 March 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                                                             |       |                                                 |       |   |   |
| Net revenue:                                                     |       |                                                 |       |   |   |
|  Merchandise sales                                          | ** ** | $                                                    | 34,636     |   | $ | 44,639 | ** ** |
|  Commissions                                                |       | 57                                                   |       | 85 |   |
|  Advertising                                                |       | 1                                                    |       | — |   |
|                                                             |       |                                                 |       |   |   |
|                                                             |       | 34,694                                               |       | 44,724 |   |
|                                                             |       |                                                 |       |   |   |
| Cost of revenue                                                  |       | 25,516                                               |       | 33,596 |   |
|                                                             |       |                                                 |       |   |   |
| Gross Profit                                                     |       | 9,178                                                |       | 11,128 |   |
|                                                             |       |                                                 |       |   |   |
| Operating expenses:                                              |       |                                                 |       |   |   |
|  General and administrative                                 |       | 3,352                                                |       | 4,843 |   |
|  Sales and marketing                                        |       | 2,407                                                |       | 2,600 |   |
|  Depreciation and amortization                              |       | 54                                                   |       | 74 |   |
|                                                             |       |                                                 |       |   |   |
| Total operating  expenses                                        |       | 5,813                                                |       | 7,517 |   |
|                                                             |       |                                                 |       |   |   |
| Income from operations                                           |       | 3,365                                                |       | 3,611 |   |
|                                                             |       |                                                 |       |   |   |
| Other income - interest  income                                  |       | 17                                                   |       | 1 |   |
| Other expense -  interest (expense)                              |       | —                                               |       | (82 | ) |
|                                                             |       |                                                 |       |   |   |
| Income before income  tax expense                                |       | 3,382                                                |       | 3,530 |   |
|                                                             |       |                                                 |       |   |   |
| Income tax expense                                               |       | 90                                                   |       | 95 |   |
|                                                             |       |                                                 |       |   |   |
| Net income                                                       | ** ** | $                                                    | 3,292      |   | $ | 3,435 | ** ** |
|                                                             |       |                                                 |       |   |   |
| Net income per share  available to common shareholders - basic   | ** ** | $                                                    | 0.14       |   | $ | 0.15 | ** ** |
|                                                             |       |                                                 |       |   |   |
| Net income per share  available to common shareholders - diluted | ** ** | $                                                    | 0.14       |   | $ | 0.14 | ** ** |
|                                                             |       |                                                 |       |   |   |
| Weighted average number  of shares outstanding - basic           |       | 23,312,500                                           |       | 23,245,987 |   |
|                                                             |       |                                                 |       |   |   |
| Weighted average number of shares outstanding - diluted          |       | 23,826,758                                           |       | 23,724,657 |   |

 

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

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**Bidz.com, Inc.**

**CondensedStatements of Cash Flows (Unaudited)**

*(inthousands)*
| ** **                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                                                                                               |       |                                                 |       |   |   |
| **Cash flows provided by (used  for) operating activities:**                                       |       |                                                 |       |   |   |
| Net income                                                                                         |       | $                                                    | 3,292      |   | $ | 3,435 |   |
|                                                                                               |       |                                                 |       |   |   |
| **Adjustments  to reconcile net income to net cash  provided by (used for) operating activities:** | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                                     |       | 54                                                   |       | 74 |   |
| Change in  inventory reserve                                                                       |       | 147                                                  |       | 82 |   |
| Amortization of  deferred stock-based compensation                                                 |       | 50                                                   |       | — |   |
| Stock-based  compensation                                                                          |       | —                                               |       | 144 |   |
| **Changes  in assets and liabilities:**                                                            | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| ** (Increase) decrease in assets:**                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                               |       | 177                                                  |       | 535 |   |
| Inventories                                                                                        |       | (1,751                                               | )          | (321 | ) |
| Prepaid  Inventory                                                                                 |       | —                                               |       | 1,829 |   |
| Other current  assets                                                                              |       | (103                                                 | )          | 254 |   |
| Deposits                                                                                           |       | (253                                                 | )          | — |   |
| ** Increase (decrease) in liabilities:**                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Post-dated check  financing                                                                        |       | 817                                                  |       | — |   |
| Accounts payable                                                                                   |       | (2,248                                               | )          | (7,537 | ) |
| Accrued expenses                                                                                   |       | 324                                                  |       | (209 | ) |
| Deferred revenue                                                                                   |       | (386                                                 | )          | (1,965 | ) |
| Net cash  provided by (used for) operating activities                                              |       | 120                                                  |       | (3,679 | ) |
|                                                                                               |       |                                                 |       |   |   |
| **Cash flows (used for) investing  activities:**                                                   |       |                                                 |       |   |   |
|  Capital expenditures                                                                         |       | (127                                                 | )          | (227 | ) |
| **Cash flows provided by financing  activities:**                                                  |       |                                                 |       |   |   |
| Increase in  revolving credit line balance                                                         |       | —                                               |       | 3,721 |   |
|                                                                                               |       |                                                 |       |   |   |
| **Net (decrease) in cash**                                                                         |       | (7                                                   | )          | (185 | ) |
| **Cash, beginning of period**                                                                      |       | 7                                                    |       | 359 |   |
| **Cash, end of period**                                                                            |       | $                                                    | —     |   | $ | 174 |   |
|                                                                                               |       |                                                 |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                             |       |                                                 |       |   |   |
| Interest paid                                                                                      |       | $                                                    | —     |   | $ | 82 |   |
| Income taxes paid                                                                                  |       | $                                                    | —     |   | $ | 10 |   |

 

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

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**BIDZ.COM,INC.NOTES TO FINANCIAL STATEMENTS(NUMBERS IN THOUSANDS, EXCEPT FOR PER SHARE NUMBERS)(UNAUDITED)**

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

**Basis of Presentation**

The accompanying unaudited financial statements havebeen prepared in accordance with the instructions to Form 10-Q and do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  These financial statements and related notes should be readin conjunction with the Company’s audited financial statements for the fiscalyear ended December 31, 2006 filed in the form 10-K Annual Report by theCompany on March 12, 2007. In the opinion of management, these financialstatements reflect all adjustments which are of a normal recurring nature andwhich are necessary to present fairly the financial position ofBidz.com, Inc. as of March 31, 2007 and the results of operations for thethree month periods ended March 31, 2006 and 2007 and the cash flows for thethree month periods ended March 31, 2006 and 2007.  The results of operationsfor the three months ended  March 31,2007 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 allowancereserve, inventory reserve, accrued expenses, and valuation allowance fordeferred tax assets.

**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. We operate a websitelocated at www.bidz.com for the purpose of selling merchandise, utilizing ourunique sales auction platform.

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 82.2% and 79.5% ofnet revenue for the three months ended March 31, 2006 and 2007, respectively.

For thethree month period March 31, 2007, we reported net income of $3.4 millionand net cash provided from operating activities of $42,000. As of March 31,2007, we had current assets of $35.2 million and current liabilities of $25.8million or working capital of $9.4 million.

Duringthe year ended December 31, 2006, we reported net income of$5.4 million and net cash provided by operating activities of$1.5 million. As of December 31, 2006, we had current assets of$37.8 million and current liabilities of $31.8 million or workingcapital of $6.0 million.

**Recent Developments**

In April2007 our Board of Directors authorized us to initiate steps to list and tradethe shares of our common stock. We have determined that, in order to provideliquidity to our shareholders and as a prerequisite to listing on The NASDAQStock Market, we will establish a public market for our common stock on theOver the Counter Bulletin Board (“OTCBB”), which we anticipate will occursometime in May 2007, and apply for listing on The NASDAQ Capital Market.  The Board of Directors has authorized the useof up to $5 million to repurchase shares of the Company.

We haveprovided financial guidance in our press releases. Our most recent pressrelease provided for expected net revenue of $170 million to $180 million,gross profit margin of 24% to 25% and net income before tax of $13 million to$14 million for the 2007 fiscal year. For the three months ended June 30, 2007we expect net revenue of $38 million to $40 million and net income before taxof $2.8 million to $3.3 million.

6

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We are adefendant in a lawsuit brought by Yossi Gatlin in October 2005 for anautomobile purchased from us in March 2002 for $28,000. Gatlin alleges that wedid not provide prior registration so that Gatlin was not able to register thevehicle. In April 2007, we have reached an agreement in principle to settle thecase.

***Recent Accounting Pronouncements***

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

In February 2007, the FASB issued Statement No. 159 (“FAS159”) which expanded FAS No. 157, “*FairValue Measurements*,” which defines fair value, establishesguidelines for measuring fair value and expands disclosures regarding fairvalue measurements. FAS 159 does not require any new fair value measurementsbut rather eliminates inconsistencies in guidance found in various prioraccounting pronouncements. SFAS 159 is effective for fiscal years beginningafter November 15, 2007. Earlier adoption is permitted, provided thecompany has not yet issued financial statements, including for interim periods,for that fiscal year. The Company is currently evaluating the impact of FAS159, but does not expect the adoption of FAS 159 to have a material impact on ourfinancial statements.

In July 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes, aninterpretation of FAS* *109*“(“FIN 48”) which clarifies theaccounting for uncertainty in income taxes recognized in accordance with FAS109, “*Accounting for Income Taxes.”*FIN48 is a comprehensive model for how a company should recognize, measure,present, and disclose in its financial statements uncertain tax positions thatthe company has taken or expects to take on a tax return. If an income taxposition exceeds a more likely than not (greater than 50%) probability ofsuccess upon tax audit, the company will recognize an income tax benefit in itsfinancial statements. Additionally, companies are required to accrue interestand related penalties, if applicable, on all tax exposures consistent withjurisdictional tax laws. This interpretation is effective on January 1,2007.  The adoption of this statement does not have a material impact onour financial statements.

In June 2006, the Board of the FASB ratified theconclusion reached by the EITF and contained therein in Issue No. 06-03. The Task Force reached a conclusion that the presentation of taxes on either agross or net basis is an accounting policy decision that should be disclosedpursuant to Opinion 22.  We present sales tax liability on a netbasis.  Sales are not grossed up with the attendant taxes and deducted asa separate line item. The EITF becomes effective for interim and annualreporting periods beginning after December 15, 2006.  The adoption of thisstatement has no impact on our financial statements.

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

7

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**2.****                                      EarningsPer 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 the potential common shares had been issued and if the additional commonshares were not anti-dilutive.

The dilutiveeffect of outstanding stock options and warrants is reflected in dilutedearnings per share by application of the treasury stock method for the threemonth periods ended March 31, 2006 and 2007.  The following table setsforth the computation of basic and diluted net income per share.

*(in thousands, except share and per share data)*
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2007** | ** ** |
|                                     |       |                             |       |   |   |
| Basic and diluted net  income per share: |       |                             |       |   |   |
|                                     |       |                             |       |   |   |
| Numerator:                               |       |                             |       |   |   |
| Net income                               |       | $                                | 3,292      |   | $ | 3,435 |   |
|                                     |       |                             |       |   |   |
| Denominator:                             |       |                             |       |   |   |
|                                     |       |                             |       |   |   |
| Weighted common  shares outstanding      |       | 23,312,500                       |       | 23,245,987 |   |
|                                     |       |                             |       |   |   |
| Effect of  dilutive securities           |       | 514,258                          |       | 478,670 |   |
|                                     |       |                             |       |   |   |
| Denominator for  diluted calculation     |       | 23,826,758                       |       | 23,724,657 |   |
|                                     |       |                             |       |   |   |
| Net income per share,  basic             |       | $                                | 0.14       |   | $ | 0.15 |   |
|                                     |       |                             |       |   |   |
| Net income per share, diluted            |       | $                                | 0.14       |   | $ | 0.14 |   |

 

**3.             Revolving Credit Line**

In July 2006, we entered into a revolving credit line agreement withLaSalle Bank, ABN AMRO, to provide working capital financing secured byinventories and tangible assets. The agreement allows for us to initially drawon a line of credit up to $10 million, with a provision to increase the limitup to $15 million with the future consent of the bank’s loan committee. Duringthe three month period ended March 31, 2007 we successfully increased the limitto $15 million. The revolving credit line agreement expires in July of 2010. Asof March 31, 2007, there was an outstanding balance of $7.7 million under therevolving credit line and remaining availability of $5.8 million afterdeducting a reserve of $1.5 million for minimum required excess availabilitywhich is a reserve of the $15 million credit line that we cannot utilize.

Under the termsand conditions of the revolving credit line agreement, the Company is subjectto certain restrictive covenants including the following restrictive financialcovenants: -

Minimum TTMEBITDA: Actual Trailing Twelve Month (TTM) EBITDA compliance is measured on amonthly basis, and shall not vary negatively from the Dollar amount for plannedLTM EBITDA, set forth in an agreed upon schedule, for the applicable period,and is subject to resetting in Lender’s discretion based upon a business planfor subsequent periods acceptable to Lender.

CapitalExpenditures: Borrower shall not make capital expenditures in excess of anagreed upon amount for each fiscal year covered by the loan agreement. Allcapital expenditures limits are subject to resetting on an annual basis at theLender’s discretion based upon a business plan for subsequent periods and areacceptable to the Lender.

Minimum ExcessAvailability: We are to maintain an Excess Availability of  $1.5 million, when the Maximum RevolverAmount is $15 million. This covenant is subject to resetting at the Lender’sdiscretion based upon a business plan for subsequent periods and is acceptableto Lender.

8

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**4.****                                      StockBased Compensation**

In December 2004, the FASB issued SFASNo. 123R, “Share Based payment: An Amendment of FASB StatementsNo. 123 and 95.” This statement requires that we recognize in our financialstatements the cost resulting from all share- based payment transactions. Inaddition, in March 2005 the Securities and Exchange Commission (“SEC”)released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB107”), which provides the SEC staff’s position regarding the application ofSFAS 123R and certain SEC rules and regulations, and also provides thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies. On January 1, 2006, we adopted SFAS 123R, whicheliminates our ability to account for share-based compensation transactions, aswe formerly did, using the intrinsic value method as prescribed by APB 25 andgenerally requires that we recognize in our statements of operations allshare-based payments to employees, including grants of stock options based ontheir 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 ended March 31, 2006 and 2007, respectively, reflect the impact ofadopting 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 toDecember 31, 2005, will be based on the grant date fair value estimated inaccordance with SFAS 123R. As stock-based compensation expense recognized inthe statements of income is based on awards ultimately expected to vest, itwill be reduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures 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 and employee stock option exercise behaviors. The stock-basedcompensation expense from stock options for the three months ended March 31,2006 and  2007 totaled $0 and $32,000,respectively.

**Stock Award**

Weawarded and issued as director compensation a total of 18,750 shares of commonstock for the three months ended March 31, 2007. Our non-employee directors,Man Jit Singh and Peter Hanelt, received stock awards of 8,750 and 10,000shares, respectively, in lieu of stock options. We grant annually to eachnon-employee director options to purchase 10,000 shares of our common stock. Inlieu of receiving such stock options, non-employee directors may elect toreceive one share of common stock for each option to purchase two shares ofcommon stock. Non-employee directors also will receive stock options (orrestricted stock in lieu thereof) for committee service per year in addition tothe standard non-employee director compensation: options to purchase anadditional 5,000 shares of common stock to the Chairman of the Audit Committee,and options to purchase an additional 2,500 shares of common stock to eachmember of our Audit Committee (other than the Chairman), Compensation Committeeand Corporate Governance and Nominating Committee. The fair market value of theshares granted was $6.00 per share, which was determined based on a combinationof factors that include recent share transactions between shareholders and anindependent valuation of the Company. The stock-based expense from stock awardsfor the three months ended March 31, 2006 and 2007 totaled $0 and $112,000,respectively.

**Stock Option Plan**

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. The 2006 Planprovides for the granting of awards in the form of incentive stock options,nonqualified stock options, stock appreciation rights, shares of restrictedcommon stock, bonus stock in lieu of obligations, or other stock-based awardsto employees, directors, and independent contractors who provide valuable servicesto our company.  The vesting requirements, performance thresholds andother terms and conditions of options granted under the Plans will bedetermined by our Compensation Committee and Board of Directors.

Thefollowing is a summary of stock option activity as of March 31, 2007, andchanges during the three months ended March 31, 2007.

9

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| **Options**                               | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December  31, 2006         |       | 8,353,000  |       | $                                       | 5.64       |                                                     | 3.8        |                            | $          | 2,976,750 |   |
| Granted                                   |       | 490,000    |       | $                                       | 6.50       |                                                     |       |                            |       |   |
| Exercised                                 |       | —     |       | —                                  |       |                                                     |       |                            |       |
| Forfeited                                 |       | —     |       | —                                  |       |                                                     |       |                            |       |
| Expired                                   |       | (9,000     | )          | $                                       | 6.00       |                                                     |       |                            |       |   |
| Outstanding at  March 31, 2007            |       | 8,834,000  |       | $                                       | 5.69       |                                                     | 3.6        |                            | $          | 2,976,750 |   |
| Vested and Exercisable  at March 31, 2007 |       | 8,229,000  |       | $                                       | 5.64       |                                                     | 3.5        |                            | $          | 2,976,750 |   |

 

The following tablesummarizes information about stock options outstanding and exercisable atMarch 31, 2007.

 
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | **Options Outstanding and Exercisable** | ** ** | ** **                   | ** ** | ** **         | ** ** |
|---------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------------------------|------------|------------------------------|------------|--------------------|------------|
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | **as of March 31, 2007**           | ** ** | ** **                   | ** ** | ** **         | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | ** **                                             | ** ** | ** **                   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | **Options Outstanding**                           | ** ** | **Options Exercisable** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | ** **                                             | ** ** | ** **                   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **      | ** ** | **Weighted**                                           | ** ** | **Weighted**                 | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **         | ** ** | **Number**      | ** ** | **Average**                                            | ** ** | **Average**                  | ** ** | **Number**         | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Outstanding**    | ** ** | **Remaining**   | ** ** | **Exercise**                                           | ** ** | **Exercisable**              | ** ** | **Average**        | ** ** |
| **Exercise Prices** | ** ** | **As of 03/31/07** | ** ** | **Contractual** | ** ** | **Price**                                              | ** ** | **As of 03/31/07**           | ** ** | **Exercise Price** | ** ** |
| $3.01               |       | $4.00              |       | 1,056,000       |       | 0.71                                                   |       | $3.75                        |       | 1,056,000          |       | $3.75 |   |
| $4.01               |       | $5.00              |       | 400,500         |       | 1.68                                                   |       | $4.50                        |       | 400,500            |       | $4.50 |   |
| $5.01               |       | $6.00              |       | 6,887,500       |       | 4.06                                                   |       | $6.00                        |       | 6,772,500          |       | $6.00 |   |
| $6.01               |       | $7.00              |       | 490,000         |       | 4.94                                                   |       | $6.50                        |       | 0                  |       | $0.00 |   |
| $3.01               |       | $7.00              |       | 8,834,000       |       | 3.60                                                   |       | $5.69                        |       | 8,229,000          |       | $5.64 |   |

 

As of March 31,2007, stock options to purchase 605,000 shares were not fully vested. Theunamortized stock-based compensation expense as of March 31, 2007 is $1.2million.

During the three monthsended March 31, 2007, we issued 490,000 stock options to purchase sharesin our common stock. No options were exercised during three months ended March31, 2007 and there was no recognized tax benefit related thereto. We recognizecompensation expense on a straight-line basis over the requisite service periodfor each stock option grant. The stock options were granted at prices above thefair market value of our common stock on the date of grant and have a four yearvesting period with 25% vesting on each subsequent anniversary of the grantdate. The stock options expire 5 years from the grant date. No options weregranted or exercised for the three months ended March 31, 2006.

The weighted-averagegrant date fair value of options granted during the three months ended March31, 2007 was $2.00. Options granted during the three months ended March 31,2007 were valued in accordance with SFAS 123R. The fair value of these optionswas calculated using a Black-Scholes option pricing model using the followingassumptions: (1) risk-free interest rates of 4.33%, (2) an expectedlife of five years, (3) expected volatility of 33%, (4) expectedforfeitures of 0%, and (5) a dividend yield of 0%. Because there was nopublic market for our common stock and in accordance with SFAS 123R, we usedthe calculated method to determine volatility.

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**5.****                                      SegmentInformation:**

Net revenue by geographic area is presented based uponthe country of destination. No foreign country represented 10% or more of netrevenue for three-month periods ended March 31, 2006 and 2007. Net revenue bygeographic area was as follows:

*(inthousands, except percentage data)*
| ** **          | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|------------------------|------------|
| ** **          | ** ** | **March 31,**          | ** ** |
| ** **          | ** ** | **2006**               | ** ** | **2007** | ** ** |
| ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Geographic area** | ** ** | **Amount**             | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United States       |       | $28,522                |       | 82.2 | % | $35,574 |   | 79.5 | % |
| International       |       | 6,172                  |       | 17.8 | % | 9,150 |   | 20.5 | % |
|                |       |                   |       |   |   |   |   |   |   |
| Total               |       | $34,694                |       | 100.0 | % | $44,724 |   | 100.0 | % |

 

**6.****                                      Concentrations**

Purchases from twovendors amounted to $12.4 million and $5.6 million representing 48.8% and 21.5%of the total purchases during the three months ended March 31, 2006 and 2007,respectively. Outstanding accounts payable to the two vendors totaled $4.5million and $1.8 million****as ofDecember 31, 2006 and March 31, 2007, respectively. Loss of either ofthese vendors may have a negative impact on the operations of the Company.

**7.****                                      RelatedParty Transactions**

During the three monthsended March 31, 2006 and 2007, we purchased approximately 40.0% and 7.0%,respectively, of our merchandise from LA Jewelers, Inc. One of the ownersof LA Jewelers, Saied Aframian, owns 1,228,000 shares of our common stock as ofMarch 31, 2007**.**

Our Vice-President ofTechnology is a major shareholder of Technolect, Inc. which providedtechnology consulting services to us in the amount of $12,000 and $0 for thethree months ended March 31, 2006 and 2007, respectively. We own 10% ofthe common stock of Technolect, Inc. which we acquired for nominalconsideration at the inception of Technolect, and have otherwise made noinvestments in Technolect. As of March 31, 2007, we have a cost basis of$0 in Technolect.

**8.****             Income Tax — FIN 48**

Weadopted the provisions of FASB Interpretation 48, *Accountingfor Uncertainty in Income Taxes*, on January 1, 2007. Previously, wehad accounted for tax contingencies in accordance with Statement of FinancialAccounting Standards 5, *Accounting forContingencies*. As required by Interpretation 48, which clarifiesStatement 109, *Accounting for Income Taxes*, werecognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustainthe position following an audit. For tax positions meeting themore-likely-than-not**threshold, theamount recognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. At the adoption date, we appliedInterpretation 48 to all tax positions for which the statute of limitationsremained open. Our preliminary analysis of the implementation of Interpretation48 reveals that there is no material effect on our financial statements.

Theamount of unrecognized tax benefits as of January 1, 2007, was $5.9 million(without regard to impact from alternative minimum tax in a future period)which, if ultimately recognized, will reduce our annual effective tax rate.There have been no material changes in unrecognized tax benefits, except forutilization of net operating loss carryforwards applied against net income forthe three months ended March 31, 2007.

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.

We will be under examination by the InternalRevenue Service for the 2004 and 2005 tax years. We expect the examination tobe concluded and settled in the next 12 months. The Company, which has recordedunrecognized tax benefits of $5.9 

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millionrelated primarily to tax net operating loss deductions, believes it isreasonably possible that the resolution of these examinations could result inno additional tax due.

Wehad not accrued interest and penalties at January 1, 2007 because in management’sjudgment there are not tax positions requiring the accrual.

**9.             Contingencies**

We are subject to variouslegal proceedings and claims that arise in the ordinary course ofbusiness.  Although the Company believes it has defenses to theallegations and intends to pursue them vigorously, management does notcurrently have sufficient information to assess the validity of the claims orthe amount of potential damages.  Company management currently believes,however, that resolution of such legal matters will not have a material adverseimpact on the Company’s financial position, results of operations or cashflows.

*Yossi Gatlin  v.Bidz.com*

We are adefendant in a lawsuit brought by Yossi Gatlin in October 2005 for anautomobile purchased from us in March 2002 for $28,000. Gatlin alleges that wedid not provide prior registration so that Gatlin was not able to register thevehicle. Gatlin is claiming his payment of $28,000, the value of the automobilerepresented to be $350,000, and loss of the use of the automobile in the amountof $100,000. In April 2007, we have reached an agreement in principle to settlethe case.

*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 inApril 2006. The lawsuit alleges that Cartier has proprietary rights,including trade dress, patents, trademarks, copyrights and others, in watchdesigns known as a Tank, Tank Francaise, Tank Americaine, Panthere and Pasha DeCartier Grille, and Tank Devan, and further alleges that we have infringed uponthose rights by selling watches bearing copies of one or more of the watchdesigns. We intend to defend the lawsuit vigorously. We do not believe theoutcome of the case will have a materially adverse effect on our financialposition.  The court has yet to set atrial date.

*Shareholderlawsuits*

Bidz.com and DavidZinberg are defendants in two lawsuits brought by three shareholders, whoinvested a total of $85,000, and are seeking a return of their investments. Wedo not believe the outcome of these cases will have a materially adverse effect on our financial position and weintend to defend the lawsuits vigorously.

*Prior Sales of Securities*

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of $5.5million and issued approximately 250 stock option grants to purchase commonstock at a weighted average exercise price of $4.45. After conducting thesesales of our securities, we determined that these sales were not exempt fromthe registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

If we were ordered torescind all purchases of our common stock by stockholders not affiliated withus, we could be required to make an aggregate payment to the holders of theseshares of up to approximately $20.5 million, in addition to statutoryinterest of $11.9 million, as of March 31, 2007. We may also be liable for the$5.5 million of services rendered and property exchanged in considerationfor the issuance of common stock, in addition to interest of approximately $3.0million through March 31, 2007. In addition, we may be liable for the$1.3 million that we anticipate offering to non-management optionees asthe optionees did not receive information regarding our potential liability forthese violations of federal and state securities laws. In addition, regulatorscould impose monetary fines or other sanctions as provided under these laws.

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Theprobability that stockholders would assert a claim against us and the extent ofthe our liability, if any, are contingent on a number of factors, including astockholder’s desire to rescind his or her investment, applicable legalprecedent, and statutes of limitation. As of the date of this filing, three ofour shareholders have filed actions seeking a return of their investment in ourcommon stock, in the aggregate of $85,000, and unspecified damages.  Basedon current facts known to management at this time, management does not believethat assertion of any such claims by the Company’s shareholders in a materialamount is probable. Accordingly, no accruals for either potential amountspayable or reserves have been made at this time.

**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 uncertainties discussedbelow 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 andeffectively source closeout and regular merchandise, and rapidly respond tochanging consumer demands for certain jewelry. We offer our products through acontinuous live format, featuring “no reserve” auctions, a $1 minimum openingbid and a unique 15-second auction extension period that allows our auctions tocontinue until all bids are received.  The majority of our auctions areshort-term, often lasting less than one hour, providing immediate gratificationto our customers and encouraging frequent visits and active viewing of ourwebsite. Our product inventory includes gold, platinum, and silver jewelry setwith diamonds, rubies, emeralds, sapphires, and other precious andsemi-precious stones; and watches.  We believe we are the second largestonline retailer of jewelry based on revenue and the largest online jewelryauction site based on web traffic.

Inassessing our business, we consider operational and non-financial performancemetrics, such as average selling price per order, average orders per day,average items sold per day, acquisition cost per new buyer, and number of newbuyers. We averaged daily sales of approximately 9,482 items or 3,317 orderswith an average sales transaction amount per order of $154 in the three monthperiod ended March 31, 2007.

We sellto consumers and resellers looking for reliable bargains on jewelry. Because wepurchase and retain all of our jewelry inventory onsite, we can provide ourcustomers with timely service and delivery of their purchases. In addition,each item is inspected by one of our trained product specialists prior to itsplacement on our website, which assures our customers of the quality of ourproducts. We operate in a highly competitive market with low barriers to entry.By selling our own merchandise, we provide a buying environment in which weminimize 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 are conducted24 hours a day, seven days a week. We also offer 24-hour online customersupport.

**Critical Accounting Policies**

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

*Revenue Recognition*

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

 

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

 We presentsales tax liability on a net basis in accordance with Emerging Issues TaskForce (“EITF”) Issue No. 06-03.  Sales are not grossed up with theattendant taxes and deducted as a separate line item. The EITF becomeseffective for interim and annual reporting periods beginning after December 15,2006.

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

Wederive commission’s revenue from sales of Certified Merchant merchandise thatis owned by third parties and recognize that revenue when services have beenrendered. For commission revenue, we recognize as revenue only the commissionportion of the price our customers pay for the purchased products because weare acting as an agent in such transactions. Commissions are also reduced bythe impact of returns and other discounts redeemed to obtain such sales.

Werecognize advertising revenue from allowing other companies to advertise on ourweb site when the services are rendered and the advertising revenue is knownand collectible.

*Return and Allowance Reserve*

Weestimate potential future product returns and chargebacks  related tocurrent period revenue. We analyze historical returns and changes in customerdemand and 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.

*PrepaidInventory*

Werecord payments made to our suppliers for purchases we have yet to receive asprepaid inventory until they are in our physical procession and satisfactorilyexamined; we then categorize them as inventory.

*Inventory Reserve*

Werecord reserves against our inventory for lower of cost or market equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions. We also recordreserves of 100% of the value of inventory held for more than one year..

*Stock-Based Compensation*

On January 1, 2006, we adopted SFAS No. 123 (revised2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’) requiring that share-basedpayment transactions be recognized in the financial statements based on thefair value of the equity or liability instrument issued. We use theBlack-Scholes option pricing model to estimate the value of our options inimplementing SFAS 123R and the calculated method to determine expectedvolatility. Under SFAS 123R stock-based compensation expense recognized duringthe period is based on the value of the portion of stock-based payment awardsthat is ultimately expected to vest. Accordingly, stock-based compensationexpense recognized 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.

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*Descriptionof Our Revenue, Costs, and Expenses*

The following table presents our historical results ofoperations for the periods indicated as a percentage of net revenue.

 

|                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                                   |       |                                                 |       |   |   |
| Net Sales                              |       | 100.0                                                | %          | 100.0 | % |
| Gross Profit                           |       | 26.5                                                 |       | 24.9 |   |
| Operating  Expenses:                   |       |                                                 |       |   |   |
|  General &  Administrative    |       | 9.7                                                  |       | 10.8 |   |
|  Sales &  Marketing           |       | 6.9                                                  |       | 5.8 |   |
|  Depreciation  & Amortization |       | 0.2                                                  |       | 0.2 |   |
| Total Operating  Expenses              |       | 16.8                                                 |       | 16.8 |   |
| Profit from  Operations                |       | 9.7                                                  |       | 8.1 |   |
| Interest income                        |       | 0.1                                                  |       | 0.0 |   |
| Interest expense                       |       | —                                               |       | 0.2 |   |
| Income tax  expense                    |       | 0.3                                                  |       | 0.2 |   |
| Net Income                             |       | 9.5                                                  | %          | 7.7 | % |

 

*Net Revenue*

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

The following table presents our sources of revenuefor the periods indicated as a percentage of net revenue. 

|                                | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                           | * *   | * *                                             | * *   | * * | * * |
| Net Sales                      |       |                                                 |       |   |   |
|  Merchandise  sales       |       | 85.0                                                 | %          | 85.9 | % |
|  Shipping  & handling |       | 11.7                                                 |       | 10.8 |   |
|  Transaction  fees        |       | 3.1                                                  |       | 3.1 |   |
|  Commissions              |       | 0.2                                                  |       | 0.2 |   |
|  Advertising              |       | 0.0                                                  |       | 0.0 |   |
| Total Net Sales                |       | 100.0                                                | %          | 100.0 | % |

 

*Gross Profit*

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

*General and Administrative Expenses*

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

*Sales and Marketing Expenses*

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

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**Comparison of Three Months Ended March 31, 2006 to ThreeMonths Ended March 31, 2007**

Netincome in the three months ended March 31, 2007 was $3.4 million, or $0.15 and$0.14 per basic and diluted share, respectively. In the three months endedMarch 31, 2006, net income was $3.3 million and net income per basic anddiluted share was $0.14. Net revenue increased by 28.9% in the three monthsended March 31, 2007 compared to the three months ended March 31, 2006 whilethe net income increased by 4.3% over the same period. The increase in netincome was due primarily to increased revenue offset by lower gross profitmargins as a percentage of revenue.

*Net Revenue*

Netrevenue increased 28.9% to $44.7 million in the three months ended March 31,2007 from $34.7 million in the three months ended March 31, 2006. Thisincrease in net revenue was due primarily to the growth in demand for ourjewelry products and the increase in average sales amount per order.

We anticipate that thenet revenue will be lower for the second and third quarter periods of 2007compared to the three months ended March 31, 2007 as the second and thirdquarters are seasonally weak periods for jewelry sales.

*Gross Profit*

Grossprofit increased 21.2% to $11.1 million in the three months ended March 31,2007 from $9.2 million in the three months ended March 31, 2006. The increasein gross profit resulted from the increase in sales revenue which rose by 28.9%for the three months ended March 31, 2007 from the three months ended March 31,2006 offset by the lower gross profit margin of 24.9% in three months endedMarch 31, 2007 compared to 26.5% in the three months ended March 31, 2006.

Grossprofit margins improved starting in February 2007 after we stopped freeshipping promotions toward the end of January 2007. In the three months ended March31, 2006, there was no free shipping promotions. Since we do not anticipate anymajor free shipping promotions in the foreseeable future, gross profit marginsfor the remainder of the fiscal year is expected to be better than thecorresponding period of the prior year, when we had free shipping promotions.

*General and Administrative Expenses*

Generaland administrative expenses increased 44.5% to $4.8 million in the three monthsended March 31, 2007 from $3.4 million in three months ended March 31,2006. The increase in general and administrative expenses was due to ouroverall growth and includes increases in payroll and payroll related expenses,outsourcing and administrative expenses. General and administrative expenses asa percentage of net revenue increased to 10.8% in the three months endedMarch 31, 2007 from 9.7% in the three months ended March 31, 2006.

*Sales & Marketing Expenses*

Salesand marketing expenses increased 8.0% to $2.6 million in the three months endedMarch 31, 2007 from $2.4 million in the three months ended March 31, 2006.Sales and marketing expenses as a percentage of net revenue decreased to 5.8%in the three months ended March 31, 2007 from 6.9% in the three months endedMarch 31, 2006. Our efforts to control the sales and marketing expenses havebeen successful in keeping the rate of increase below the growth rate in netrevenue.

In line with expectedlower revenue in the second and third quarter periods of 2007 compared to thethree months ended March 31, 2007 sales and marketing expenses are alsoexpected to be lower in the second and third quarters of the year..

**Additional Quarterly Data**

|                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                                     |       |                                                 |       |   |   |
| Average selling  price per order (gross) |       | $                                                    | 142        |   | $ | 154 |   |
| Average orders  per day                  |       | 2,901                                                |       | 3,317 |   |
| Average items  sold per day              |       | 7,173                                                |       | 9,482 |   |
| Acquisition  costs per new buyer         |       | 38                                                   |       | 45 |   |
| Number of new buyers                     |       | 63.618                                               |       | 58,056 |   |
|                                          |            |                                                      |            |  |  |  |  |

 

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**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 sale, wetypically have extended payment terms with our suppliers.

As ofMarch 31, 2007, we had a working capital surplus of $9.4 million and have nolong-term debt obligations. Net cash provided by operating activities was$42,000 in the three months ended March 31, 2007 compared to net cash providedof $120,000 in the three months ended March 31, 2006. Cash in the three months ended March 31, 2007 was primarilyaffected by changes in net income, inventories, accounts payable and deferredrevenue. The net cash in the three months ended March 31, 2006 was affectedmainly by changes in net income, inventories and  accounts payable.

Werecorded net income of $3.4 million in the three months ended  March 31, 2007 compared to $3.3 million inthe three months ended  March 31, 2006.Cash flows from net income were used to meet our working capital requirements.In the three months ended  March 31,2007, inventories increased by $321,000, prepaid inventory decreased by $1.8million, accounts payable decreased by $7.5 million and deferred revenuedecreased by $2.0 million. In the three months ended  March 31, 2006, inventories increased by $1.8million and accounts payable decreased by $2.2 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.

Netcash used in investing activities was $227,000 in the three months ended  March 31, 2007 compared to $127,000 in thethree months ended  March 31, 2006. Duringthe three months ended March 31, 2006 and 2007, respectively, net cashused for investing activities related mainly to capital expenditures for officeand computer equipment and software. We expect capital expenditures in 2007 tobe significantly higher than in 2006 as we upgrade our technologyinfrastructure. The sources of funds will be provided from our operating cashflows.

Netcash of $3.7 million and $0 were provided by financing activities in thethree months ended March 31, 2007 and 2006, respectively. The financingactivities were all related to our revolving credit line.

Webelieve that cash and cash equivalents currently on hand, cash flows fromoperations and the availability of a $15 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 transaction processingsystems; the extent of our advertising and marketing programs; the levels ofthe inventory we carry; and other factors relating to our business. Enhancementof our website, network infrastructure, and transaction processing systems willrequire us to spend significantly more than we have in the past. Moreover, todate our spending in these areas has been lower than industry averages. Weanticipate increasing our system expenditures to accommodate these needs in thefuture.

**RelatedParty Transactions**

Duringthe three months ended March 31, 2006 and 2007, we purchased approximately40.0% and 7.0%, respectively, of our merchandise from LA Jewelers, Inc. One ofthe owners of LA Jewelers, Saied Aframian, owns 1,228,000 shares of our commonstock as of March 31, 2007.

**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***

Managementevaluated, with the participation of the Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this report. Based on that evaluation,we have concluded that there was a material weaknesses in the internal controlenvironment related to the recording of merchandise inventory and cost of goodssold and, consequently, that the related disclosure controls and procedures areineffective.

Duringthe first quarter ended March 31, 2007, we identified errors in reconcilinginventory purchases between our accounting system and our proprietary inventorysystem. Inventory purchases that were not properly recorded resulting inamounts improperly applied to cost of goods sold. The deficiency in internalcontrols was discovered during the account analysis and reconciliation processat period end. We immediately proceeded to develop new procedures to addressthis deficiency. The new procedures are scheduled to be operational in the nextquarter.

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**ITEM 4T —CONTROLS AND PROCEDURES**

Disclosurepursuant to this Item is not applicable to us until we become either a “largeaccelerated filer” or  an “acceleratedfiler,” as those terms are defined in Rule 12b-2 under the Securities ExchangeAct of 1934, or until after the fiscal year ended on December 15, 2007 butbefore December 15, 2008.

**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

*Yossi Gatlin v. Bidz.com*

We are adefendant in a lawsuit brought by Yossi Gatlin in October 2005 for anautomobile purchased from us in March 2002 for $28,000. Gatlin alleges that wedid not provide prior registration so that Gatlin was not able to register thevehicle. Gatlin is claiming his payment of $28,000, the value of the automobilerepresented to be $350,000, and loss of the use of the automobile in the amountof $100,000.  In April 2007, we havereached an agreement in principle to settle the case.

*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 yet to set atrial date.

*Shareholderlawsuits*

Bidz.com and DavidZinberg are defendants in two lawsuits brought by three shareholders, whoinvested a total of $85,000, and are seeking a return of their investments. Wedo not believe the outcome of these cases will have a materially adverse effecton our financial position and we intend to defend the lawsuits vigorously.

**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.*

***Weintend to establish a public market for our common stock on the OTC BulletinBoard (OTCBB) as a prerequisite to applying to list on The Nasdaq Stock Market;trading in our common stock may be illiquid and the market price may bevolatile.***Presently, there is no public market for our common stock.  In order to provide liquidity to ourshareholders, and as a prerequisite to listing on The NASDAQ Stock Market, wewill establish a public market for our common stock on the OTCBB, which weanticipate will occur sometime in May 2007. We will thereafter apply for listing on The NASDAQ Capital Market.  Our common stock may trade in low volumes, which would result in an illiquid market for oursecurities.  If the trading volume of ourcommon stock is low, sales of even small amounts of our common stock may causethe price of our common stock to fluctuate greatly.  If limited trading in our stock continues, itmay be difficult for investors to sell their shares in the public market at anygiven time at prevailing prices. An active public market for our common stockmay not develop or be sustained.Morevover, sales of a substantial number of shares in the public market, or theperception that such sales may occur, could 

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result insignificant downward pressure on the price of our common stock. As of March 31,2007, there were 23,252,654 shares of common stock outstanding. Of theseshares, 45% are held by non-affiliates of the Company who have held thoseshares for more than two years and, pursuant to Rule 144 under the SecuritiesAct, such shares may be sold without restriction. Shares held by affiliates ofour company are subject to the resale limitations of Rule 144 describedbelow.  As we did not consummate our plannedinitial public offering in 2006, any “lock up” agreements (i.e., agreementsbetween us and a shareholder restricting the transferability of the shareholder’sshares for a period of time) are no longer effective..

Furthermore,we plan to register for offer and sale the shares of common stock that arereserved for issuance pursuant to stock options covered by our incentive stockoption plans. Shares covered by such registration statements upon the exerciseof stock options or warrants generally will be eligible for sale in the publicmarket, except that affiliates will continue to be subject to volumelimitations and other requirements of Rule 144. The issuance or sale ofsuch shares could depress the market price of our common stock.

Ingeneral, under Rule 144 as currently in effect, any person, or personswhose shares are aggregated for purposes of Rule 144, who beneficiallyowns restricted securities with respect to which at least one year has elapsedsince the later of the date the shares were acquired from us, or from anaffiliate of ours, is entitled to sell within any three-month period a numberof shares that does not exceed the greater of 1% of the then outstanding sharesof our common stock and the average weekly trading volume in common stock duringthe four calendar weeks preceding such sale. Sales under Rule 144 also aresubject to certain manner-of-sale provisions and notice requirements and to theavailability of current public information about us.

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

Our net revenue dependsto a significant extent on the number of customers who visit our website topurchase merchandise and the dollar amount of their purchases. Generatingincreased traffic to our website and converting that traffic into buyersrequires us to achieve effective results from our marketing campaigns; offer awide variety of products that our customers can purchase at favorable prices;maintain a user-friendly shopping experience; ensure the satisfactoryavailability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

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

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

In addition, we have aheavy concentration of inventory purchases from a small number of suppliers.Our top two suppliers accounted for approximately 48.8% and 21.5% of our totalpurchases during the three months ended March 31, 2006 and 2007, respectively

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

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

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

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

***Our business operations could be disrupted due to the lack documentationof our internally developed software application systems and dependence on keysystem developers to maintain the system***

Our business depends inpart on continuous and uninterrupted online availability to our customers. Ourinternally developed software application systems are not fully documented andthis makes it more difficult to locate and trouble shoot problems that mayoccur in our systems. Any delays in resolving system problems will result inlonger disruptions to the service available to our customers and/or prevent ouremployees from performing their functions efficiently. The internally developedAuction platform, Billing, Shipping, and Inventory Control systems are notfully documented. We are dependent on institutional knowledge of our key systemdevelopers to provide ongoing support and functional enhancements. If we wereto lose the services of these key systems support personnel, operations maysuffer from system down time that would take longer than desirable to correctand return to normal operations.

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

The acquisition of newcustomers is a key factor in increasing demand for our jewelry products andincreasing our revenue. We currently attract new customers by driving traffic toour website using a marketing and advertising strategy that includes targetedkeyword searches, online banner advertising, targeted e-mail advertising, andparticipation in affiliate programs. We do not maintain long-term contracts orarrangements with any companies, including any search engines, Internetportals, or other websites, and we may not successfully enter into additionalrelationships or maintain existing ones. Recently, we have experiencedsignificantly higher rates for keyword search advertising. We expect that wemay have to pay increasing fees to maintain, expand, or enter into newrelationships with third-party search engines, Internet portals, and websites.In addition, traffic to our website could decline if our online marketingprograms become less effective or the traffic decreases to the search engines,Internet portals, and websites with which we advertise. Our business could bematerially and adversely affected if any substantial number of companies onwhich we advertise experience financial or operational difficulties orexperience other corporate developments that adversely affect theirperformance. A failure to maintain or expand existing online advertisingrelationships or to establish additional online advertising relationships thatgenerate a significant amount of traffic from other websites could result indecreased sales or limit the growth of our business.

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

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

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

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

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

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

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

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

If our sales increase, wewill be required to increase our inventory proportionately. Consumer tastes andpreferences for jewelry products can change rapidly, thereby exposing us tosignificant inventory risks. Currently, because the products we sell alsoconsist of closeout merchandise from manufacturers, distributors, and othersuppliers, we have less control over the specific items that we offer for salethan we would if we primarily ordered goods for manufacture for us. Inaddition, it is important that we are able to purchase jewelry that we perceiveto be in demand. The demand for specific products can change between the timewe order items and when we sell them. As a result, we may be required to takesignificant inventory markdowns, which could reduce our gross margin, if we donot accurately predict these trends or if we overstock unpopular merchandise.

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

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

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

The jewelry industry isaffected by fluctuations in the prices of precious metals and precious and semi-preciousstones. The availability and prices of gold, silver, platinum, and otherprecious metals and precious and semi-precious stones may be influenced by suchfactors as cartels, political instability in exporting countries, changes inglobal demand, and inflation. Shortages of these materials or an increase intheir prices could reduce the quantity of products we have available for saleand our ability to sell our products for more than our cost, causing reducedsales or lower margins.

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

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

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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 business andresults 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.

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

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

We also intend tointroduce additional or enhanced features and services to retain currentcustomers and attract new customers to our website. We may experiencedifficulties that could delay or prevent us from introducing new features andservices. If we introduce a feature or a service that is not favorablyreceived, our current customers may not use our website as frequently and wemay not be successful in attracting new customers. These new features orservices also may contain errors that are discovered only after theirintroduction, and we may need to modify significantly the design of thesefeatures or services to correct errors.

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

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

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

In the three months endedMarch 31, 2006 and 2007, 17.8% and 20.5%, respectively, of our net revenue wasgenerated by shipments to customers outside of the United States. We plan, overtime, to expand our reach into international markets. We do not, however,currently have any overseas fulfillment, distribution, or server facilities orany website content localized for foreign markets. We cannot be certain that wewill be able to expand our global presence. In addition, there are certainrisks associated with doing business on an international basis, includingregulatory requirements, legal uncertainty regarding liability, tariffs, and othertrade barriers, longer payment cycles, and potentially adverse taxconsequences, any of which could adversely affect our business. Although ourforeign sales historically have been denominated in U.S. dollars, we also maybe subject to increased risks relating to foreign currency exchange ratefluctuations to the extent we decide to denominate our sales in foreigncurrencies.

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

Our success depends on thecontinued growth and maintenance of the Internet. The Internet has experienced,and is likely to continue to experience, significant growth in the numbers ofusers and amount of traffic. If Internet usage continues to grow asanticipated, the infrastructure may not be able to support the level of usageand its performance and reliability may decline. If outages or delays on theInternet increase, overall Internet usage could grow more slowly or decline. Inaddition, the performance of the Internet may be harmed by increased number ofusers or bandwidth requirements or by viruses, worms, 

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and similar issues. TheInternet has experienced a variety of outages and other delays as a result ofdamage to portions of its infrastructure, and it could face outages and delaysin the future. These outages and delays could reduce the level of Internetusage.

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

The business of buyingand selling goods over the Internet is relatively new and dynamic. Our successdepends on the widespread acceptance and use of the Internet as an effectivemedium for commerce by consumers. The acceptance and use of the Internet maynot continue to expand as expected, and a sufficient broad base of consumersnecessary for its continued growth may not adopt the Internet as a medium forcommerce. Consumers who historically have used traditional means of commerce mayhave concerns about privacy, the inability to physically inspect merchandisebefore buying, delivery time, product damage during shipment, and the costs andinconvenience involved in returning purchased items, which may inhibit theircrossover to e-commerce. In order to expand our user base, we must appeal toand acquire consumers who historically have used traditional means of commerceto purchase goods. If these new customers execute fewer or lower dollar amountsof orders than our historical users, and we are unable to gain efficiencies inour operating costs, including the cost of acquiring new customers, ourbusiness and profits could be adversely affected.

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

A significant barrier toonline commerce and communications is the secure transmission of confidentialinformation over public networks. Third parties may have the technology orexpertise to breach the security of customer transaction data. Our securitymeasures may not prevent security breaches that could result in substantialharm to our business and results of operations and damage to our reputation. Currently,a majority of our sales are billed to our customers’ credit card accountsdirectly. Under current credit card practices, we are liable for fraudulentcredit card transactions because we do not obtain cardholder signatures. Werely on encryption and authentication technology licensed from third parties toeffect secure transmission of confidential information, including credit cardnumbers. We do not currently carry insurance against this risk. Advances incomputer capabilities, new discoveries in the field of cryptography, or otherdevelopments may result in a compromise or breach of the technology we use toprotect customer transaction data. In addition, anyone who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. Any such compromise of our securitycould damage our reputation and brand and expose us to a risk of loss orlitigation and possible liability, which would substantially harm our businessand results of operations.

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

Our network securitymeasures to prevent third parties from penetrating our network and improperly accessingour customers’ personal information or credit card information may not besuccessful. Although we have not experienced any theft of our customers’ creditcard information to date, as new discoveries in the field of cryptography andadvances in computer capabilities occur, our security measures may noteffectively prevent others from obtaining improper access to our customerinformation. In addition, third parties may target our customers directly withfraudulent identity theft schemes designed to appear as legitimate e-mails fromus. In March 2006, one such third party attempted to solicit customerinformation through a tactic, commonly known as “phishing,” whereby an e-mailpurporting to be from us solicited customer information from recipients of thee-mail. Any such security breach or fraud perpetrated on our customers couldexpose us to increased costs and could harm our business and results ofoperations.

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

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

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

All our inventory isstored at our warehouse/office facility in Culver City, California.Consequently, our merchandise supply is vulnerable to fire, flood, earthquakes,and similar events that may impact our facility. Any damage to or loss of allor a significant portion of our inventory could cause significant delays inshipment of goods to our customers, resulting in negative publicity about anddiminished customer confidence in our website. In addition, we may experiencetheft of our products while they are being held in inventory or during the courseof their shipment to our customers by third-party 

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carriers. We haveimplemented security measures to prevent such theft and maintain insurance tocover losses resulting from theft. Nevertheless, we could incur significantlosses from theft, which would substantially harm our business and results ofoperations, if our security measures fail, losses exceed our insurancecoverage, or we are not able to maintain insurance at a reasonable cost.

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

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

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

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

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

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

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

Prior to fiscal year 2004we experienced significant operating losses. At March 31, 2007, we had anaccumulated deficit of $18.1 million. We cannot be certain that theimprovements in our operations resulting since 2004 will continue in thefuture. See “Management’s discussion and analysis of financial condition andresults of operations—Liquidity and Capital Resources.”

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

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

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

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

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

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

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

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

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

In an effort to provideaccurate descriptions of jewelry posted on our website, we provide appraisalsummaries from third-party gemological laboratories for some of our jewelryitems. All other jewelry and watch descriptions are provided by our full-timeGemological Institute of America, or GIA, trained gemologists and severalexperienced product specialists. Nevertheless, there is a subjective componentinvolved with respect to assessing the clarity, color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes oromissions of important information in our descriptions may occur. Even if ourdescriptions are accurate, buying a product online may lead to disappointmentresulting in returned merchandise. For example, a customer may determine that apiece does not have the expected look, feel, and overall appearance of themerchandise that the buyer envisioned from the website photograph.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Federal TradeCommission also has settled several proceedings against companies regarding themanner in which personal information is collected from users and provided tothird parties. Specific statutes intended to protect user privacy have beenpassed in many foreign jurisdictions. Compliance with these laws, given thetight integration of our systems across different countries and the need tomove data to facilitate transactions among our users, such as payment companiesand shipping companies, is both necessary and difficult. Failure to complycould subject us to lawsuits, fines, criminal penalties, statutory damages,adverse publicity, and other losses that could harm our business. Changes toexisting laws or the passage of new laws intended to address these issues coulddirectly affect the way we do business or could create uncertainty on the useof the Internet. This could reduce demand for our products, increase the costof our doing business, expose us to litigation costs, increase our service ordelivery costs, or otherwise harm our business.

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

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

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

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

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

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

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of $5.5million and issued approximately 250 stock option grants to purchase commonstock at a weighted average exercise price of $4.45. After conducting thesesales of our securities, we determined that these sales were not exempt fromthe registration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in a “generalsolicitation” of securities. In addition, these employees received compensationfor selling our common stock and were required to be licensed as broker-dealerswith the Securities and Exchange Commission, or SEC, and various stateauthorities, but they were not so licensed. In such situations, a number ofremedies may be available to regulatory authorities and the investors whopurchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

If we were ordered torescind all purchases of our common stock by stockholders not affiliated withus, we could be required to make an aggregate payment to the holders of theseshares of up to approximately $20.5 million, in addition to statutoryinterest of $11.9 million, as of March 31, 2007. We may also be liable for the$5.5 million of services rendered and property exchanged in considerationfor the issuance of common stock, in addition to interest of approximately $3.0million through March 31, 2007. In addition, we may be liable for the$1.3 million that we will offer to non-management optionees as theoptionees did not receive information regarding our potential liability forthese violations of federal and state securities laws. In addition, regulatorscould impose monetary fines or other sanctions as provided under these laws.

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

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

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

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

Our founder, executiveofficers, and directors together own approximately 34.9% of our common stock asof March 31, 2007. Marina Zinberg, our Vice President, who is the sister of DavidZinberg, our Chairman, President and Chief Executive Officer, owns anadditional 33.1% of our common stock.  Asa result, these individuals will have significant influence over our managementand affairs and over all matters requiring stockholder approval, including theelection of directors and the approval of significant corporate transactions,such as a merger or a sale of our company or its assets, for the foreseeablefuture. This concentrated control will limit the ability of other stockholdersto influence corporate matters. Because of this, we may take actions that someof our stockholders do not view as beneficial. As a result, the market price ofour common stock could be adversely affected because stockholders may not viewfavorably the concentration of control in the hands of management.

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

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

**ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

OnFebruary 2, 2007, we awarded and issued as director compensation a total of18,750 shares of common stock to our non-employee directors, Man Jit Singh andPeter Hanelt, stock awards of 8,750 and 10,000 shares, respectively, in lieu ofstock options. These shares were issued in reliance on the exemption fromregistration under Section 4(2) under the Securities Act of 1933. We grantannually to each non-employee director options to purchase 10,000 shares of ourcommon stock. In lieu of receiving such stock options, non-employee directorsmay elect to receive one share of common stock for each option to purchase twoshares of common stock. Non-employee directors also will receive stock options(or restricted stock in lieu thereof) for committee service per year inaddition to the standard non-employee director compensation: options topurchase an additional 5,000 shares of common stock to the Chairman of theAudit Committee, and options to purchase an additional 2,500 shares of commonstock to each member of our Audit Committee (other than the Chairman), CompensationCommittee and Corporate Governance and Nominating Committee. The fair marketvalue of the shares granted was $6.00 per share, which was determined based ona combination of factors that include recent share transactions betweenshareholders and an independent valuation of the Company. The stock-basedexpense from stock awards for the three months ended March 31, 2006 and 2007totaled $0 and $112,000, respectively.

During the three monthsended March 31, 2007, we issued 490,000 stock options to purchase sharesin our common stock under our 2006 Award Plan. The stock options were grantedat prices above the fair market value of our common stock on the date of grantand have a four year vesting period with 25% vesting on each subsequentanniversary of the grant date. The stock options expire 5 years from the grantdate. These options to purchase common stock were issued in reliance on theexemption from registration under Section 4(2) under the Securities Act of1933.

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**ITEM6. 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                            |

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                        |       | BIDZ.COM, INC.                             |
|------------------------|------------|--------------------------------------------|
|                   |       |                                       |
|                   | By:        | /s/ DAVID  ZINBERG                         |
|                   |       |                                       |
| ** **             | ** ** | **David  Zinberg**                         |
| ** **             | ** ** | **President  and Chief Executive Officer** |
|                   |       |                                       |
|                   | By:        | /s/ LAWRENCE  KONG                         |
|                   |       |                                       |
| ** **             | ** ** | **Lawrence  Kong**                         |
| ** **             | ** ** | **Principal  Accounting Officer**          |
|                   |       |                                       |
| Dated: April 30,  2007 |       |                                       |
|                        |            |                                            |  |

 

 

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