**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                             |
| ** ** | ** ** | **For the quarterly period ended June 30,  2006**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                             |
| **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  Identification Number) |
| incorporation or  organization)  |   |                                     |

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

(Address, including zip code, of principalexecutive 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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non accelerated filer. See definition of “acceleratedfiler and large filer” in Rule 12b-2 of the Exchange Act). (Check one):Large accelerated filer o                                                    Acceleratedfiler o                                                Non-acceleratedfiler 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 ofAugust 14, 2006:

**23,312,500**

 

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**TABLE OF CONTENTS**
| PART I. FINANCIAL  INFORMATION |                                                                                                                     |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements                                                                                                     |   |
|                                | Condensed Balance Sheets as of December  31, 2005 and June 30, 2006 (unaudited)                                          | 2 |
|                                | Condensed Statements of  Operations for three month and six month periods ended June 30, 2005 and  2006 (unaudited) | 3 |
|                                | Condensed Statements of Cash  Flows for six month periods ended June 30, 2005 and 2006 (unaudited)                  | 4 |
|                                | Notes to Financial Statements  (unaudited)                                                                               | 5 |
| Item 2.                        | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                              | 12 |
| Item 3.                        | Quantitative and Qualitative  Disclosures About Market Risk                                                              | 19 |
| Item 4.                             | Controls and Procedures                                                                                                  | 19 |
| PART II. OTHER INFORMATION     | 20                                                                                                                       |
| Item 1.                             | Legal Proceedings                                                                                                        | 20 |
| Item 1A                             | Risk Factors                                                                                                             | 20 |
| Item 6.                             | Exhibits                                                                                                                 | 32 |
| SIGNATURES                          | 33                                                                                                                       |

 

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.

1

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIALSTATEMENTS**

 

**Bidz.com, Inc.**

**Condensed Balance Sheets**

 

*(Inthousands, except share data)*

 
| ** **                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                  | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | **(Unaudited)**   | ** ** |
| **Assets**                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Current assets:**                                                                                                                                                                                                         | ** ** | ** **            | ** ** | ** **        | ** ** |
| ** **                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **        | ** ** |
| Cash                                                                                                                                                                                                                        |       | $                     | 7          |              | $          | 1 |   |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Accounts  receivable                                                                                                                                                                                                        |       | 886                   |       | 562               |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Inventories, net  of reserves of $331and $442 at December 31, 2005 and June 30, 2006  respectively                                                                                                                          |       | 15,921                |       | 16,634            |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Other current  assets                                                                                                                                                                                                       |       | 158                   |       | 617               |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Total current  assets                                                                                                                                                                                                       |       | 16,972                |       | 17,814            |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| **Property and equipment, net**                                                                                                                                                                                             |       | 384                   |       | 497               |       |
| ** **                                                                                                                                                                                                                  |       |                  |       |              |       |
| **Intangible asset**                                                                                                                                                                                                        |       | 150                   |       | 150               |       |
| ** **                                                                                                                                                                                                                  |       |                  |       |              |       |
| **Deposits**                                                                                                                                                                                                                |       | 240                   |       | 90                |       |
| ** **                                                                                                                                                                                                                  |       |                  |       |              |       |
| ** **                                                                                                                                                                                                                  |       | $                     | 17,746     |              | $          | 18,551 |   |
| ** **                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Current liabilities:**                                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** **        | ** ** |
| Post-dated check  financing (includes related party amounts of $2,184 and $2,587 at December  31, 2005 and June 30, 2006 respectively)                                                                                      |       | $                     | 5,315      |              | $          | 4,702 |   |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Accounts payable  (includes related party amounts of $2,712 and $913 at December 31, 2005 and  June 30, 2006 respectively)                                                                                                  |       | 7,297                 |       | 4,669             |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Accrued expenses                                                                                                                                                                                                            |       | 1,774                 |       | 2,967             |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Deferred revenue                                                                                                                                                                                                            |       | 1,577                 |       | 891               |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Total current  liabilities                                                                                                                                                                                                  |       | 15,963                |       | 13,262            |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| **Commitments and contingencies**                                                                                                                                                                                           |       | —                |       | —            |       |
| **Stockholders’ equity:**                                                                                                                                                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
| Common Stock: no  par value; authorized 50,000,000 shares; issued and outstanding 23,312,500 at  December 31, 2005 and par value $0.001; authorized 100,000,000 shares; issued  and outstanding 23,312,500 at June 30, 2006 |       | 28,830                |       | 23                |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Additional Paid  in capital                                                                                                                                                                                                 |       | —                |       | 28,807            |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Deferred  stock-based compensation                                                                                                                                                                                          |       | (100                  | )          | —            |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Accumulated  deficit                                                                                                                                                                                                        |       | (26,947               | )          | (23,508           | )          |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| Total  stockholders equity                                                                                                                                                                                                  |       | 1,783                 |       | 5,322             |       |
|                                                                                                                                                                                                                        |       |                  |       |              |       |
| ** **                                                                                                                                                                                                                  |       | $                     | 17,746     |              | $          | 18,551 |   |

 

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

2

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**Bidz.com,Inc.**

**Condensed Statements of Operations (Unaudited)**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **June 30,  2005**          | ** ** | **June 30,  2006**        | ** ** | **June 30,  2005** | ** ** | **June 30,  2006** | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| **Net revenues:**                                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Merchandise  sales and shipping**                              |       | $                                | 17,997     |                           | $          | 32,435 |   | $ | 38,625 |   | $ | 67,071 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Commissions**                                                  |       | 55                               |       | (2                             | )          | 146 |   | 55 |   |
| ** **                                                       |       |                             |       |                           |       |   |   |   |   |
| **Advertising**                                                  |       | 1                                |       | 1                              |       | 2 |   | 2 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       |       | 18,053                           |       | 32,434                         |       | 38,773 |   | 67,128 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cost of revenues**                                             |       | 14,429                           |       | 24,745                         |       | 31,404 |   | 50,261 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross Profit**                                                 |       | 3,624                            |       | 7,689                          |       | 7,369 |   | 16,867 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating expenses:**                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative                                      |       | 2,502                            |       | 3,443                          |       | 5,091 |   | 6,795 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Sales and  marketing                                             |       | 714                              |       | 2,838                          |       | 1,589 |   | 5,245 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Public offering  costs                                           |       | —                           |       | 1,231                          |       | — |   | 1,231 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  amortization                                   |       | 38                               |       | 67                             |       | 76 |   | 121 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| **Total operating expenses**                                     |       | 3,254                            |       | 7,579                          |       | 6,756 |   | 13,392 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income from operations**                                       |       | 370                              |       | 110                            |       | 613 |   | 3,475 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Income-Interest Income**                                 |       | —                           |       | 41                             |       | — |   | 58 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| **Income before income taxes**                                   |       | 370                              |       | 151                            |       | 613 |   | 3,533 |   |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income taxes**                                                 |       | —                           |       | 4                              |       | — |   | 94 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| **Net income**                                                   | ** ** | $                                | 370        |                           | $          | 147 |   | $ | 613 |   | $ | 3,439 | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net income per share  available to common shareholders - basic   | ** ** | $                                | 0.02       |                           | $          | 0.01 |   | $ | 0.02 |   | $ | 0.15 | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net income per share  available to common shareholders - diluted | ** ** | $                                | 0.02       |                           | $          | 0.01 |   | $ | 0.02 |   | $ | 0.14 | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted average number  of shares outstanding - basic           |       | 23,312,500                       |       | 23,312,500                     |       | 25,361,819 |   | 23,312,500 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted average number of shares outstanding - diluted          |       | 23,834,780                       |       | 23,821,700                     |       | 25,887,719 |   | 23,824,215 |   |

 

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

3

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**Bidz.com, Inc.**

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

** **

*(inthousands)*

 

|                                                                                                    | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                         | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                                         | ** ** | **2005**                       | ** ** | **2006** | ** ** |
|                                                                                               |       |                           |       |   |   |
| **Cash flows from operating  activities:**                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                                         |       | $                              | 613        |   | $ | 3,439 |   |
|                                                                                               |       |                           |       |   |   |
| **Adjustments  to reconcile net income to net cash provided by (used for) operating  activities:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                                     |       | 76                             |       | 121 |   |
|                                                                                               |       |                           |       |   |   |
| Change in  inventory reserve                                                                       |       | (71                            | )          | 111 |   |
|                                                                                               |       |                           |       |   |   |
| Amortization of  deferred stock-based compensation                                                 |       | 100                            |       | 100 |   |
| **Changes  in assets and liabilities:**                                                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **(Increase)  decrease in assets:**                                                                | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                               |       | 99                             |       | 324 |   |
|                                                                                               |       |                           |       |   |   |
| Inventories                                                                                        |       | 3,708                          |       | (824 | ) |
|                                                                                               |       |                           |       |   |   |
| Other current  assets                                                                              |       | (417                           | )          | (459 | ) |
|                                                                                               |       |                           |       |   |   |
| Deposits                                                                                           |       | —                         |       | 150 |   |
| **Increase  (decrease) in liabilities:**                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Post-dated check  financing                                                                        |       | (1,723                         | )          | (613 | ) |
|                                                                                               |       |                           |       |   |   |
| Accounts payable                                                                                   |       | (1,640                         | )          | (2,628 | ) |
|                                                                                               |       |                           |       |   |   |
| Accrued expenses                                                                                   |       | (268                           | )          | 1,193 |   |
|                                                                                               |       |                           |       |   |   |
| Deferred revenue                                                                                   |       | (347                           | )          | (686 | ) |
|                                                                                               |       |                           |       |   |   |
| Net cash  provided by (used for) operating activities                                              |       | 130                            |       | 228 |   |
|                                                                                               |       |                           |       |   |   |
| **Cash flows from investing  activities:**                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                              |       | (125                           | )          | (234 | ) |
|                                                                                               |       |                           |       |   |   |
| Net cash (used  for) investing activities                                                          |       | (125                           | )          | (234 | ) |
| **Cash flows provided from  financing activities:**                                                | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net cash  provided from financing activities                                                       |       | —                         |       | — |   |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Net increase (decrease) in cash**                                                                |       | 5                              |       | (6 | ) |
| ** **                                                                                         |       |                           |       |   |   |
| **Cash, beginning of period**                                                                      |       | 5                              |       | 7 |   |
| ** **                                                                                         |       |                           |       |   |   |
| **Cash, end of period**                                                                            |       | $                              | 10         |   | $ | 1 |   |
|                                                                                               |       |                           |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                             | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest paid                                                                                      |       | $                              | —     |   | $ | — |   |
|                                                                                               |       |                           |       |   |   |
| Income taxes paid                                                                                  |       | $                              | —     |   | $ | 35 |   |

 

The accompanying notes forman integral part of these condensed financial statements.

4

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**BIDZ.COM,INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(NUMBERSIN 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, 2005 filed in the form 10-K Annual Report by theCompany on March 29, 2006. 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 June 30, 2006 and the results of operations forthe three month and six month periods ended June 30, 2005 and 2006 and thecash flows for the six month periods ended June 30, 2005 and 2006. The results of operations for the three months and six months endedJune 30, 2006 are not necessarily indicative of the results which may beexpected for the 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.

**Nature of Business Operations**

Bidz.com, Inc. was founded in November of1998 as a California corporation with its principal location of business in LosAngeles, California. We operate a website located at www.bidz.com for thepurpose of selling merchandise, utilizing our unique sales auctionplatform.  During June 2006, wereincorporated in Delaware.

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia in recentyears. Revenue generated from the United States accounted for approximately79.3% and 79.6% of net revenue for the three months ended June 30, 2005 and2006, respectively and 80.4% and 81.0% of net revenue for the six months endedJune 30, 2005 and June 30, 2006, respectively.

As noted in our financial statements and the relatednotes for the years ended December 31, 2002, 2003 and 2004, the report of ourindependent registered public accounting firm stated that our history ofsignificant operating losses, working capital deficit, lack of additionalfinancing, and negative cash flows from operations raised substantial doubtabout our ability to continue as a going concern. However, we have beenprofitable since 2004, and we secured a $10 million revolving line of credit inJuly 2006.

For the six month period June 30, 2006, wereported net income of $3.4 million and net cash provided from operatingactivities of $0.2 million. As of June 30, 2006, we had current assets of $ 17.8million and current liabilities of $13.3 million or working capital of$4.5 million. Available cash was $3.5 million before post-dated checks andwas $1,000 net of post-dated checks.

During the year ended December 31, 2005, wereported net income of $2.6 million and net cash provided by operatingactivities of $1.4 million. As of December 31, 2005, we had currentassets of

5

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$17.0 millionand current liabilities of $16.0 million or working capital of$1.0 million. Available cash was $2.6 million before post-datedchecks and was $7,000 net of post-dated checks

**RecentDevelopments**

On March 15, 2006, our Board of Directorsauthorized us to file a registration statement with the SEC for an initialpublic offering of our common stock. On June 29, 2006, we decided to postponeour initial public offering in order to reduce the initial public offeringoverhang (shares available for sale following the initial public offering) byrequesting that our shareholders enter into a lock-up agreement for a period of180 days. Accordingly, in June 2006, we expensed $1.2 million, consisting ofoffering costs related to the planned initial public offering.

On June 22, 2006 the Company reincorporated in thestate of Delaware. In connection with our reincorporation in Delaware, we areauthorized to issue 100,000,000 shares of common stock, $0.001 par value, and4,000,000 shares of undesignated preferred stock, $0.001 par value.

***Recent Accounting Pronouncements***

OnJune 28, 2006 the Board of the FASB ratified the conclusion reached by the EITFand contained therein in Issue No. 06-03. The Task Force reached a conclusion that the presentation of taxes oneither a gross or net basis is an accounting policy decision that should bedisclosed pursuant to Opinion 22. Currently, the Company presents its sales tax liability on a netbasis.  Sales are not grossed up with theattendant taxes deducted as a separate line item. The EITF becomes effectivefor interim and annual reporting periods beginning after December 15,2006.  At such time, the Company willdisclose this matter in its accounting policies.

In December 2004, the FASB issued SFASNo. 123R (Revised 2004), “Share-Based Payment” (“SFAS 123R”). Thisstatement addresses the accounting for share-based payment transactions inwhich a company receives employee services in exchange for the company’s equityinstruments or liabilities that are based on the fair value of the company’sequity securities or may be settled by the issuance of these securities.SFAS 123R eliminates the ability to account for share-based compensation usingAPB 25 and generally requires that such transactions be accounted for using afair value method. The provisions of this statement are effective for financialstatements issued in the first quarter reporting period commencing afterDecember 15, 2005. The stock-based compensation we will recognize afterthe adoption of SFAS 123R will be affected by the number and type ofstock-based awards granted in the future and the pricing model and relatedassumptions we decide to use in order to estimate the fair values of options.

We will use the Black-Scholes option pricing model toestimate the value of options under SFAS 123R. Because all of our stock optionsoutstanding as of June 30, 2006 were fully vested, we do not anticipate anymaterial impact on our results of operations by the adoption of SFAS 123R.

In February of2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments-an amendment of FASB Statements No. 133 and 140.”  In March of 2006, the FASB issued SFAS No.156, “Accounting for Servicing of Financial Assets-an amendment of FASBStatement No. 140.”  In June of 2006 FASBInterpretation # 48 was issued by the FASB. The FIN states that if a tax position is taken by a company that does notmeet the more-likely-than-not recognition threshold; the benefit of thatposition is not recognized in the financial statements.  The Interpretation is effective for fiscalyears beginning after December 31, 2006. These pronouncements have no impact on the company’s financialstatements.

**2.****                                      EarningsPer Common Share**

In accordance with SFAS No. 128, “Earnings PerShare,” the basic earnings per common share is calculated by dividing netincome available to common stockholders less preferred dividends by theweighted average number of common shares outstanding. Diluted earnings percommon share is computed

6

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similarlyto basic 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 dilutive effect of outstanding stock options andwarrants is reflected in diluted earnings per share by application of thetreasury stock method for the three month and six month periods endedJune 30, 2006 and 2005.  The following table sets forth thecomputation of basic and diluted net income per share

*(inthousands, except share and per share data)*
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                               | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted net  income per share: |       |                             |       |                           |       |   |   |   |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Numerator:                               |       |                             |       |                           |       |   |   |   |   |
| Net income                               |       | $                                | 370        |                           | $          | 147 |   | $ | 613 |   | $ | 3,439 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Denominator:                             |       |                             |       |                           |       |   |   |   |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Weighted common  shares outstanding      |       |                             |       |                           |       |   |   |   |   |
|                                     |       | 23,312,500                       |       | 23,312,500                     |       | 25,361,819 |   | 23,312,500 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Effect of  dilutive securities           |       | 522,280                          |       | 509,200                        |       | 525,900 |   | 511,715 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Denominator for  diluted calculation     |       |                             |       |                           |       |   |   |   |   |
|                                     |       | 23,834,780                       |       | 23,821,700                     |       | 25,887,719 |   | 23,824,215 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Net income per share,  basic             |       | $                                | 0.02       |                           | $          | 0.01 |   | $ | 0.02 |   | $ | 0.15 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Net income per share, diluted            |       | $                                | 0.02       |                           | $          | 0.01 |   | $ | 0.02 |   | $ | 0.14 |   |

 

**3.****                                      StockBased Compensation**

Prior to January 1, 2006, we measuredcompensation expense to employees for our stock option incentive plans usingthe intrinsic value method prescribed by Accounting Principles Board OpinionNo. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” We did notrecord employee stock based compensation expense in the Statement of Operationsfor the three month and six month periods ended June 30, 2005, as alloptions granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which amended, SFAS No. 123, wedisclosed the pro forma net income and net income per share as if the fairvalue based method had been applied in measuring compensation expense. TheFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148 inDecember 2002 to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, SFAS No. 148 expanded the disclosurerequirements of SFAS No. 123 to require more prominent disclosures in both

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annual and interim financial statements regarding themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.

The transition provisions of SFAS No. 148 wereeffective for fiscal years ended after December 15, 2002. The transitionprovisions did not have an impact on our financial position or results ofoperations as we did not elect to adopt the fair value-based method ofaccounting for stock-based employee compensation under SFAS No. 123. Thedisclosure provisions of SFAS No. 148 were effective for financialstatements for interim periods beginning after December 15, 2002. Weadopted the disclosure requirements in the first quarter of 2003.

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 ourfinancial statements the cost resulting from all share- based paymenttransactions. In addition, in March 2005 the Securities and ExchangeCommission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-BasedPayment” (“SAB 107”), which provides the SEC staff’s position regarding theapplication of SFAS 123R and certain SEC rules and regulations, and alsoprovides the staff’s views regarding the valuation of share-based paymentarrangements for public companies. On January 1, 2006, we adopted SFAS123R, which eliminates our ability to account for share-based compensationtransactions, as we formerly did, using the intrinsic value method asprescribed by APB 25 and generally requires that we recognize in our statementsof operations all share-based payments to employees, including grants of stockoptions based on their fair values.

The Company adopted SFAS 123R using the modifiedprospective method which requires the application of the accounting standard asof January 1, 2006. The Company’s financial statements as of and for thethree months and six months ended June 30, 2006 reflect the impact ofadopting SFAS 123R. In accordance with the modified prospective method, thefinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123R.

There was no stock-based compensation expenserecognized during the three months and six months ended June 30, 2006, aswe did not grant such compensation during the period. Consequently, there is noeffect on our statements of operations as a result of adopting SFAS 123R.Similarly, there in no effect on our statements of operations as a result ofthe SEC staff’s release of SAB 107. Under SFAS 123R stock-based compensationexpense recognized 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. In the pro forma informationrequired under SFAS 148 for the periods prior to 2006, we did not account forforfeitures, as all options granted were fully vested at the date of grant andwere not subject to any service period condition.

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.

At June 30, 2006, the Company has one stock-basedemployee compensation plan (the 2006 Stock Option Plan replacing the 2002 StockOption Plan and the 2001 Stock Option Plan). The following table illustratesthe effect on net income and income per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation:

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

 

|                                                          | ** ** | **Three Months  Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**            | ** ** | **June 30,**              | ** ** |
| ** **                                               | ** ** | **2005**                     | ** ** | **2005**                       | ** ** |
| Net Income, as  reported                                 |       | $                            | 370        |                           | $          | 613 |   |
| Compensation  recognized under APB 25                    |       | —                       |       | —                         |       |
| Compensation  recognized under SFAS 123                  |       | 178                          |       | 178                            |       |
| Pro-forma net income (loss)                              |       | $                            | 192        |                           | $          | 435 |   |
|                                                     |       |                         |       |                           |       |
| Net Income (loss)  per share:                            |       |                         |       |                           |       |
| Basic - as  reported                                     |       | $                            | 0.02       |                           | $          | 0.03 |   |
| Basic -  pro-forma                                       |       | $                            | 0.01       |                           | $          | 0.02 |   |
| Diluted - as  reported                                   |       | $                            | 0.02       |                           | $          | 0.03 |   |
| Diluted -  pro-forma                                     |       | $                            | 0.01       |                           | $          | 0.02 |   |
|                                                     |       |                         |       |                           |       |
| Weighted average  number of shares outstanding - basic   |       | 23,312,500                   |       | 25,361,819                     |       |
|                                                     |       |                         |       |                           |       |
| Weighted average number  of shares outstanding - diluted |       | 23,834,780                   |       | 25,887,719                     |       |

 

TheBlack-Scholes option pricing formula was used to estimate the fair value of thestock based compensation under SFAS 123. For all the three month and six monthperiods ended June 30, 2005 4% risk free interest rate, 0% dividend rate,0% volatility and $6.00 market value

**4.****                                      StockOption 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 valuableservices to our company.  The vestingrequirements, performance thresholds and other terms and conditions of optionsgranted under the Plans will be determined by our Compensation Committee andBoard of Directors.

Thefollowing is a summary of stock option activity as of June 30, 2006, andchanges during the six months ended June 30, 2006 is presented below:

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| **Options**                     | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January  1, 2006 |       | 8,342,000  |       | $                                           | 5.63       |                                                     |       |                            |       |   |
| Granted                         |       | 0          |       | —                                      |       |                                                     |       |                            |       |
| Exercised                       |       | 0          |       | —                                      |       |                                                     |       |                            |       |
| Forfeited                       |       | 0          |       |                                        |       |                                                     |       |                            |       |
| Expired                         |       | (38,000    | )          | $                                           | 5.38       |                                                     |       |                            |       |   |
| Outstanding at June 30,  2006   |       | 8,304,000  |       | $                                           | 5.63       |                                                     | 4.24       |                            | $          | 3,054,750 |   |
| Vested at June 30, 2006         |       | 8,304,000  |       | $                                           | 5.63       |                                                     | —     |                            | $          | 3,054,750 |   |
| Exercisable at June 30, 2006    |       | 8,304,000  |       | $                                           | 5.63       |                                                     | 4.24       |                            | $          | 3,054,750 |   |

 

We did not issueany options in the three months and six months ended June 30, 2006, and nooptions vested during this period, as all outstanding options were fullyvested, and no options were exercised. Accordingly, no compensation cost has been charged against income forthe three months and six months ended June 30, 2006, and there was norecognized tax benefit related thereto.

**5. Concentrations**

Purchases from twovendors amounted to $2.7million, and $6.4 million representing 25.7% and 30.5%of the total purchases during the three months ended June 30, 2005 and2006 respectively. Purchases from two vendors amounted to $9.6 million, and$18.8 million representing 40.0% and 40.6% of the total purchases during thesix months ended June 30, 2005 and 2006 respectively. Outstanding accountspayable to the two major vendors (net of amounts of post dated checks and LAJdeposit) totaled $3.2 million and $567,000 as of December 31, 2005 andJune 30, 2006, respectively. These vendors were holding post-datedchecks amounting to $2.5 million and $3.2 million as of December 31, 2005 andJune 30, 2006, respectively.  Loss of anyof these vendors may have a negative impact on the operations of the Company.

**6.****                                      Segmentand Geographic Information:**

Net revenue by geographic area presented based uponthe country of destination. No other foreign country represented 10% or more ofnet revenue for three-month and six-month periods ended June 30, and 2006.Net revenue by geographic area was as follows :

*(in thousands, except percentage data)*
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **    | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United States |       | $                                | 14,309     |                           | 79.3       | % | $ | 25,834 |   | 79.6 | % | $ | 31,171 |   | 80.4 | % | $ | 54,355 |   | 81.0 | % |
| International |       | 3,744                            |       | 20.7                           | %          | 6,602 |   | 20.4 | % | 7,602 |   | 19.6 | % | 12,774 |   | 19.0 | % |
|          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total         |       | $                                | 18,053     |                           | 100.0      | % | $ | 32,436 |   | 100.0 | % | $ | 38,773 |   | 100.0 | % | $ | 67,129 |   | 100.0 | % |

 

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

During the three months ended June 30, 2005 and2006, the Company purchased approximately 19.3 % and 19.5 %, respectively, ofmerchandise from LA Jewelers, Inc.  During the six months endedJune 30, 2005 and 2006, the Company purchased approximately 34.2% and 30.8%, respectively. One of the owners of Los Angeles Jewelers owns 1,200,000shares of the Company’s common stock as of June 30, 2006.

Our Vice-President of Technology is a majorshareholder of Technolect, Inc. which provided technology consultingservices to us in the amount of $0 for the three months ended June 30, 2006 and$12,000 in the six months ended June 30, 2006. We own 10% of the common stockof Technolect, Inc.

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whichwe acquired for nominal consideration at the inception of Technolect, and haveotherwise made no investments in Technolect. As of June 30, 2006, we have acost basis of $0 in Technolect.

**8****.             Contingencies**

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business.  Although theCompany believes it has defenses to the allegations and intends to pursue themvigorously, currently, management does not currently have sufficient informationto assess the validity of the claims or the amount of potential damages. Company management currently believes, however, that resolution of such legalmatters will not have a material adverse impact on the Company’s financialposition, results of operations or cash flows.

Yossi Gatlin v. Bidz.com

We are a defendant in a lawsuit brought by YossiGatlin in October 2005 for an automobile purchased from us in March 2002 for$28,000. Gatlin alleges that we did not provide prior registration so thatGatlin was not able to register the vehicle. Gatlin is claiming his payment of$28,000, the value of the automobile represented to be $350,000, and loss ofthe use of the automobile in the amount of $100,000. We have accrued aliability in the amount of $28,000 for this lawsuit.

*Cartier v. Bidz.com*

We are a defendant in a lawsuit filed by Cartier, andCartier International, B.V., in the United States District Court SouthernDistrict of New York in April 2006. The lawsuit alleges that Cartier hasproprietary rights, including trade dress, patents, trademarks, copyrights andothers, in watch designs known as a Tank, Tank Francaise, Tank Americaine,Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges thatwe have infringed upon those rights by selling watches bearing copies of one ormore of the watch designs. We intend to defend the lawsuit vigorously. We donot believe the outcome of the case will have a materially adverse effect onour financial position.

*Prior Sales of Securities*

From our inceptionuntil mid-2003, we raised over $20.5 million in gross equity capital by sellingshares of our common stock to approximately 830 investors at prices rangingfrom $4.00 to $6.00 per share with a weighted average share price of $4.50. Wealso issued shares of common stock to about 30 persons in exchange for servicesand other non-cash consideration valued in excess of $5.5 million and issuedoptions to purchase common stock to approximately 250 individuals at a weightedaverage exercise price of $4.45. After conducting these sales of oursecurities, we determined that these sales were not exempt from theregistration requirements under the Securities Act of 1933 and similarprovisions of laws of the states in which our stockholders reside, becausecertain of our employees who solicited investors engaged in 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. We also determined that becauseinvestors did not receive information regarding our potential liability forthese violations of federal and sate securities laws, the common stock wasissued to persons who failed to receive adequate information under federal andstate securities laws. In such situations, a number of remedies may beavailable to regulatory authorities and the investors who purchased commonstock in those offerings, including a right of rescission, civil penalties, arestraining order or injunction, and a court order to pay restitution andcosts.

If we were orderedto rescind all purchases of our common stock by stockholders not affiliatedwith us, we could be required to make an aggregate payment to the holders ofthese shares of up to approximately $20.5 million, in addition to statutoryinterest of $10.3 million, as of June 30, 2006. We may also be liable for the$5.5 million of services rendered and property exchanged in consideration forthe

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issuance of common stock,in addition to interest of approximately $2.6 million through June 30, 2006. Inaddition, we may be liable for the $1.3 million that we anticipate offering tonon-management optionees. In addition, regulators could impose monetary finesor other sanctions as provided under these laws.

The probability that shareholders would assert a claimagainst the Company and the extent of the Company’s liability, if any, arecontingent on a number of factors, including a shareholder’s desire to rescindhis or her purchase, applicable legal precedent and statutes oflimitation. There are presently no claims by shareholders against theCompany in a material amount. Based on information presently known tomanagement, management does not believe that assertion of such claims in anymaterial amount by the Company’s shareholders is probable. Accordingly, noaccruals for either potential amounts payable or reserves have been made atthis time.  However, there can be no assurance that the Company will besuccessful in securing the financing necessary for it to conduct a rescissionoffer.  An unfavorable outcome in any ofthese contingencies could have a material adverse impact on the Company’sfinancial position, results of operations and cash flows.

SFAS 5 par 8 provides that an estimated loss from aloss contingency shall be accrued by a charge to income if both**of the following conditions are met: 1) Informationavailable prior to issuance of the financial statements indicates that it isprobable that an asset had been impaired or a liability had been incurred atthe date of the financial statements.  Itis implicit in this condition that it must be probable that one or more futureevents will occur confirming the fact of the loss.  2) The amount of loss can be reasonablyestimated.

The accompanying financial statements do not includeany adjustments that might result from the outcome for this uncertainty.

**9.       Subsequent Event**

On July 12, 2006the Company entered into a Loan and Security Agreement with LaSalle RetailFinance.  The Agreement provides for a$10 million revolving Line of Credit and the term of the agreement is for fouryears.  The assets of the Company arepledged as collateral and under certain conditions the maximum amount of theline can be increased to $15 million.

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

*The following discussion should beread in conjunction with the financial statements and related notes whichappear elsewhere in this form. This discussion contains forward-lookingstatements. Our actual results could differ materially from those anticipatedin these forward-looking statements as a result of various factors, includingvarious risks and uncertainties discussed below and throughout this report.*

**Overview**

We are a leading online retailer of jewelry, featuringa live auction format. We have established our retail brand in the onlinemarketplace by offering high-quality merchandise, a unique user-friendlyshopping experience, and the opportunity for buyers to achieve significant costsavings versus traditional retail channels. A key to our success has been ourability efficiently and effectively to source closeout merchandise and rapidlyrespond to changing consumer demands for certain jewelry. We offer our productsthrough a continuous live format, featuring “no reserve” auctions, a $1 minimumopening bid and a unique 15-second auction extension period that allows ourauctions to continue until all bids are received.  The majority of our auctions are short-term,often lasting less than one hour, providing immediate gratification to ourcustomers and encouraging frequent visits and active viewing of our website.Our product inventory includes gold, platinum, and silver jewelry set withdiamonds, rubies, emeralds, sapphires, and other precious and semi-preciousstones; and watches.  We believe we arethe second largest online retailer of jewelry based on revenue and the largestonline jewelry auction Internet site based on web traffic.

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In assessing our business, we consider operational andnon-financial performance metrics, such as average selling price per order,average orders per day, average items sold per day, acquisition cost per newbuyer, and number of new buyers. We averaged daily sales of approximately 7,730items or 2,832 orders with an average sales transaction amount per order of$133 in the three month period ended June 30, 2006.

We sell to consumers looking for reliable bargains onjewelry. Because we purchase and retain all of our jewelry inventory onsite, wecan provide our customers with timely service and delivery of their purchases.In addition, each item is inspected by one of our trained product specialistsprior to its placement on our website, which assures our customers of thequality of our products. We operate in a highly competitive market with lowbarriers to entry. By selling our own merchandise, we provide a buyingenvironment in which we minimize fraudulent activity and questionable productquality frequently associated with purchase transactions from third-partysellers. We also provide a 15-day return policy on all merchandise. We believethat many of our customers resell merchandise that they purchase from ourauctions on eBay, at local auctions, and through other retail channels. Ourauctions are conducted 24 hours a day, seven days a week. We also offer 24-houronline customer support.

**CriticalAccounting 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 the circumstances.Actual results may differ from these estimates. The following are the criticalaccounting policies that we believe require significant estimation andjudgment.

*RevenueRecognition*

Wederive our revenue from five sources: merchandise sales, commission revenue,advertising revenue, shipping revenue, and auction transaction fee 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.

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

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

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

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 or commissions.

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*InventoryReserve*

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. Beginning from thethree months ended June 30, 2006 we will only record reserves of 100% of thevalue of inventory held for more than one year and will no longer recordreserves for 50% of the value of inventory held for between six months and oneyear. If the previous method of estimating reserves had been used, theinventory reserves would have been higher by $138,000.

*Returnand Allowance Reserve*

Weestimate potential future product returns related to current period revenue. Weanalyze historical returns, current economic trends, 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 are greater than our estimates, we will record additional returns andallowances in addition to our estimates, which will result in lower net revenuerecorded during that period. 

*Stock-BasedCompensation*

Prior to January 1, 2006,we measured compensation expense to employees for our stock option incentiveplans under the recognition and measurement provisions of Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees,*and related interpretations. Utilizing theintrinsic value method prescribed by APB No. 25, we did not record compensationexpense when stock options were granted to eligible participants as long as theexercise price was not less than the fair market value of the stock when theoption was granted. 

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

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

On January 1, 2006, weadopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’)requiring that share-based payment transactions be recognized in the financialstatements based on the fair value of the equity or liability instrumentissued. We intend to use the Black-Scholes option pricing model to estimate thevalue of our options in implementing SFAS 123R and will use the calculatedmethod to determine expected volatility, rather than the minimum value method,which we previously used to determine expected volatility. Under SFAS 123Rstock-based compensation expense recognized during the period is based on thevalue of the portion of stock-based payment awards that is ultimately expectedto vest. Accordingly, stock-based compensation expense recognized in thestatements of income will be reduced for estimated forfeitures. SFAS 123Rrequires forfeitures to be estimated at the time of grant and

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revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the pro forma information requiredunder SFAS 148 for the period prior to 2006, we did not account forforfeitures, as all options granted were fully vested at the date of grant andwere not subject to any service period conditions. We expensed stock-basedcompensation on the date of grant, as all options granted prior to January 1,2006, vested immediately. In the future, we anticipate that stock-basedcompensation will include vesting provisions and therefore stock-basedcompensation expense in the future will be reduced for estimated forfeitures.

We adopted SFAS 123Rusing the modified prospective method which requires the application of theaccounting standard as of January 1, 2006. Under this transition method, we arerequired to recognize compensation cost beginning January 1, 2006 for theportion of outstanding awards for which the requisite service has beenrendered, based on the grant-date fair value of those awards calculated underSFAS 123 for our pro forma disclosures. As of June 30, 2006, all stock optionsoutstanding were fully vested, and we did not issue any stock-based paymentawards in the three months and six months ended June 30, 2006. Therefore, theadoption of SFAS 123R did not affect our results of operations. In accordancewith the modified prospective method, the financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123R.

  Description of Our Revenue, Costs, andExpenses 

The following table presents our historical results ofoperations for the periods indicated as a percentage of net revenue. 
| ** **                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
|                            |       |                                                |       |                                              |       |   |   |   |   |
| Net Sales                       |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Gross Profit                    |       | 20.1                                                | %          | 23.7                                              | %          | 19.0 | % | 25.1 | % |
| Operating  Expenses:            |       |                                                |       |                                              |       |   |   |   |   |
| General & Administrative    |       | 13.9                                                | %          | 10.6                                              | %          | 13.1 | % | 10.1 | % |
| Sales & Marketing           |       | 4.0                                                 | %          | 8.8                                               | %          | 4.1 | % | 7.8 | % |
| Pre-IPO costs                   |       | —                                              |       | 3.8                                               | %          | — |   | 1.8 | % |
| Depreciation & Amortization |       | 0.2                                                 | %          | 0.2                                               | %          | 0.2 | % | 0.2 | % |
| Total Operating  Expenses       |       | 18.1                                                | %          | 23.4                                              | %          | 17.4 | % | 19.9 | % |
| Profit from  Operations         |       | 2.0                                                 | %          | 0.3                                               | %          | 1.6 | % | 5.2 | % |
| Interest income                 |       | —                                              |       | 0.1                                               | %          | — |   | 0.1 | % |
| Income tax  expense             |       | —                                              |       | 0.0                                               | %          | — |   | 0.1 | % |
| Net Income                      |       | 2.0                                                 | %          | 0.4                                               | %          | 1.6 | % | 5.2 | % |

 

*Net Revenue*

Substantially all of our net revenue consists ofjewelry sold via the Internet, net of returns. We also generate net revenuefrom shipping and handling, transaction fee revenue, commissions from CertifiedMerchants, and advertising revenue. 

The following table presents our sources of revenuefor the periods indicated as a percentage of net revenue. 
| ** **              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
|                    |       |                                                |       |                                              |       |   |   |   |   |
| Net Sales               |       |                                                |       |                                              |       |   |   |   |   |
| Merchandise sales       |       | 90.6                                                | %          | 84.8                                              | %          | 90.5 | % | 84.9 | % |
| Shipping & handling |       | 9.1                                                 | %          | 12.1                                              | %          | 9.1 | % | 11.9 | % |
| Transaction fees        |       | —                                              |       | 3.1                                               | %          | — |   | 3.1 | % |
| Commissions             |       | 0.3                                                 | %          | 0.0                                               | %          | 0.4 | % | 0.1 | % |
| Advertising             |       | 0.0                                                 | %          | 0.0                                               | %          | 0.0 | % | 0.0 | % |
| Total Net Sales         |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |

 

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InNovember 2005, we implemented a 3% transaction fee on all sales. Thetransaction fee is applied to all merchandise sales, including shipping andhandling, but not to sales tax or commissions.

*GrossProfit*

Ourgross profit consists of net revenue less the cost of sales. Our cost of salesconsists of the cost of merchandise sold to customers, inbound and outboundshipping costs, shipping supplies, insurance on shipments, and credit card andother transaction fees associated with payments. 

*Generaland Administrative Expenses*

Ourgeneral and administrative expenses consist primarily of payroll and relatedbenefit costs for our employees. These expenses also include fulfillment,customer service, technology, professional fees, other general corporate expenses,and stock-based compensation, consisting substantially of stock option grantsand stock grants to employees and consultants. We anticipate that ourcompensation expense under SFAS No. 123(R) will increase in futureperiods. 

*Salesand Marketing Expenses*

Our marketing expensesconsist primarily of costs associated with paid website searches, contextualmarketing, e-mail campaigns, affiliate programs and optimization services.These marketing programs, which are designed to drive buyers to our website,are the most important factor in increasing demand for our jewelry products andincreasing net revenue.

*Public offering costs*

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

**Comparison of Three Months Ended June 30, 2005 to ThreeMonths Ended June 30, 2006**

Net income in the three months ended June 30,2006 was $147,000, or $0.01 per basic and diluted share. In the three monthsended June 30, 2005, net income was $370,000 and net income per basic anddiluted share was $0.02.  Net revenueincreased by 79.7 % in the three months ended June 30, 2006 compared tothe three months ended June 30, 2005 while the net income decreased by60.3% over the same period.  The decreasein net income was due to the expensing of pre-IPO costs of $1.2 million offsetby increased revenue and improved profit margins.  Gross profit margin inthe second quarter of 2006 was 23.7 % compared to 20.1% in the second quarterof 2005.

*Net Revenue*

Net revenue increased 79.7% to $32.4 million in thethree months ended June 30, 2006 from $18.1 million in the threemonths ended June 30, 2005. This increase in net revenue was dueprimarily to the increase in registered buyers at our website, growth in demandfor our jewelry products and the increase

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inaverage dollar amount per order. In the three month period ended June 30, 2006we stopped charging commissions for Certified Merchants that sell on ourwebsite, and we do not expect that this change in policy will materially affectour results of operations.  

*Gross Profit*

 Gross profitincreased 112 % to $ 7.7 million in the three months ended June 30, 2006 from$3.6 million in the three months ended June 30, 2005.  The increase in gross profit resulted fromthe increase in gross profit as a percentage of net sales to 23.7 % for thethree months ended June 30, 2006 compared to 20.1% for the three months endedJune 30, 2005 and from the increase in sales revenue which rose by $14.3million for the three months ended June 30, 2006 from the three months endedJune 30, 2005. The implementation of transaction fee charges of 3.0% sinceNovember 2005 has improved gross profit performance in the current three monthperiod ended June 30, 2006.

 *General andAdministrative Expenses*

 General and administrative expenses increased37.6 % to $3.4 million in the three months ended June 30, 2006 from$2.5 million in three months ended June 30, 2005. The increase in generaland administrative expenses was due in general to our overall growth andspecifically in payroll and payroll related expenses which increased by $0.5million over the period.

*Sales & Marketing Expenses*

Sales and marketing expenses increased 297% to $2.8million in the three months ended June 30, 2006 from $714,000 in the threemonths ended June 30, 2005. This increase resulted primarily fromincreased marketing campaigns and the increased cost of online advertising toattract new buyers. Sales and marketing expenses as a percentage of net revenueincreased to 8.8% in the three months ended June 30, 2006 from 4.0% in 2005. Weexpect our sales and marketing expenses to continue to increase in absolutedollars, as we intend to continue increasing our online marketing campaign inorder to attract new customers. 

*Public offering costs*

On June 29, 2006, we decided to postpone our initialpublic offering in order to reduce the initial public offering overhang (sharesavailable for sale following the initial public offering) by requesting thatour shareholders enter into a lock-up agreement for a period of 180 days.  Accordingly, in June 2006, we expensed $1.2million, consisting of offering costs related to the planned initial publicoffering. 

**Comparison of Six Months Ended June 30, 2005 to SixMonths Ended June 30, 2006**

Netincome in the six months ended June 30, 2006 was $3.4 million, or $0.15per basic and $0.14 per diluted share.  In the six months endedJune 30, 2005, net income was $0.6 million and net income per basic anddiluted share was $0.02.  Net revenue increased by 73.1 % in the sixmonths ended June 30, 2006 compared to the six months ended June 30,2005, and net income increased by 461 % over the same period. 

*Net Revenue*

Net revenue increased 73.1 % to $ 67.1 million inthe six months ended June 30, 2006 from $38.8 million in the sixmonths ended June 30, 2005 This increase in net revenue was due primarilyto the increase in registered buyers at our website, growth in demand for ourjewelry products and the increase in average dollar amount per order. Inthe second quarter of 2006 we stopped charging commissions for CertifedMerchants that sell on our website, and we do not expect this change in policywill materially affect our results of operations.  

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*Gross Profit*

Gross profit increased 129% to $16.9 million inthe six months ended June 30, 2006 from $7.4 million in the sixmonths ended June 30, 2005 The increase in gross profit resulted from theincrease in gross profit as a percentage of net sales to 25.1 % for the sixmonths ended June 30, 2006 compared to 19.0% for the six months endedJune 30, 2005 and from the increase in net revenue which rose by $28.3million for the six months ended June 30, 2005 from the six months endedJune 30, 2005. The implementation of transaction fee charges of 3.0% sinceNovember 2005 has improved gross profit performance in the current six monthperiod ended June 30, 2006.

*General and Administrative Expenses*

General and administrative expenses increased 33.5 %to $6.8 million in the six months ended June 30, 2006 from$5.1 million in the six months ended June 30, 2005. The increase ingeneral and administrative expenses was primarily due to the increase inpayroll and payroll related expenses which increased by $1.1million.

*Sales & Marketing Expenses*

Sales and marketing expenses increased 230 % to $5.2million in the six months ended June 30, 2006 from $1.6 million inthe six months ended June 30, 2005.  The increase in sales andmarketing expenses was attributable to increased marketing campaigns and to theincreased cost of such online marketing this period relative to thecorresponding period last year. Sales and marketing expenses as a percentage ofnet revenue increased to 7.8% in the six months ended June 30, 2006 from 4.1%in 2005. We expect our sales and marketing expenses to continue to increase inabsolute dollars, as we intend to continue increasing our online marketingcampaign in order to attract new customers. 

*Public offering costs*

On June 29, 2006, we decided to postpone our initialpublic offering in order to reduce the initial public offering overhang (sharesavailable for sale following the initial public offering) by requesting thatour shareholders enter into a lock-up agreement for a period of 180 days.  Accordingly, in June 2006, we expensed $1.2million, consisting of offering costs related to an initial public offering. 

**Additional Quarterly Data**
|                                         | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                            | ** ** | **2006** | ** ** |
| Average sales  amount per order (gross) |       | $                                                   | 106        |   | $ | 133 |   |
| Average orders  per day                 |       | 2,381                                               |       | 2,832 |   |
| Average items  sold per day             |       | 6,699                                               |       | 7,730 |   |
| Acquisition cost  per new buyer         |       | $                                                   | 30         |   | $ | 49 |   |
| Number of new buyers                    |       | 22,651                                              |       | 57,520 |   |

 

**Liquidity and Capital Resources**

Since inception, we have funded our operations throughthe sale of equity securities and cash generated from operations. Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by post-dated check financing,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, we typicallyhave extended payment terms with our suppliers.

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As of June 30, 2006, we had a working capitalsurplus of $4.5 million and have no short or long-term debt obligations. The “post-datedcheck financing” reflected on our balance sheets results from post-dated checksoutstanding. It is customary for our vendors to accept checks post-dated by 60days as extended payment for purchase of merchandise.

Net cash providedby operating activities was $228,000 in the six months ended June 30, 2006compared to net cash provided of $130,000 in the six months endedJune 30, 2005. The net cash in the six months ended June 30, 2006 wasaffected mainly by changes in net income, inventories, post-dated checkfinancing, accounts payable, accrued expenses and deferred revenue. The netcash in the six months ended June 30, 2005 was affected mainly by changes innet income, inventories, post-dated check financing and accounts payable. Werecorded net income of $3.4 million in the six months ended June 30, 2006compared to $613,000 in the six months ended June 30, 2005. Cash flowsfrom net income were used to meet our working capital requirements. In the sixmonths ended June 30, 2006, inventories increased by $824,000, post-dated checkfinancing decreased by $613,000, accounts payable decreased by $2.6 million,accrued expenses increased by $1.2 million and deferred revenue decreased by$686,000. In the six months ended June 30, 2005, inventories decreased by $3.7million, post-dated check financing decreased by $1.7 million and accountspayable decreased by $1.6 million. Inventories and accounts payable generallyincrease in line with sales growth and changes in our inventory strategy. Ourinventory strategy is influenced by our ability to secure inventory that webelieve will improve our margins.

Net cash used ininvesting activities was $234,000 in the six months ended June 30, 2006compared to $125,000 in the six months ended June 30, 2005. Duringthe six months ended June 30, 2006, net cash used for investing activities wasrelated to capital expenditures mainly for computer equipment and in the sixmonths ended June 30, 2005 was related to capital expenditures mainly foroffice and computer equipment.

We believe thatcash and cash equivalents currently on hand, cash flows from operations and theavailability of a $10 million revolving line of credit will be sufficient tocontinue our operations and to pursue our growth strategy for the foreseeablefuture. Our future capital requirements will depend on many factors, includingthe rate of our revenue growth; the timing and extent of spending to enhanceour website, network infrastructure, and transaction processing systems; theextent of our advertising and marketing programs; the levels of the inventorywe carry; and other factors relating to our business. Enhancement of ourwebsite, 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. We may require additional financing in the future in order toexecute our operating plan. We cannot predict whether this additional financingwill be in the form of equity, debt, or a combination of debt or equity.We may not be able to obtain any necessary additional funds on a timelybasis, on acceptable terms, or at all.

**ITEM 3 - QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

Market risk represents the risk of loss arising fromadverse changes in market rates and foreign exchange rates.  We do notbelieve that a change in market interest rates would have a material effect onour results of operations or financial condition.  Although we derive aportion of our sales outside of the United States, all of our sales aredenominated in U.S. Dollars.  We have limited exposure to financial marketrisks, including changes in interest rates and foreign currency exchange rates.

**ITEM 4 - CONTROLS AND PROCEDURES**

The Company conducted an internal evaluation of itsdisclosure, controls, and procedures as of the end of the period covered bythis report under the supervision and with the participation of management,including David Zinberg, President and Chief Executive Officer (CEO), andLawrence Kong, Chief Financial Officer (CFO). Based upon that evaluation, theCEO and CFO concluded that the Company’s

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disclosurecontrols and procedures were effective to provide reasonable assurance to theofficers that they have been provided, on a timely basis, all materialinformation necessary for them to determine that the Company has disclosed allmaterial information required to be included in the Company’s periodic reportsfiled with the Securities and Exchange Commission.  Based upon theofficers’ evaluation, there were not any significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

**PART II. OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

*Yossi Gatlin v. Bidz.com*

We are a defendant in a lawsuit brought by YossiGatlin in October 2005 for an automobile purchased from us in March 2002 for$28,000. Gatlin alleges that we did not provide prior registration so thatGatlin was not able to register the vehicle. Gatlin is claiming his payment of$28,000, the value of the automobile represented to be $350,000, and loss ofthe use of the automobile in the amount of $100,000. We have accrued aliability in the amount of $28,000 for this lawsuit.

*Cartier v. Bidz.com*

We are a defendant in a lawsuit filed by Cartier, andCartier International, B.V., in the United States District Court SouthernDistrict of New York in April 2006. The lawsuit alleges that Cartier hasproprietary rights, including trade dress, patents, trademarks, copyrights andothers, in watch designs known as a Tank, Tank Francaise, Tank Americaine,Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges thatwe have infringed upon those rights by selling watches bearing copies of one ormore of the watch designs.  We intend todefend the lawsuit vigorously. We do not believe the outcome of the case willhave a materially adverse effect on our financial position.

**ITEM 1.A. RISK FACTORS**

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

Our netrevenue depends to a significant extent on the number of customers who visitour website to purchase merchandise and the dollar amount of their purchases.Generating increased traffic to our website and converting that traffic intobuyers requires us to achieve effective results from our marketing campaigns;offer a wide variety of products that our customers can purchase at favorableprices; 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 guaranteedsupply of jewelry products, and we have a heavy concentration of inventorypurchases from our top five suppliers****.*

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

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Inaddition, we have a heavy concentration of inventory purchases from a smallnumber of suppliers. Our top five suppliers accounted for approximately 40.1%and 51.1% of our total purchases in the three months ended June 30, 2005, and2006, respectively. In the three months ended June 30, 2005 and 2006, wepurchased 19.3% and 19.5%, respectively, of our merchandise from Los AngelesJewelers, Inc., a jewelry manufacturer and liquidator.

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

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, 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.

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

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

***Competition from onlineauctioneers and other online companies with greater brand recognition mayadversely affect our sales.***

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

Wecurrently compete with a number of other companies, and other competitors mayappear in the future. Our competitors currently include various online auctionservices and retailers that offer jewelry, including eBay, Odimo, Blue Nile,Overstock, and uBid. We also encounter competition from national jewelry retailchains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and massretailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J.C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors havegreater brand recognition, longer operating histories, larger customer bases,and significantly greater financial, marketing, and other resources than we do.Smaller competitors may enter

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intostrategic or commercial relationships with larger, more established, andwell-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 made in the past to develop and market synthetic stones andgems to compete in the market for gemstones and gemstone jewelry. We expectsuch efforts to continue in the future. If any such efforts are successful increating widespread demand for synthetic or alternative gemstone products,demand and price levels for our products could decline and our business andresults of operations would be substantially harmed.

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

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

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

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

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

We had$16.6 million in inventory as of June 30, 2006. 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 typicallyconsist 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 andthird-party carriers as part of our fulfillment process, and these thirdparties may fail to meet shipping schedules or requirements****.*

We relyon suppliers to deliver our orders promptly, which we then carry in inventoryto ensure availability and expedited delivery to our customers. We also rely onthird-party carriers to ship our products to our customers. As a result, we aresubject to various risks, including employee strikes and inclement weather,associated with the ability of third-party carriers to provide deliveryservices to meet our shipping needs and those of our suppliers. The failure ofour suppliers and third-party carriers to deliver products to us or

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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 ofprecious metals and precious and semi-precious stones would increase the costof our jewelry products.***

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

***Our business and results ofoperations would be harmed in the event of any failure of our auction andbidding systems hardware, which is located at a single third-party co-locationfacility, or any failure of our fulfillment and administrative hardware.***

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

***We may not be able to increaseour capacity or respond to rapid technological changes in a timely manner orwithout service interruptions, which may harm our business.***

We maynot be able to accommodate any substantial growth in traffic or user demand onour website, network infrastructure, and transaction processing systems in atimely manner or without substantial costs. If we are unable to upgrade ourexisting technology, network infrastructure, and transaction processing systemsto accommodate any increased sales volume, our potential customers may be dissatisfiedand may purchase merchandise from our competitors. We may also fail to provideenough capacity in our customer service and sales support functions to providea high level of customer service. A failure to implement new systems andincrease customer service capacity effectively could adversely affect oursales. Enhancement of our website, network infrastructure, and transactionprocessing systems will require us to spend a significantly higher amount thanwe have in the past. Moreover, to date our spending in these areas as apercentage of revenue has been lower than industry averages. We anticipateincreasing our system expenditures to accommodate these needs in the future.

We alsointend to introduce additional or enhanced features and services to retaincurrent customers 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,

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ourcurrent customers may not use our website as frequently and we may not besuccessful in attracting new customers. These new features or services also maycontain errors that are discovered only after their introduction, and we mayneed to modify significantly the design of these features or services tocorrect errors.

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

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

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

In2005, and in the six months ended June 30, 2006, 19.2% and 19.0%, respectively,of our net revenue was generated by shipments to customers outside of theUnited States. We plan, over time, to expand our reach into internationalmarkets. We do not, however, currently have any overseas fulfillment,distribution, or server facilities or any website content localized for foreignmarkets. We cannot be certain that we will be able to expand our globalpresence. In addition, there are certain risks associated with doing businesson an international basis, including regulatory requirements, legal uncertaintyregarding liability, tariffs, and other trade barriers, longer payment cycles,and potentially adverse tax consequences, any of which could adversely affectour business. Although our foreign sales historically have been denominated inU.S. dollars, we also may be subject to increased risks relating to foreigncurrency exchange rate fluctuations to the extent we decide to denominate oursales in foreign currencies.

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

Oursuccess depends on the continued growth and maintenance of the Internet. TheInternet has experienced, and is likely to continue to experience, significantgrowth in the numbers of users and amount of traffic. If Internet usagecontinues to grow as anticipated, the infrastructure may not be able to supportthe level of usage and its performance and reliability may decline. If outagesor delays on the Internet increase, overall Internet usage could grow moreslowly or decline. In addition, the performance of the Internet may be harmedby increased number of users or bandwidth requirements or by viruses, worms,and similar issues. The Internet has experienced a variety of outages and otherdelays as a result of damage to portions of its infrastructure, and it couldface outages and delays in the future. These outages and delays could reducethe level of Internet usage.

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

Thebusiness of buying and selling goods over the Internet is relatively new anddynamic. Our success depends on the widespread acceptance and use of theInternet as an effective medium for commerce by consumers. The acceptance anduse of the Internet may not continue to expand as expected, and a sufficientbroad base of consumers necessary for its continued growth may not adopt theInternet as a medium for commerce.

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Consumerswho historically have used traditional means of commerce may have concernsabout privacy, the inability to physically inspect merchandise before buying,delivery time, product damage during shipment, and the costs and inconvenienceinvolved in returning purchased items, which may inhibit their crossover toe-commerce. In order to expand our user base, we must appeal to and acquireconsumers who historically have used traditional means of commerce to purchasegoods. If these new customers execute fewer or lower dollar amounts of ordersthan our historical users, and we are unable to gain efficiencies in ouroperating costs, including the cost of acquiring new customers, our businessand profits could be adversely affected.

***Our failure to protectconfidential information of our customers and our network against securitybreaches could damage our reputation and substantially harm our business andresults of operations****.*

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

***We are vulnerable to fraudulentactivities on our website, including unauthorized use of customer informationand identity theft by third parties****.*

Ournetwork security measures to prevent third parties from penetrating our networkand improperly accessing our customers’ personal information or credit cardinformation may not be successful. Although we have not experienced any theftof our customers’ credit card information to date, as new discoveries in thefield of cryptography and advances in computer capabilities occur, our securitymeasures may not effectively prevent others from obtaining improper access toour customer information. In addition, third parties may target our customersdirectly with fraudulent identity theft schemes designed to appear aslegitimate e-mails from us. In March 2006, one such third party attempted tosolicit customer information through a tactic, commonly known as “phishing,”whereby an e-mail purporting to be from us solicited customer information fromrecipients of the e-mail. Any such security breach or fraud perpetrated on ourcustomers could expose us to increased costs and could harm our business andresults of operations.

***Increased product returns andthe failure to predict product returns could substantially harm our businessand results of operations****.*

As weexpand our business and product offerings, rates of product return mayincrease. Any significant increase in product returns above our returnassumptions and allowances could substantially harm our business and results ofoperations.

***Our inventory is vulnerable todamage or loss caused by fire, flood, earthquakes, and similar events, and weface the risk of theft of our products from inventory or during shipment.***

All ofour inventory is stored 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 orloss of all or a significant portion of our inventory could cause significantdelays

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inshipment of goods to our customers, resulting in negative publicity about anddiminished customer confidence in our website. In addition, we may experiencetheft of our products while they are being held in inventory or during thecourse of their shipment to our customers by third-party carriers. We haveimplemented security measures to prevent such theft and maintain insurance tocover losses resulting from theft. Nevertheless, we could incur significantlosses from theft, which would substantially harm our business and results ofoperations, if our security measures fail, losses exceed our insurancecoverage, or we are not able to maintain insurance at a reasonable cost.

***Customer complaints or negativepublicity about our customer service could adversely affect our reputation and,as a result, our business could suffer.***

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

***Increases in credit cardprocessing fees could increase our costs.***

Visa,MasterCard, American Express, and Discover Card could increase the interchangefees that they charge for transactions using their cards. Increases ininterchange fees may result in increased operating costs and reduced profitmargin.

***Our limited operating history makesit difficult for us to forecast accurately net revenue and appropriately planour expenses.***

We havea limited operating history. As a result, it is difficult to forecastaccurately our sales or operating expenses. We base our estimated expenselevels on our operating forecasts and estimates of future sales. Sales andresults of operations are difficult to forecast because they generally dependon the number, dollar volume, and timing of the orders we receive, which areuncertain. Some of our expenses are fixed, making it difficult to adjust ourspending in a timely manner to take into account any unexpected shortfall insales. We may also be unable to adjust spending in a timely manner tocompensate for any unexpected sales shortfall, which could cause our net incomein a given quarter to be lower than expected.

***We incurred losses fromoperations prior to fiscal 2004 and have accumulated a significant deficit.***

Priorto fiscal year 2004 we experienced significant operating losses. AtJune 30, 2006, we had an accumulated deficit of $23.5 million. Wecannot be certain that the improvements in our operations resulting since 2004will continue in the future. See “Management’s discussion and analysis offinancial condition and results of operations—Liquidity and Capital Resources.”

***We may default on ourobligations, if we are unable to generate sufficient cash through sales in atimely manner.***

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

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***Seasonal fluctuations in our netrevenue could cause our quarterly results to fluctuate and cause our results ofoperations to be below expectations****.*

Historically,sales in the jewelry industry are seasonal and have been higher in the fourthquarter of the calendar year as a result of higher consumer spending during theDecember holiday season. Approximately 26.0%, 29.3%, and 33.9% of our netrevenue in 2003, 2004, and 2005, respectively, was generated during the fourthquarter. As we continue to grow, we expect to experience more pronouncedseasonal fluctuations in our net revenue and anticipate a disproportionateamount of our revenue will occur in the fourth quarter. In anticipation of anyincreased sales activity during the fourth quarter, we may incur significantadditional expenses, including higher sales and marketing costs and additionalstaffing in our fulfillment and customer support operations. If we were toexperience lower than expected sales during any future fourth quarter, it wouldhave a disproportionately large impact on our results of operations for thatyear. In the future, our seasonal sales patterns may become more pronounced,may strain our personnel and fulfillment activities, and may cause a shortfallin sales compared with expenses in a given period, which would substantiallyharm our business and results of operations.

***Sales growth in prior periodsmay not be indicative of our future growth.***

Oursales have fluctuated significantly in the past, in part, as a result ofvarying amounts of funds we have spent on advertising and inventory levels andmay fluctuate significantly in the future because of increasing advertising andinventory costs. These factors may prevent the meaningful use ofperiod-to-period comparisons of financial results. For these and other reasons,investors should not rely on past sales growth rates as a prediction of ourfuture sales growth.

***We have grown quickly, and our businesswill suffer if we fail to manage our growth****.*

We haveexpanded our operations at a rapid pace. This expansion has placed asignificant strain on our management, operations, and financial resources. Weanticipate adding personnel in the future, including managerial, technical, andoperations personnel. In order to manage any further growth of our operations,we also will be required to improve existing and implement newtransaction-processing, operational and financial systems, procedures, and controls.If we are unable to manage growth effectively, our business and results ofoperations will be harmed.

***Descriptions of our jewelryitems are not guarantees and may confuse, mislead, or disappoint our customers****.*

In aneffort to provide accurate descriptions of jewelry posted on our website, weprovide appraisal summaries from third-party gemological laboratories for someof our jewelry items. All other jewelry and watch descriptions are provided byour full-time Gemological Institute of America, or GIA, trained gemologists andseveral experienced product specialists. Nevertheless, there is a subjectivecomponent involved with respect to assessing the clarity, color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes or omissionsof 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 response to 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.

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***We may not be able to maintainour domain name uniqueness.***

OurInternet domain name is critical to our success. Under current domain nameregistration practices, no other entity can obtain an identical domain name,but can obtain a similar name 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 not registered our domain name with different suffixes norhave we registered our name in any other jurisdiction. As a result, thirdparties may use domain names that are similar to our domain name, which mayresult in confusion to potential customers and lost sales. We are aware thatother businesses have registered the name “bidz” with other suffixes and inother countries.

***We may be unable to protect orenforce our own intellectual property rights adequately, and we may becomesubject to intellectual property litigation****.*

Weregard the protection of our trademarks, copyrights, domain name, trade dress,and trade secrets as critical to our success. We rely on a combination ofcommon law as well as trademark, copyright, trade dress, and trade secret lawsto protect our intellectual property rights. We also have entered intoconfidentiality and invention assignment agreements with our employees andcontractors and nondisclosure agreements with parties with whom we conductbusiness in order to limit access to and disclosure of our proprietaryinformation. These contractual arrangements and other steps we have taken toprotect our intellectual property may not prevent misappropriation of ourintellectual property or deter independent development of similar intellectualproperty by others. 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 domainname protection is very expensive to maintain and may require litigation. Wemust protect our trademarks, copyrights, patents, and domain names in anincreasing number of jurisdictions, a process that is expensive and may not besuccessful in every location.

Thirdparties may from time to time claim that we have infringed their intellectualproperty relating to our business model or auction systems. We expect thatparticipants in our market increasingly will be subject to infringement claimsas the number of services and competitors in our industry segment grows. Anyclaim like this, whether meritorious or not, could be time-consuming, result incostly litigation, cause service upgrade delays, or require us to enter intoroyalty or license agreements. These royalty or license agreements may not beavailable on acceptable terms or at all. As a result, any such claim could harmour business.

***We may be unable to enforceprotection of our intellectual property rights under the laws of othercountries.***

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

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

We aresubject to increasing regulation at the federal, state, and internationallevels relating to privacy and the use of personal user information designed toprotect the privacy of personally identifiable information as well as toprotect against its misuse. These laws include the Federal Trade CommissionAct, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act,the Fair Credit Reporting Act, the Homeland Security Act, and relatedregulations. Several states have proposed legislation that would limit the useof personal information gathered online or require online services to establishprivacy policies. Moreover, proposed legislation in the United States andexisting laws in foreign countries require companies to establish procedures tonotify users of privacy and security policies, obtain consent from users forcollection and use of personal information, and/or provide users with theability to access, correct, and delete personal information stored bycompanies. These regulations and other laws, rules, and

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regulationsenacted in the future may adversely affect our ability to collect, disseminate,or share demographic and personal information about users and our ability toe-mail or telephone users, which could be costly and adversely affect ourmarketing efforts**.**

***We may be subject to a taxliability for past sales and our future sales may decrease if we are requiredto collect sales and use taxes on the products we sell****.*

Inaccordance with current industry practice and our interpretation of currentlaw, we do not currently collect sales or other taxes with respect to shipmentsof goods into states other than California. However, one or more states orforeign countries may seek to impose sales or other tax obligations on us inthe future. A successful assertion by one or more states or foreign countriesthat we should be collecting sales or other taxes on the sale of our productscould result in substantial tax liabilities for past and future sales,discourage customers from purchasing products from us, decrease our ability tocompete with traditional retailers, and otherwise substantially harm ourbusiness, financial condition, and results of operations.

***We may be subject to regulationsgoverning the conduct and liability of auctioneers, which could affect the wayin which we conduct our business or otherwise increase our cost of doingbusiness.***

Numerousstates and foreign jurisdictions, including California, where our headquartersis located, have regulations regarding how auctions may be conducted and theliability of auctioneers in conducting such auctions. No final legaldetermination has been made whether the California regulations apply to ourbusiness, and little precedent exists in this area. Several states and someforeign jurisdictions have attempted, and may attempt in the future, to imposeregulations that could affect us or our users, which could harm our business.

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

Severalstates have proposed, and California, Minnesota, Utah, and Vermont haverecently passed, legislation that would limit the uses of personal userinformation gathered online or offline. Many states already have such laws andcontinually consider strengthening them, especially against online services.However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in1970 to protect consumer privacy, includes a provision preempting conflictingstate laws on the sharing of information between corporate affiliates. Thepreemptive provisions of FCRA were permanently extended in 2002, therebyensuring that we are not subject to the laws of each individual state withrespect to matters within the scope of FCRA, but remain subject to the otherprovisions of FCRA.

TheFederal Trade Commission also has settled several proceedings against companiesregarding the manner in which personal information is collected from users andprovided to third parties. Specific statutes intended to protect user privacyhave been passed in many foreign jurisdictions. Compliance with these laws,given the tight integration of our systems across different countries and theneed to move data to facilitate transactions among our users, such as paymentcompanies and shipping companies, is both necessary and difficult. Failure tocomply could subject us to lawsuits, fines, criminal penalties, statutorydamages, adverse publicity, and other losses that could harm our business.Changes to existing laws or the passage of new laws intended to address theseissues could directly affect the way we do business or could create uncertaintyon the use of the Internet. This could reduce demand for our products, increasethe cost of our doing business, expose us to litigation costs, increase ourservice or delivery costs, or otherwise harm our business.

***New and existing regulationscould harm our business****.*

We aresubject to the same foreign and domestic laws as other companies conductingboth online and offline business. There are still relatively few lawsspecifically directed towards online business. However,

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due tothe increasing popularity and use of the Internet and online services, manylaws relating to the Internet are being debated at all levels of governmentaround the world, and it is possible that such laws and regulations will beadopted. These laws and regulations could cover issues such as user privacy,freedom of expression, pricing, fraud, content and quality of products andservices, taxation, advertising, intellectual property rights, and informationsecurity. Applicability to the Internet of existing laws governing issues, suchas property ownership, copyrights and other intellectual property issues,taxation, libel and defamation, obscenity, and personal privacy is uncertain.The vast majority of these laws was adopted prior to the advent of the Internetand related technologies and, as a result, do not contemplate or address theunique issues of the Internet and related technologies. Those laws that doreference the Internet, such as the U.S. Digital Millennium Copyright Act andthe European Union’s Directive on Distance Selling and Electronic Commerce,have only recently begun to be interpreted by the courts and implemented by theEuropean Union member states, so their applicability and scope remainuncertain. As our activities and the types of goods listed on our websiteexpand, regulatory agencies may claim that we or our users are subject tolicensure in their jurisdiction, either with respect to our business ingeneral, or in order to allow the sale of certain items, such as real estate,event tickets, boats, and automobiles.

In addition,because our products are available over the Internet in multiple states andbecause we sell merchandise to consumers residing in multiple states, we couldbe required to qualify to do business as a foreign corporation in each state inwhich our products are available. Our failure to qualify as a foreigncorporation in a jurisdiction in which we are required to do so could subjectus to penalties. Any new legislation or regulation, or the application of lawsor regulations from jurisdictions whose laws do not currently apply to ourbusiness could have a material adverse affect on our business.

***We depend to a very significantextent on David Zinberg, our Chairman of the Board, President, and ChiefExecutive Officer.***

Ourperformance depends substantially upon David Zinberg, our Chairman of theBoard, President, and Chief Executive Officer, who has extensive experiencewith the purchase and sale of jewelry, art, and collectibles throughnon-traditional channels, including through liquidation. We rely on Mr. Zinbergto make critical operational decisions on a daily basis, such as productofferings and purchases, and to make key strategic plans. We have an employmentagreement with Mr. Zinberg extending through 2009. The loss of theservices of Mr. Zinberg would adversely affect our business andoperations.

***Holders of common stock issuedby us in prior offerings are entitled 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$5.5 million and issued options to purchase common stock to approximately250 individuals at a weighted average exercise price of $4.45. After conductingthese sales 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 “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 wewere ordered to rescind all purchases of our common stock by stockholders notaffiliated with us, we could be required to make an aggregate payment to theholders of these shares of up to approximately $20.5 million, in additionto statutory interest of $10.3 million, as of June 30, 2006. We may alsobe liable for the $5.5 million of services rendered and property exchangedin consideration for the issuance of common stock, in addition to interest ofapproximately $2.6 million through June 30, 2006. In addition, we

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may beliable for the $1.3 million that we will offer to non-management optioneesas the optionees did not receive information regarding our potential liabilityfor these violations of federal and state securities laws. In addition,regulators could impose monetary fines or other sanctions as provided underthese laws.

Federalsecurities laws do not provide that a rescission offer will terminate apurchaser’s right to rescind a sale of stock that was not registered asrequired or was not otherwise exempt from such registration requirements. Ifany or all of the offerees reject a rescission offer, we may continue to beliable under federal and state securities laws for up to an amount equal to thevalue of all options and common stock granted or issued since the date ofissuance plus any statutory interest we may be required to pay.

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

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

***The concentration of our capitalstock ownership with our founder and executive officers and directors and theiraffiliates will limit your ability to influence corporate matters.***

Ourfounder, executive officers, and directors will together own approximately37.4% of our common stock as of June 30, 2006. As a result, they will havesignificant influence over our management and affairs and over all mattersrequiring stockholder approval, including the election of directors and theapproval of significant corporate transactions, such as a merger or a sale ofour company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporatematters. Because of this, we may take actions that some of our stockholders donot view as beneficial. As a result, the market price of our common stock couldbe adversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

***Our charter documents andDelaware law could make it more difficult for a third party to acquire us, anddiscourage a takeover****.*

DuringJune 2006, we reincorporated in Delaware, and the Delaware certificate ofincorporation and the Delaware General Corporation Law, or DGCL, containprovisions that may have the effect of making more difficult or delayingattempts by others to obtain control of our company, even when these attemptsmay be in the best interests of our stockholders. The Delaware certificate of incorporationalso authorizes our Board of Directors, without stockholder approval, to issueone or more series of preferred stock, which could have voting and conversionrights that adversely affect or dilute the voting power of the holders ofcommon stock. Delaware law also imposes conditions on certain businesscombination transactions with “interested stockholders.” The Delawarecertificate of incorporation divides our Board of Directors into three classes,with one class to stand for election each year for a three-year term after theinitial election. The classification of directors tends to discourage a thirdparty from initiating a proxy solicitation or otherwise attempting to obtaincontrol of our company and may maintain the incumbency of our Board of Directors,as this structure generally increases the difficulty of, or may delay,replacing a majority of directors. The Delaware bylaws authorize our Board ofDirectors to fill vacancies or newly created directorships. A majority of thedirectors then in office may elect a successor to fill any vacancies or newlycreated directorships.

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ITEM6.  EXHIBITS.
| 4.1    |   | Specimen of Common Stock Certificate(1)                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                   |
| 10.6   |   | 2006 Stock Award Plan (2)                                                                                              |
|   |   |                                                                                                                   |
| 10.7   |   | Client Service Agreement between Administaff  Companies II, L.P. and Bidz.com, Inc., dated January 2, 2006 (3)         |
|   |   |                                                                                                                   |
| 10.8   |   | Employment Agreement between Bidz.com, Inc. and  David Zinberg, dated June 6, 2006 (4)                                 |
|   |   |                                                                                                                   |
| 10.9   |   | Employment Agreement between Bidz.com, Inc. and  Lawrence Kong, dated June 6, 2006 (5)                                 |
|   |   |                                                                                                                   |
| 10.10  |   | Loan and Security Agreement by Bidz.com, Inc. and  LaSalle Retail Finance, dated July 12, 2006                         |
|   |   |                                                                                                                   |
| 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                            |

 

(1)    Incorporatedby reference to Exhibit 4.1 to the Registrant's Registration Statement on FormS-1 (File No. 333-132545) as filed with the Commission on or about June 14,2006.

(2)    Incorporatedby reference to Exhibit 10.3 to the Registrant's Registration Statement on FormS-1 (File No. 333-132545) as filed with the Commission on or about March 17,2006.

(3)    Incorporatedby reference to Exhibit 10.9 to the Registrant's Registration Statement on FormS-1 (File No. 333-132545) as filed with the Commission on or about May 5, 2006.

(4)    Incorporatedby reference to Exhibit 10.4 to the Registrant's Registration Statement on FormS-1 (File No. 333-132545) as filed with the Commission on or about June 9,2006.

(5)    Incorporatedby reference to Exhibit 10.5 to the Registrant's Registration Statement on FormS-1 (File No. 333-132545) as filed with the Commission on or about June 9,2006.

 

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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: August 14,  2006 |       |                                       |

 

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