**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                              |
| ** ** | ** ** | **For the  quarterly period ended March 31, 2008**                                                                                 |
| ** ** | ** ** | ** **                                                                                                                              |
| **o**      | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                          |
| ** ** | ** ** | ** **                                                                                                                              |
| ** ** | ** ** | **For the  transition  period                 to** |

 

**Commission file number 000-51257**

 

**BIDZ.COM, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address, including zip code, of principal executiveoffice)

 

**(310) 280-7373**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.     Yes x   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon accelerated filer. See definition of “accelerated filer and large filer” inRule 12b-2 of the Exchange Act). (Check one):

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

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). 

 

o  Yes    x  No

 

Number of sharesoutstanding of Registrant’s common stock, $0.001 par value, as of April 30,2008: 23,930,557

** **

** **

----

** **

**TABLE OF CONTENTS**

 
| PART I.  FINANCIAL INFORMATION |                                                                                                            |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------|
| Item 1.                        | Financial Statements                                                                                            | 3 |
|                                | Condensed  Balance Sheets as of December 31, 2007 and March 31, 2008  (unaudited)                     | 3 |
|                                | Condensed  Statements of Income for the three month periods ended March 31, 2007  and 2008 (unaudited)     | 4 |
|                                | Condensed  Statements of Cash Flows for the three month periods ended March 31,  2007 and 2008 (unaudited) | 5 |
|                                | Notes  to Financial Statements (unaudited)                                                                      | 6 |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 11 |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                     | 16 |
| Item 4.                             | Controls and  Procedures                                                                                        | 16 |
|                                |                                                                                                            |   |
| PART II. OTHER INFORMATION     | 17                                                                                                              |
| Item 1.                             | Legal Proceedings                                                                                               | 17 |
| Item  1A                            | Risk Factors                                                                                                    | 17 |
| Item 2.                             | Unregistered Sales and Purchases of Equity  Securities                                                          | 28 |
| Item  6.                            | Exhibits                                                                                                        | 29 |
|                                |                                                                                                            |   |
| SIGNATURES                          | 30                                                                                                              |

 

This quarterly reportincludes forward looking statements. All statements other than statements ofhistorical facts contained in this registration statement, including statementsregarding our future financial position, business strategy and plans andobjectives of management for future operations, are forward looking statements.The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, as they relate to us, are intended toidentify forward looking statements. We have based these forward-lookingstatements largely on our current expectations and projections about futureevents and financial trends that we believe may affect our financial condition,results of operations, business strategy and financial needs. These forwardlooking statements are subject to a number of risks, uncertainties andassumptions discussed throughout this filing.

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

** **

**Bidz.com, Inc.**

 

**Condensed Balance Sheets**

 

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

 
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** ** | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current  assets:                                                                                                                                                                  |       |                  |       |               |       |
| Cash                                                                                                                                                                              |       | $                     | 4,808      |               | $          | 6,593 |   |
| Accounts receivable                                                                                                                                                               |       | 2,275                 |       | 4,913              |       |
| Inventories, net of reserves of $1,075 and  $919 at December 31, 2007 and March 31, 2008, respectively                                                                  |       | 56,686                |       | 34,795             |       |
| Other current assets                                                                                                                                                              |       | 5,958                 |       | 4,040              |       |
| Total current assets                                                                                                                                                              |       | 69,727                |       | 50,341             |       |
| Property and equipment, net                                                                                                                                                       |       | 1,323                 |       | 1,364              |       |
| Intangible asset                                                                                                                                                                  |       | 161                   |       | 161                |       |
| Deposits                                                                                                                                                                          |       | 104                   |       | 104                |       |
| Total assets                                                                                                                                                                      |       | $                     | 71,315     |               | $          | 51,970 |   |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **         | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                    | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current  liabilities:                                                                                                                                                             |       |                  |       |               |       |
| Revolving credit line                                                                                                                                                             |       | $                     | 5,924      |               | $          | — |   |
| Accounts payable (includes related party  amounts of $5,050 and $856 at December 31, 2007 and March 31, 2008,  respectively)                                            |       | 26,400                |       | 12,010             |       |
| Accrued expenses                                                                                                                                                                  |       | 4,509                 |       | 5,676              |       |
| Deferred revenue                                                                                                                                                                  |       | 2,900                 |       | 1,635              |       |
| Total current liabilities                                                                                                                                                         |       | 39,733                |       | 19,321             |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| Commitments  and contingencies (note 10)                                                                                                                                          |       |                  |       |               |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| Stockholders’  equity:                                                                                                                                                       |       |                  |       |               |       |
| Preferred stock: par value $0.001;  authorized 4,000,000 shares; none issued and outstanding at December 31,  2007 and March 31, 2008, respectively                     |       | —                |       | —             |       |
| Common stock: par value $0.001; authorized  100,000,000 shares; issued and outstanding 24,556,354 and 24,418,584 at  December 31, 2007 and March 31, 2008, respectively |       | 25                    |       | 25                 |       |
| Additional paid in capital                                                                                                                                                        |       | 35,875                |       | 34,968             |       |
| Shares held in treasury, at cost; 100,000  and 433,827 shares at December 31, 2007 and March 31, 2008,  respectively                                                    |       | (886                  | )          | (3,517             | )          |
| Retained earnings (Accumulated deficit)                                                                                                                                           |       | (3,432                | )          | 1,173              |       |
| Total stockholders’ equity                                                                                                                                                   |       | 31,582                |       | 32,649             |       |
|                                                                                                                                                                              |       |                  |       |               |       |
| ** **                                                                                                                                                                        |       | $                     | 71,315     |               | $          | 51,970 |   |

 

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

 

3

----

 

 

**Bidz.com, Inc.**

 

**Condensed Statements of Income (Unaudited)**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                              | ** ** | **2008** | ** ** |
|                                                             |       |                                  |       |   |   |
| Net revenue:                                                     |       |                                  |       |   |   |
| Merchandise sales                                                | ** ** | **$**                                 | 44,639     |   | **$** | 61,811 | ** ** |
| Other revenue                                                    |       | 85                                    |       | 118 |   |
|                                                             |       | 44,724                                |       | 61,929 |   |
| Cost of  revenue                                                 |       | 33,596                                |       | 43,893 |   |
| Gross profit                                                     |       | 11,128                                |       | 18,036 |   |
| Operating  expenses:                                             |       |                                  |       |   |   |
| General and administrative                                       |       | 4,843                                 |       | 5,907 |   |
| Sales and marketing                                              |       | 2,600                                 |       | 4,199 |   |
| Depreciation and amortization                                    |       | 74                                    |       | 162 |   |
| Total  operating expenses                                        |       | 7,517                                 |       | 10,268 |   |
| Income from  operations                                          |       | 3,611                                 |       | 7,768 |   |
| Other income  - interest income                                  |       | 1                                     |       | 13 |   |
| Other  expense - interest (expense)                              |       | (82                                   | )          | (11 | ) |
| Income  before income tax expense                                |       | 3,530                                 |       | 7,770 |   |
| Income tax  expense                                              |       | 95                                    |       | 3,165 |   |
| Net income                                                       | ** ** | **$**                                 | 3,435      | ** ** | **$** | 4,605 | ** ** |
|                                                             |       |                                  |       |   |   |
| Net income  per share available to common shareholders - basic   | ** ** | **$**                                 | 0.15       | ** ** | **$** | 0.19 | ** ** |
| Net income  per share available to common shareholders - diluted | ** ** | **$**                                 | 0.14       | ** ** | **$** | 0.18 | ** ** |
| Weighted  average number of shares outstanding - basic           |       | 23,245,987                            |       | 24,538,263 |   |
| Weighted  average number of shares outstanding - diluted         |       | 23,724,657                            |       | 25,828,507 |   |

 

Theaccompanying notes form an integral part of these condensed financialstatements.

 

4

----

 

**Bidz.com, Inc.**

 

**CondensedStatements of Cash Flows (Unaudited)**

 

*(In thousands)*

 
| ** **                                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                              | ** ** | **2008** | ** ** |
|                                                                                         |       |                                  |       |   |   |
| **Cash  flows provided by (used for) operating activities:**                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                     | 3,435      |   | $ | 4,605 |   |
|                                                                                         |       |                                  |       |   |   |
| **Adjustments to reconcile net income to net  cash  provided by operating activities:** | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                                |       | 74                                    |       | 162 |   |
| Change in inventory reserve                                                                  |       | 82                                    |       | (156 | ) |
| Stock-based compensation                                                                     |       | 144                                   |       | 267 |   |
| **Changes in assets and liabilities:**                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **(Increase) decrease in assets:**                                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Accounts receivable                                                                          |       | 535                                   |       | (2,638 | ) |
| Inventories                                                                                  |       | 1,508                                 |       | 22,047 |   |
| Other current assets                                                                         |       | 254                                   |       | 1,918 |   |
| **Increase (decrease) in liabilities:**                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Accounts payable                                                                             |       | (7,537                                | )          | (14,390 | ) |
| Accrued expenses                                                                             |       | (209                                  | )          | 1,167 |   |
| Deferred revenue                                                                             |       | (1,965                                | )          | (1,265 | ) |
| Net cash provided by (used for) operating  activities                                        |       | (3,679                                | )          | 11,717 |   |
|                                                                                         |       |                                  |       |   |   |
| **Cash  flows (used for) investing activities:**                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Capital expenditures                                                                         |       | (227                                  | )          | (203 | ) |
| **Cash  flows provided by (used for) financing activities:**                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Revolving credit line                                                                        |       | 3,721                                 |       | (5,924 | ) |
| Repurchase of common stock                                                                   |       | —                                |       | (3,808 | ) |
| Proceeds from exercise of stock options                                                      |       | —                                |       | 3 |   |
| Net cash provided by (used for) financing  activities                                        |       | 3,721                                 |       | (9,729 | ) |
| ** **                                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Net  (decrease) increase in cash**                                                         |       | (185                                  | )          | 1,785 |   |
| **Cash,  beginning of period**                                                               |       | 359                                   |       | 4,808 |   |
| **Cash,  end of period**                                                                     |       | $                                     | 174        |   | $ | 6,593 |   |
|                                                                                         |       |                                  |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Interest paid                                                                                |       | $                                     | 82         |   | $ | 11 |   |
|                                                                                         |       |                                  |       |   |   |
| Income taxes paid                                                                            |       | $                                     | 10         |   | $ | 1,332 |   |

 

Theaccompanying notes form an integral part of these condensed financialstatements.

 

5

----

 

**BIDZ.COM, INC.NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2007AND 2008(UNAUDITED)**

 

**1.****                                      Basis ofPresentation and Nature of Business Operations**

 

**Basisof Presentation**

 

Theaccompanying condensed balance sheet as of December 31, 2007, which hasbeen derived from audited financial statements, and the unaudited financialstatements included herein have been prepared in accordance with theinstructions to Form 10-Q and do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.  These financialstatements and related notes should be read in conjunction with the Company’saudited financial statements for the fiscal year ended December 31, 2007 filedin the Annual Report on Form 10-K by the Company on March 12, 2008with the Securities and Exchange Commission. In the opinion of management,these financial statements reflect all adjustments which are of a normalrecurring nature and which are necessary to present fairly the financialposition of Bidz.com, Inc. as of March 31, 2008 and the results ofoperations for the three month periods ended March 31, 2007 and 2008 andthe cash flows for the three month periods ended March 31, 2007 and2008.  The results of operations for the three months ended  March 31, 2008 are not necessarilyindicative of the results which may be expected for the entire fiscal year.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from thoseestimates. We have made estimates for return and allowance reserve, inventory reserve,inventory vendor marketing reserves, deferred tax assets, accrued expenses,stock price volatility, stock option forfeiture rate, and expected stock optionterm.

 

**Natureof Business Operations**

 

Bidz.com, Inc. wasfounded in November of 1998 as a California corporation with its principallocation of business in Los Angeles, California. We operate a website locatedat www.bidz.com for the purpose of selling merchandise, utilizing our uniquesales auction platform.

 

Wesell our products throughout the United States and have expanded the reach ofour customer base to Europe and Asia. Revenue generated from the United Statesaccounted for approximately 79.5% and 76.4% of net revenue for the three monthsended March 31, 2007 and 2008, respectively.

 

**RecentDevelopments**

 

In April 2008, weannounced the launch of our online retail store, Buyz.com, which offersmerchandise at a fixed price, to complement the Bidz.com online auctions.

 

In February 2008, Bank of America (LaSalle Bank) approved anincrease in our revolving credit line to $25 million from $15 million.

 

In February 2008, our Board ofDirectors authorized an increase in the open market stock buyback program ofits outstanding common stock to $20 million from $5 million. The stock buybackwill be at prices deemed appropriate by management over a 24 month period. Asof April 22, 2008, we have purchased a cumulative total of 817,097shares for $6.8 million, and 626,297 shares have been retired which reduced ournumber of shares outstanding.

** **

**Recent Accounting Pronouncements**

 

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

 

6

----

 

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

 

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

 

In accordance with SFAS No. 128,“Earnings Per Share,” the basic earnings per common share is calculated bydividing net income available to common stockholders less preferred dividendsby the weighted average number of common shares outstanding. Diluted earningsper common share is computed similarly to basic earnings per common share,except that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if potential common shares hadbeen issued and if the additional common shares were not anti-dilutive.

 

The dilutive effect ofoutstanding stock options is reflected in diluted earnings per share byapplication of the treasury stock method excluding the impact of pro forma deferred taxbenefits for the three month period ended March 31, 2007 andincluding the impact of pro forma deferred tax benefits for the three monthperiod ending March 31, 2008.  The following table sets forth thecomputation of basic and diluted net income per share.

 

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

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                        | ** ** | **2008** | ** ** |
|                                     |       |                                            |       |   |   |
| Basic and  diluted net income per share: |       |                                            |       |   |   |
| Numerator:                               |       |                                            |       |   |   |
| Net income                               |       | $                                               | 3,435      |   | $ | 4,605 |   |
| Denominator:                             |       |                                            |       |   |   |
| Weighted common shares outstanding       |       | 23,245,987                                      |       | 24,538,263 |   |
| Effect of dilutive securities            |       | 478,670                                         |       | 1,290,244 |   |
| Denominator for diluted calculation      |       | 23,724,657                                      |       | 25,828,507 |   |
| Net income per  share, basic             |       | $                                               | 0.15       |   | $ | 0.19 |   |
| Net income  per share, diluted           |       | $                                               | 0.14       |   | $ | 0.18 |   |

 

**3**.             **Inventories**

 

Inventories, which are pledged as collateral for ourrevolving line of credit, consist of the following *(Inthousands)*:

 
| ** **                               | ** ** | **December 31, 2007** | ** ** | **March 31, 2008 (unaudited)** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|
|                                     |       |                       |       |                                |       |
| Fine  jewelry, watches and other         |       | $                          | 53,054     |                                | $          | 33,946 |   |
| Loose  diamonds and semi-precious stones |       | 4,392                      |       | 525                                 |       |
| Prepaid  inventory                       |       | 94                         |       | 101                                 |       |
| Inventory  with manufacturing vendors    |       | 221                        |       | 1,142                               |       |
| Product  inventories                     |       | 57,761                     |       | 35,714                              |       |
| Less: Inventory  reserve                 |       | (1,075                     | )          | (919                                | )          |
|                                     |       | $                          | 56,686     |                                | $          | 34,795 |   |

 

**4.             RevolvingCredit Line**

 

In July 2006, we entered into arevolving credit line agreement with LaSalle Bank, ABN AMRO, to provide workingcapital financing secured by inventories and tangible assets. The agreementallowed for us to initially draw on a line of credit up to $10 million. Duringthe three month period ended March 31, 2008 we successfully increased thelimit to $25 million. The revolving credit line agreement expires in July of2010. As of March 31, 2008, there was no outstandingbalance  under the revolving credit line.Under the terms and conditions of the revolving credit line agreement, theCompany is subject to certain restrictive covenants for which it is incompliance at March 31, 2008.

 

7

----

 

**5.****             Stock Based Compensation**

 

In December 2004,the FASB issued SFAS No. 123R, “Share Based payment: An Amendment of FASBStatements No. 123 and 95.” This statement requires that we recognize inour financial 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 SFAS 123R,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 income all share-based payments to employees, including grants of stockoptions based on their fair values.

 

TheCompany adopted SFAS 123R using the modified prospective method which requiresthe application of the accounting standard as of January 1, 2006. TheCompany’s financial statements as of and for the three months ended March 31,2007 and 2008, respectively, reflect the impact of adopting SFAS 123R.

 

UnderSFAS 123R stock-based compensation expense recognized during the period isbased on the value of the portion of stock-based payment awards that isultimately expected to vest. Compensation expense for the stock-based paymentawards granted subsequent to December 31, 2005, will be based on the grantdate fair value estimated in accordance with SFAS 123R. As stock-based compensationexpense recognized in the statements of income is based on awards ultimatelyexpected to vest, it will be reduced for estimated forfeitures. SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

 

UnderSFAS 123R, we will continue to use the Black-Scholes model to estimate the fairvalue of options. Our assessment of the estimated compensation charges will beaffected by our stock price as well as assumption regarding a number ofsubjective variables and the related tax impact. These variables include, butare not limited to, our stock price volatility, forfeiture rates and employeestock option exercise behaviors (or expected term).

 

**StockAwards**

 

We awarded and issued asdirector compensation a total of 18,750 shares of common stock for the threemonths ended March 31, 2007. Two of our non-employee directors, Man JitSingh and Peter Hanelt, received stock awards of 8,750 and 10,000 shares, respectively.The fair market value of the shares granted was $6.00 per share, which wasdetermined based on a combination of factors that included recent sharetransactions between shareholders and an independent valuation of the Company.No stock awards were granted in the three months ended March 31, 2008. Thestock-based expense from stock award grants for the three months ended March 31,2007 and 2008 totaled $112,000 and $0, respectively.

 

**RestrictedShares**

 

The restricted stock awards areexpensed pro rata over the vesting period based upon the market value of theawards at the time of grant. Stock-based compensation from restricted stockawards totaled $0 and  $88,000 for thethree months  ended March 31, 2007and 2008, respectively. The unamortized stock-based expense for restrictedstock awards was $1.1 million at  March 31, 2008.

 

A summary of all restricted stockactivity during the three months ended March 31, 2008 is as follows:

 
| Restricted  shares outstanding, December 31, 2007 |   | 126,000 |   |
|--------------------------------------------------------|--------|---------|--------|
| Shares  granted                                        |   | 0       |   |
| Shares  vested                                         |   | (27,500 | )      |
| Shares  forfeited                                      |   | 0       |   |
| Restricted  shares outstanding, March 31, 2008    |   | 98,500  |   |

 

8

----

 

**StockOptions**

 

Weadopted our 2001 Stock Option Plan, our 2002 Special Stock Option Plan and our2006 Award Plan (collectively, the ‘‘Plans’’), in January 2001, January 2002,and March 2006, respectively. The 2006 Plan provides for the granting ofawards in the form of incentive stock options, nonqualified stock options,stock appreciation rights, shares of restricted common stock, bonus stock inlieu of obligations, or other stock-based awards to employees, directors, andindependent contractors who provide valuable services to our company.  Thevesting requirements, performance thresholds and other terms and conditions ofoptions granted under the Plans will be determined by our CompensationCommittee and Board of Directors.

 

The following is asummary of stock option activity as of March 31, 2008, and changes duringthe three months ended March 31, 2008.

 
| **Options**                                    | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price ($)** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value ($)** | ** ** |
|------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at December 31, 2007          |       | 8,131,300  |       | 6.20                                        |       | 3.3                                                      |       | 22,983,000                          |       |
| Granted                                        |       | —     |       | —                                      |       |                                                     |       |                                |       |
| Exercised                                      |       | 500        |       | 6.00                                        |       |                                                     |       |                                |       |
| Forfeited                                      |       | —     |       | —                                      |       |                                                     |       |                                |       |
| Expired                                        |       | —     |       | —                                      |       |                                                     |       |                                |       |
| Outstanding at March 31, 2008             |       | 8,130,800  |       | 6.20                                        |       | 3.1                                                      |       | 18,637,420                          |       |
| Vested and Exercisable at March 31,  2008 |       | 7,167,050  |       | 5.93                                        |       | 3.0                                                      |       | 17,732,170                          |       |

 

The following table summarizes information about stock optionsoutstanding and exercisable at March 31, 2008.

 
| ** **          | ** ** | ** **         | ** ** | **Options Outstanding and Exercisable** | ** ** | ** **                   | ** ** | ** **          | ** ** |
|---------------------|------------|--------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|---------------------|------------|
| ** **          | ** ** | ** **         | ** ** | **as of March 31, 2008**           | ** ** | ** **                   | ** ** | ** **          | ** ** |
| ** **          | ** ** | ** **         | ** ** | **Options Outstanding**                           | ** ** | **Options Exercisable** | ** ** |
| ** **          | ** ** | ** **         | ** ** | **Weighted**                                           | ** ** | **Weighted**                 | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **          | ** ** | **Number**         | ** ** | **Average**                                            | ** ** | **Average**                  | ** ** | **Number**          | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Outstanding**    | ** ** | **Remaining**                                          | ** ** | **Exercise**                 | ** ** | **Exercisable**     | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **As of 03/31/08** | ** ** | **Contractual**                                        | ** ** | **Price**                    | ** ** | **As of 03/31/078** | ** ** | **Exercise Price** | ** ** |
| $4.01               |       | $5.00              |       | 395,000                                                |       | 0.68                         |       | $                   | 4.50       |   | 395,000 |   | $ | 4.50 |   |
| $5.01               |       | $6.00              |       | 6,735,800                                              |       | 3.08                         |       | $                   | 6.00       |   | 6,649,550 |   | $ | 6.00 |   |
| $6.01               |       | $7.00              |       | 490,000                                                |       | 3.94                         |       | $                   | 6.50       |   | 122,500 |   | $ | 6.50 |   |
| $9.01               |       | $10.00             |       | 510,000                                                |       | 4.21                         |       | $                   | 9.90       |   | — |   | — |   |
| $4.01               |       | $10.00             |       | 8,130,800                                              |       | 3.08                         |       | $                   | 6.20       |   | 7,167,050 |   | $ | 5.93 |   |

 

Thestock-based compensation expense from stock options for the three months ended March 31,2007 and  2008 totaled $32,000 and$179,000, respectively. The unamortized stock-based compensation expense fromstock options as of March 31, 2008 is $2.2 million.

 

No stock options were granted in the three months ended March 31,2008 and the weighted-average grant date fair value of options granted duringthe three months ended March 31, 2007 was $2.00. The fair value of theseoptions was calculated using a Black-Scholes option pricing model using thefollowing assumptions: (1) risk-free interest rates of 4.33%, (2) anexpected life of five years, (3) expected volatility of 33%, (4) expectedforfeitures of 0%, and (5) a dividend yield of 0%. Because there was nopublic market for our common stock and in accordance with SFAS 123R, we usedthe calculated method to determine volatility for the three months ended March 31,2007.

 

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

 

Netrevenue by geographic area is presented based upon the country of destination.No foreign country represented 10% or more of net revenue for three-monthperiods ended March 31, 2007 and 2008. Net revenue by geographic area wasas follows:

 

9

----

 

*(In thousands, except percentage data)*

 
| ** **          | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|------------------------|------------|
| ** **          | ** ** | **March 31,**     | ** ** |
| ** **          | ** ** | **2007**               | ** ** | **2008** | ** ** |
| **Geographic area** | ** ** | **Amount**             | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| United  States      |       | $                      | 35,574     |   | 79.5 | % | $ | 47,325 |   | 76.4 | % |
| International       |       | 9,150                  |       | 20.5 | % | 14,604 |   | 23.6 | % |
|                |       |                   |       |   |   |   |   |   |   |
| Total               |       | $                      | 44,724     |   | 100.0 | % | $ | 61,929 |   | 100.0 | % |

 

**7.****                                      Concentrations**

 

Purchases from two vendors amounted to $5.6 million and $2.5 millionrepresenting 21.5% and 13.2% of the total purchases during the three monthsended March 31, 2007 and 2008, respectively. Outstanding accounts payableto the two vendors totaled $1.8 million and $1.4 million****asof December 31, 2007 and March 31, 2008, respectively. Loss ofeither of these vendors is not expected to have a significant negative impacton the operations of the Company.

 

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

 

During thethree months ended March 31, 2007 and 2008, we purchased approximately 7.0%and 3.2%, respectively, of our merchandise from LA Jewelers, Inc., where one of its managers is a stockholderwho beneficially owns 1,228,000 shares of our common stock as of December 31,2007. For the three months ended March 31, 2008 we earned approximately$482,000 from LA Jewelers relating to co-op marketing contributions and$127,000 was unamortized as of March 31, 2008.

 

In May, 2007we entered into an understanding with LA Jewelers whereby they will guaranteethat we will earn a certain minimum gross profit margin on their merchandise.This agreement provides that in the event of a gross profit margin shortfall wewill be compensated for the difference between our actual gross profit marginand the guaranteed minimum gross profit margin. For the three months ended March 31,2008, we recognized $141,000 under this agreement, which was outstanding andaccrued as of March 31, 2008.

 

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

 

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

 

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

 

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

 

**10.          Contingencies**

 

We are subject to various legal proceedings and claims that arise inthe ordinary course of business.  Although the Company believes it hasdefenses to the allegations and intends to pursue them vigorously, managementdoes not currently have sufficient information to assess the validity of theclaims or the amount of potential damages.  Company management currentlybelieves, however, that resolution of such legal matters will not have a materialadverse impact on the Company’s financial position, results of operations orcash flows.

 

10

----

* *

*Cartierv. Bidz.com*

 

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

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion should be read in conjunction with the financialstatements and related notes which appear elsewhere in this form. Thisdiscussion contains forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of various factors, including various risks and uncertainties discussedbelow and throughout this report.*

 

**Overview**

 

We are a leading onlineretailer of jewelry, featuring a live auction format. We have established ourretail brand in the online marketplace by offering high-quality merchandise, aunique user-friendly shopping experience, and the opportunity for buyers to achievesignificant cost savings versus traditional retail channels. A key to oursuccess has been our ability to efficiently and cost effectively sourcecloseout and regular jewelry merchandise, and rapidly respond to changingconsumer demands for certain jewelry. We offer our products through acontinuous live format, featuring a $1 minimum opening bid, and a unique15-second auction extension period that allows our auctions to continue untilall bids are received. The majority of our auctions are short-term, oftenlasting less than one hour, providing immediate gratification to our customersand encouraging frequent visits and active viewing of our website. Our productinventory includes gold, platinum, and silver jewelry set with diamonds,rubies, emeralds, sapphires, and other precious and semi-precious stones; andwatches. We believe we are the second largest online retailer of jewelry basedon revenue and the largest online jewelry auction site based on web traffic.

 

We sell to consumerslooking for reliable bargains on jewelry. Because we purchase and retain all ofour jewelry inventory onsite, we can provide our customers with timely serviceand delivery of their purchases. In addition, each item is inspected by one ofour trained product specialists prior to its placement on our website, whichassures our customers of the quality of their purchases of our products. Weoperate in a highly competitive market with low barriers to entry. By sellingour own merchandise, we provide a buying environment in which we minimizefraudulent activity and questionable product quality frequently associated withpurchase transactions from third-party sellers. We also provide a 15-day returnpolicy on all merchandise. We believe that many of our customers resellmerchandise that they purchase from our auctions on eBay, at local auctions,and through other retail channels. Our auctions are conducted 24 hours aday, seven days a week. We also offer daily telephone customer support, 24-houronline live-help and e-mail customer support.

 

Inline with our growth plans, we have completed a major upgrade of our auctionplatform at the end of 2007. The new auction LiveBid system supports a broadrange of leading browser software including Microsoft Internet Explorer,FireFox and Safari. The new system touts high availability, faster end-userresponse time and greater scalability among the key features delivered in thisrelease. We have leveraged this new software solution to launch additional sitefeatures and the new online retail store. We plan on launching more sitefeatures and foreign language versions of our website.

 

**CriticalAccounting Policies**

 

The preparation of ourfinancial statements requires us to make certain estimates and judgments thataffect amounts reported and disclosed in our financial statements and relatednotes. We base our estimates on historical experience and on other assumptionsthat we believe to be reasonable under the circumstances. Actual results maydiffer from these estimates. The following are the critical accounting policiesthat we believe require significant estimation and judgment.

 

*RevenueRecognition*

 

We derive our revenuefrom four sources: merchandise sales, which includes wholesale sales, shippingrevenue, auction transaction fee revenue and other revenue. In accordance withSAB 104, we recognize revenue from all four sources when the following revenuerecognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped or the service has

 

11

----

 

been rendered and thecustomer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured.

 

We recognize merchandisesales upon shipments made to consumers that are fulfilled from our warehouse.We require payment before we ship and the payment is generally made online bycredit card or other electronic payment methods. We record amounts received orbilled prior to shipment of goods to customers as deferred revenue. We reducegross sales by returns and chargebacks from customers.

 

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

 

We include auction transactionfee revenue in net revenue. The 3% auction transaction fee is applied to allmerchandise sales, including shipping and handling, but not to sales tax.

 

Other revenue consists ofcommissions revenue. We derive commission revenue from sales of CertifiedMerchant merchandise that is owned by third parties and recognize only thecommission portion of the price our customers pay for the purchased productsbecause we are acting as an agent in such transactions.

 

We present sales tax liability on a net basis in accordance with EmergingIssues Task Force (“EITF”) Issue No. 06-03.  Sales are not grossed upwith the attendant taxes and deducted as a separate line item. The EITF becomeseffective for interim and annual reporting periods beginning after December 15,2006.

 

*Cost of Revenue*

 

Costof revenue includes product costs, inbound and outbound shipping charges,packaging and shipping supplies, insurance on shipments, product repair andservice costs, and credit card and other electronic payment fees, and isrecorded in the same period in which related revenue has been recorded. Thecost of revenue is reduced by amortized co-op marketing contributions from ourvendors.

 

Outboundshipping costs on merchandise sales totaled $2.3 million and $3.1 millionin the three months ended March 31, 2007 and 2008, respectively.

 

*Returnsand Allowances Reserve*

 

We estimate potentialfuture product returns and chargebacks  related  to current period revenue. We analyzehistorical returns and changes in customer demand and acceptance of ourproducts when evaluating the adequacy of the sales returns reserve and otherallowances in any accounting period. If actual returns and chargebacks aregreater than our estimates, we will record additional returns and allowances inaddition to our estimates, which will result in lower net revenue recordedduring that period. Reserves for returns and chargebacks are included inaccrued liabilities.

 

*Inventories*

 

Inventories consistmainly of merchandise purchased for resale and are stated at the lower offirst-in, first-out (FIFO) cost or market.

 

*InventoryReserve*

 

Theunique nature of our business model where customers set the prices they arewilling to pay may result in items selling below our cost, and we providereserves against our inventory equal to the difference between the averageselling price and the cost of inventory if the average selling price is lowerthan the cost of inventory held for one year or less. We provide reserves forobsolescence and slow moving inventory at 100% of the cost of inventory heldfor more than one year.

 

*InventoryCo-op Marketing Contributions*

 

# In the third quarter of2007, we started to bill and collect from our inventory vendors co-op marketingcontributions as an incentive for us to market and sell their merchandise onthe Bidz website. In accordance with EITF 02-16:  Accounting by a Customer(including a Reseller) for Certain Consideration Received from a Vendor, theco-op marketing contributions that cannot be identified specifically

 

12

----

 

# to benefit the vendorsare a reduction in cost of sales and will result in an increase in grossprofit. We cannot specifically identify the benefits to each vendor,consequently, co-op marketing contributions are charged against inventory as areduction of costs and amortized as a reduction of cost of sales. For the threemonths ended March 31,  2008, wehave recognized $3.6 million of co-op marketing contributions. Approximately$3.3 million remain unamortized and is included as an offset to inventory at March 31,2008. Receivable from vendors for co-op marketing contributions, less allowancefor doubtful accounts, is included in other current assets and amounted to $1.5million at March 31, 2008.

#  

*Stock-BasedCompensation*

 

On January 1,2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS123R’’) requiring that share-based payment transactions be recognized in thefinancial statements based on the fair value of the equity or liabilityinstrument issued. We use the Black-Scholes option pricing model to estimatethe value of our options in implementing SFAS 123R and the calculated method todetermine expected volatility. Under SFAS 123R stock-based compensation expenserecognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Accordingly,stock-based compensation expense recognized in the statements of income will bereduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

 

*Descriptionof Our Revenue, Costs, and Expenses*

 

The following tablepresents our historical results of operations for the periods indicated as apercentage of net revenue.

 
| ** **                           | ** ** | **Three Months Ended   March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                               | ** ** | **2008** | ** ** |
|                                 |       |                                                   |       |   |   |
| Net  revenue                         |       | 100.0                                                  | %          | 100.0 | % |
| Gross  profit                        |       | 24.9                                                   |       | 29.1 |   |
| Operating  expenses:                 |       |                                                   |       |   |   |
| General & administrative    |       | 10.8                                                   |       | 9.5 |   |
| Sales & marketing           |       | 5.8                                                    |       | 6.8 |   |
| Depreciation & amortization |       | 0.2                                                    |       | 0.3 |   |
| Total  operating expenses            |       | 16.8                                                   |       | 16.6 |   |
| Income  from operations              |       | 8.1                                                    |       | 12.5 |   |
| Interest  income                     |       | 0.0                                                    |       | 0.0 |   |
| Interest  expense                    |       | 0.2                                                    |       | 0.0 |   |
| Income  tax expense                  |       | 0.2                                                    |       | 5.1 |   |
| Net  income                          |       | 7.7                                                    | %          | 7.4 | % |

 

*NetRevenue*

 

Substantially all of ournet revenue consists of jewelry sold via the Internet, net of returns. We alsogenerate net revenue from shipping and handling, auction transaction fee,wholesale merchandise sales and other revenue. We have commenced making wholesalemerchandise sales in the first quarter of 2008.

 

The following tablepresents our sources of revenue for the periods indicated as a percentage ofnet revenue.

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
| ** **                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Merchandise sales            |       | 85.9                                             | %          | 78.2 | % |
| Wholesale merchandise sales  |       | —                                           |       | 6.8 |   |
| Shipping & handling |       | 10.8                                             |       | 11.8 |   |
| Transaction fees             |       | 3.1                                              |       | 3.0 |   |
| Commisions                   |       | 0.2                                              |       | 0.2 |   |
| Total  net revenue           |       | 100.0                                            | %          | 100.0 | % |

 

13

----

 

*GrossProfit*

 

Our gross profit consists of net revenue less the costof revenue. Our cost of revenue consists of the cost of merchandise sold tocustomers, amortized co-op marketing contributions from vendors, inbound andoutbound shipping costs, packaging and shipping supplies, insurance on shipments,product repair and service costs, and credit card and other transaction feesassociated with payments.

 

*Generaland Administrative Expenses*

 

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

 

*Salesand Marketing Expenses*

 

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

 

**Comparisonof Three Months Ended March 31, 2007 to Three Months Ended March 31,2008**

 

Net income in the threemonths ended March 31, 2008 was $4.6 million, or $0.19 and $0.18 per basicand diluted share, respectively, and net income in the three months ended March 31,2007 was $3.4 million, or $0.15 and $0.14 per basic and diluted share,respectively. Net revenue increased by 38.5% in the three months ended March 31,2008 compared to the three months ended March 31, 2007 while the netincome increased by 34.1% over the same period. The increase in net income wasdue primarily to the increase in revenue and gross profit margins as apercentage of revenue offset by a higher income tax expense.

 

*NetRevenue*

 

Net revenue increased38.5% to $61.9 million in the three months ended March 31, 2008 from$44.7 million in the three months ended March 31, 2007. Thisincrease in net revenue was due primarily to the growth in demand for ourjewelry products and the increase in average sales amount per order. We havealso commenced selling merchandise wholesale in the first quarter of 2008 whichaccounted for $4.2 million in revenue for the three months ended March 31,2008.

 

Weanticipate that net revenue will be lower for the second and third quarters of2008 compared to the first quarter ended March 31, 2008 as the second andthird quarters are seasonally weak periods for jewelry sales.

 

*GrossProfit*

 

Gross profit increased62.1% to $18.0 million in the three months ended March 31, 2008 from $11.1million in the three months ended March 31, 2007. The increase in grossprofit resulted from the increase in sales revenue which rose by 38.5% for thethree months ended March 31, 2008 compared to the three months ended March 31,2007 and the increase in gross profit margin to 29.1% in three months ended March 31,2008 from 24.9% in the three months ended March 31, 2007.

 

Theincrease in gross profit as a percentage of net revenue resulted primarily frommore effective purchasing and co-op marketing contributions from vendors thatcommenced in July 2007. Gross profit margins benefited from the amortizedco-op marketing contributions that reduced our cost of sales by $3.6 million or5.9% of net revenue in the three months ended March 31, 2008.

 

*Generaland Administrative Expenses*

 

General andadministrative expenses increased 22.0% to $5.9 million in the three monthsended March 31, 2008 from $4.8 million in three months ended March 31,2007. The increase in general and administrative expenses was due to ouroverall growth and includes increases in payroll and payroll related expensesand administrative expenses. General and administrative expenses as a percentage

 

14

----

 

of net revenue decreasedto 9.5% in the three months ended March 31, 2008 from 10.8% in the threemonths ended March 31, 2007.

 

*Sales &Marketing Expenses*

 

Sales and marketingexpenses increased 61.5% to $4.2 million in the three months ended March 31,2008 from $2.6 million in the three months ended March 31, 2007. Sales andmarketing expenses as a percentage of net revenue increased to 6.8% in thethree months ended March 31, 2008 from 5.8% in the three months ended March 31,2007.

 

*IncomeTax Expense*

 

Income tax expenseincreased to $3.2 million in the three months ended March 31, 2008 from$95,000 in the three months ended March 31, 2007 and the effective taxrate increased to 40.7% from 2.7%. During 2007, we utilized all of our losscarryforwards and therefore became fully taxable in 2008.

 

**AdditionalQuarterly Data**

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                         | ** ** | **2008** | ** ** |
|                                   |       |                                             |       |   |   |
| Average  gross selling price per order |       | $                                                | 154        |   | $ | 182 |   |
| Average  orders per day                |       | 3,317                                            |       | 3,734 |   |
| Average  items sold per day            |       | 9,482                                            |       | 12,186 |   |
| Acquisition  costs per new buyer       |       | $                                                | 45         |   | $ | 50 |   |
| Number  of new buyers                  |       | 58,056                                           |       | 83,179 |   |

 

Wholesale merchandisesales is excluded in computing additional quarterly data.

 

**Liquidityand Capital Resources**

 

The significantcomponents of our working capital are inventory and liquid assets such as cashand accounts receivable, reduced by revolving credit line, accounts payable,accrued expenses and deferred revenue. Our business model contains beneficialworking capital characteristics: while we collect cash from sales to customerswithin several business days of the related sale, we typically have extendedpayment terms with our suppliers.

 

As of March 31,2008, we had a working capital surplus of $31.0 million and have no long-termdebt obligations. Net cash provided by operating activities was $11.7 millionin the three months ended March 31, 2008 compared to net cash used of $3.7million in the three months ended  March 31,2007. Cash in the three months ended March 31, 2008 was primarily affectedby changes in net income, accounts receivable, inventories and accounts payableand in the three months ended March 31, 2007 was primarily affected bychanges in net income, inventories, accounts payable and deferred revenue.

 

We recorded net income of$4.6 million in the three months ended  March 31,2008 compared to $3.4 million in the three months ended  March 31, 2007. Cash flows from netincome were used to meet our working capital requirements. In the three monthsended March 31, 2008, accounts receivable increased by $2.6 million,inventories decreased by $22.0 million and accounts payable decreased by $14.4million. In the three months ended  March 31,2007, inventories decreased by $1.5 million, accounts payable decreased by $7.5million and deferred revenue decreased by $2.0 million. Inventories andaccounts payable is affected by our revenue growth and changes in our inventorystrategy. Our inventory strategy is influenced by our ability to secureinventory that we believe will improve our margins and the current revenuetrend; and the need to manage our inventory more efficiently.

 

Net cash used ininvesting activities was $203,000 in the three months ended  March 31, 2008 compared to $227,000 inthe three months ended  March 31,2007. During the three months ended March 31, 2007 and 2008, respectively,net cash used for investing activities related mainly to capital expendituresfor office and computer equipment and software.

 

In the three months endedMarch 31, 2008, net cash of $9.7 million were used in financing acitivieswhen $5.9 million was used to repay our revolving credit facility and $3.8million was used to repurchase our common stock shares. In the three monthsended

 

15

----

 

March 31, 2007,$3.7 million were provided by financing activities when we utilized ourrevolving credit line for $3.7 million.

 

We believe that cash andcash equivalents currently on hand, cash flows from operations and theavailability of a $25 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; acquisition and relocation to a new corporate office; and otherfactors relating to our business. Enhancement of our website, networkinfrastructure, and transaction processing systems will require us to spendsignificantly more than we have in the past. Moreover, to date our spending inthese areas has been lower than industry averages. We anticipate increasing oursystem expenditures to accommodate these needs in the future. Wemay require additional financing in the future in order to execute ouroperating plan and we may not be able to obtain such financing. We cannotpredict whether this additional financing will be in the form of equity,debt, or a combination of debt and equity.

 

**Lease Obligations**

 

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

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

 

We are obligated for thelease of our office and warehouse space. We lease a 50,000 square-foot officeand warehouse and a separate 12,000 square-foot warehouse space in Culver City,California. The leases expires in October 2009 and August 2012,respectively.

 

**Reclassification**

 

Certain amounts fromprior years have been reclassified to conform to the current year’spresentation.

 

**ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK**

 

Market risk representsthe risk of loss arising from adverse changes in market rates and foreign exchangerates. We do not believe that a change in market interest rates would have amaterial effect on our results of operations or financial condition. Althoughwe derive a portion of our sales outside of the United States, all of our salesare denominated 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**

 

***Evaluation of Disclosure Controls and Procedures***

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the Securities and ExchangeCommission.  Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were effective.

 

***Report of Management on InternalControl over Financial Reporting***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as defined in Rule 13a-15(f) of the 1934 Act. Our internalcontrol over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Internal control over financial reportinginclude those policies and procedures that (1) pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect ourtransactions and dispositions of our assets;

 

16

----

 

(2) providereasonable assurance that our transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with appropriate authorizations; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton our financial statements.

 

We assessed theeffectiveness of our internal control over financial reporting as of March 31,2008, using the criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO) in Internal Control — IntegratedFramework. Based on this assessment, management has concluded that our internalcontrol over financial reporting was effective as of  March 31, 2008.

 

***Changes in Internal Control OverFinancial Reporting***

 

Therewere no changes in our internal control over financial reporting during thequarter ended March 31, 2008, that our certifying officers concludedmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

***Limitations on Controls***

 

Managementdoes not expect that our disclosure controls and procedures or our internalcontrol over financial reporting will prevent or detect all error and fraud.Any control system, no matter how well designed and operated, is based uponcertain assumptions and can provide only reasonable, not absolute, assurancethat its objectives will be met. Further, no evaluation of controls can provideabsolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, within the Company havebeen detected. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

*Cartierv. Bidz.com*

 

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

 

We are from time to timesubject to various other legal proceedings and claims arising in the ordinarycourse of business.  We do not expect thatthe outcome in any currently ongoing legal proceedings, individually orcollectively, will have a material adverse effect on the Company’s financialcondition, results of operations, or cash flow.

 

**ITEM 1.A. RISK FACTORS**

 

*Webelieve the risks and uncertainties described below are the most significant weface. The occurrence of any of the following risks could harm our business. Inthat case, the value of our common stock could decline, and you may lose partor all of your investment. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also impair ouroperations.*

 

***Wehave established a public market for our common stock on the NASDAQ CapitalMarket; our stock is subject to short selling and trading in our common stockmay be volatile.***

 

Since November 2007,we have been included by Nasdaq on the Regulation SHO Threshold Security List,which may be indicative of a significant amount of naked shorting in our commonstock.  As defined in Rule 203(c)(6) ofRegulation SHO, a “threshold security” is any equity security of any issuerthat is registered under Section 12 of the Exchange Act, or that isrequired to file reports under Section 15(d) of the Exchange Act(commonly referred to as reporting securities), where, for five consecutivesettlement days: (i) there are aggregate fails to deliver at a registeredclearing agency of 10,000 shares or more per security; the level of fails is equal

 

17

----

 

to at least one-half of onepercent of the issuer’s total shares outstanding; and the security is includedon a list published by a self-regulatory organization (SRO). A security ceasesto be a threshold security if it does not exceed the specified level of failsfor five consecutive settlement days. Short selling and possible market pricemanipulation of our common stock has a negative effect on the trading price ofour common stock and may cause trading in our common stock to be volatile.

 

***Thetrading price in our common stock may be volatile and you may lose all or partof your investment.***

 

The market price of ourcommon stock has been subject to significant fluctuations and thesefluctuations could continue. Some factors that could affect the market price ofour common stock are as follows:

 

·                  actual oranticipated changes in our operating results,

·                  changes inresearch analysts recommendations or estimates of financial performance,

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

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

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

·                  intellectual propertyor litigation developments.

 

Trading in our commonstock may experience significant price and volume fluctuations and adverselyaffect the trading price of our common stock. Following periods of volatilityin the market price of a public company’s securities, securities class actionlitigation has often been instituted against that company. Such litigationcould result in substantial cost and a diversion of management’s attention andresources.

 

***We must continue to generate a high volumeof visitor traffic to our website and convert those visitors into buyers.***

 

Ournet revenue depends to a significant extent on the number of customers whovisit our website to purchase merchandise and the dollar amount of theirpurchases. Generating increased traffic to our website and converting thattraffic into buyers requires us to achieve effective results from our marketingcampaigns; offer a wide variety of products that our customers can purchase atfavorable prices; maintain a user-friendly shopping experience; ensure thesatisfactory availability, 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 are subject to “prank” bidding by persons who are not required toprovide their identification.***

 

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

 

***We may face increasing costs to acquire newcustomers.***

 

Theacquisition of new customers is a key factor in increasing demand for ourjewelry products and increasing our revenue. We currently attract new customersby driving traffic to our website using a marketing and advertising strategythat includes targeted keyword searches, online banner advertising, targetede-mail advertising, and participation in affiliate programs. We do not maintainlong-term contracts or arrangements with any companies, including any searchengines, Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. In addition, trafficto our website could decline if our online marketing programs become lesseffective or the traffic decreases to the search engines, Internet portals, andwebsites with which we advertise. Our business could be materially and adverselyaffected if any substantial number of companies on which we advertiseexperience financial or operational difficulties or experience other corporatedevelopments that adversely affect their performance. A failure to maintain orexpand existing online advertising relationships or to establish additionalonline advertising relationships that generate a significant amount of trafficfrom other websites could result in decreased sales or limit the growth of ourbusiness.

 

***Our growth will depend on our ability toincrease the popularity of our website, and we may not be able to do soeffectively.***

 

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

 

18

----

 

marketingbudget and otherwise increase our financial commitment to creating andmaintaining brand loyalty among users. Brand promotion activities may not yieldincreased revenue, and even if they do, any increased revenue may not offsetthe expenses we incur in building our website popularity and our brand. If wedo attract new users to our website, they may not conduct transactions on afrequent basis or in sufficient dollar amounts. If we fail to promote andmaintain our website or incur substantial expenses in an unsuccessful attemptto promote and maintain our brand, our business would be harmed.

 

***We anticipate expanding our internationalsales activities, causing our business to become increasingly susceptible tonumerous risks that could affect our profitability.***

 

In2006 and 2007, 20.8% and 22.3%, respectively, of our net revenue was generatedby shipments to customers outside of the United States. We plan, over time, toexpand our reach into international markets. We do not, however, currently haveany overseas fulfillment, distribution, or server facilities or any websitecontent localized for foreign markets. We cannot be certain that we will beable to expand our global presence. In addition, there are certain risks associatedwith doing business on an international basis, including regulatoryrequirements, legal uncertainty regarding liability, tariffs, and other tradebarriers, longer payment cycles, and potentially adverse tax consequences, anyof which could adversely affect our business. Although our foreign saleshistorically have been denominated in U.S. dollars, we also may be subject toincreased risks relating to foreign currency exchange rate fluctuations to theextent we decide to denominate our sales in foreign currencies.

 

***Customer complaints or negative publicityabout our customer service could adversely affect our reputation and, as aresult, our business could suffer.***

 

Customercomplaints or negative publicity about our customer service could severely diminishconsumer confidence in and the use of our website. Effective customer servicerequires significant personnel expense, and this expense, if not managedproperly, could significantly impact our profitability. The failure to manageor train our customer service representatives properly could compromise ourability to handle customer inquiries and complaints effectively. If we do nothandle customer inquiries and complaints effectively, we may lose customerconfidence. As a result, our revenue could suffer and our operating margin maydecrease.

 

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

 

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

 

***Quarterly financial results may not be consistent and impact our stockprice.***

 

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

 

***We may be at risk to accurately report financial results or detectfraud if we fail to maintain an effective system of internal controls.***

 

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

 

19

----

 

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

 

***We do not have a guaranteed supply ofjewelry products, and we have a concentration of inventory purchases from ourtop two suppliers****.*

 

Thesuccess of our business depends, in part, on our ability to offer our customersa wide variety of jewelry that they can purchase at prices that aresubstantially below those of traditional jewelry retailers. We do not have anyformal or binding supply agreements with any of our manufacturers,distributors, or other suppliers for our supply of jewelry products. As 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.

 

Inaddition, we have a concentration of inventory purchases from a small number ofsuppliers. Our top two suppliers accounted for approximately 42.1%, 31.1% and24.0 % of our total purchases in 2005, 2006, and 2007, respectively. In thethree months ended March 31, 2007 and 2008, our top two suppliers accountedfor approximately 21.5% and 13.2% of our total purchases for the quarters,respectively.

 

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

 

We may be at risk of lossfor the diamonds, precious and semi-precious gems that we have given to ourmanufacturing vendors to produce into finished jewelry products. If thebusinesses of the vendors fail, the diamond inventory is lost or stolen, thevendors do not have adequate insurance coverage or if the vendors fail toproduce and deliver finished jewelry products, we would incur substantiallosses that would have a material impact on our net income and financialposition.

 

***Competition from online auctioneers andother online companies with greater brand recognition may adversely affect oursales.***

 

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

 

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

 

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

 

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

 

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

 

20

----

 

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

 

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

 

Ifour sales increase, we will be required to increase our inventoryproportionately. Consumer tastes and preferences for jewelry products canchange rapidly, thereby exposing us to significant inventory risks. Currently,because the products we sell also consist of closeout merchandise frommanufacturers, distributors, and other suppliers, we have less control over thespecific items that we offer for sale than we would if we primarily orderedgoods for manufacture for us. In addition, it is important that we are able topurchase jewelry that we perceive to be in demand. The demand for specific productscan change between the time we order items and when we sell them. As a result,we may be required to take significant inventory markdowns, which could reduceour gross margin, if we do not accurately predict these trends or if weoverstock unpopular merchandise.

 

***We may be subject to a tax liability forpast sales and our future sales may decrease if we are required to collectsales and use taxes on the products we sell.***

 

Inaccordance with current industry practice and our interpretation of current law,we do not currently collect sales or other taxes with respect to shipments ofgoods into states other than California. However, one or more states or foreigncountries may seek to impose sales or other tax obligations on us in thefuture. A successful assertion by one or more states or foreign countries thatwe should be collecting sales or other taxes on the sale of our products couldresult in substantial tax liabilities for past and future sales, discouragecustomers from purchasing products from us, decrease our ability to competewith traditional retailers, and otherwise substantially harm our business,financial condition, and results of operations.

 

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

 

Werely on suppliers to deliver our orders promptly, which we then carry ininventory to ensure availability and expedited delivery to our customers. Wealso rely on third-party carriers to ship our products to our customers. As aresult, we are subject to various risks, including employee strikes andinclement weather, associated with the ability of third-party carriers toprovide delivery services to meet our shipping needs and those of our suppliers.The failure of our suppliers and third-party carriers to deliver products to usor our customers in a timely manner or otherwise to serve us or our customersadequately would damage our reputation and brand and substantially harm ourbusiness and results of operations.

 

***Increases in the cost of precious metalsand precious and semi-precious stones would increase the cost of our jewelryproducts.***

 

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

 

***The satisfactory availability, performance,and reliability of our website, network infrastructure, and transactionprocessing systems are critical to our ability to attract, retain, and servicecustomers.***

 

Anyproblems with the availability, performance, or reliability of our website,network infrastructure, or transaction processing systems could result indecreased customer traffic, reduced orders, reduced order fulfillmentperformance, and lower net revenue as well as negative publicity and damage toour reputation. In order to remain competitive, we must continually seek toimprove and expand the functionality and features of our website, networkinfrastructure, transaction processing systems, and delivery and shippingfunctions to accommodate any substantial increase in the volume of traffic toand orders from our website. We may not be successful in these efforts, and wemay not be able to project accurately the rate or timing of increases, if any,in the use of or sales from our website, or timely expand or upgrade ourwebsite, infrastructure, or systems to accommodate any such increases.Additionally, we may not be able to remedy any such availability, performance,or reliability problems in a timely manner, or at all, because we depend inpart on third parties for such availability, performance, and reliability.

 

21

----

 

***Our businessoperations could be disrupted due to the lack of documentation of ourinternally developed software application systems and dependence on key systemdevelopers to maintain the system.***

 

Our business depends in part on continuous and uninterrupted onlineavailability to our customers. Our internally developed software applicationsystems are not fully documented and this makes it more difficult to locate andtrouble shoot problems that may occur in our systems. Any delays in resolvingsystem problems will result in longer disruptions to the service available toour customers and/or prevent our employees from performing their functionsefficiently. The internally developed Auction platform, Billing, Shipping, andInventory Control systems are not fully documented. We are dependent oninstitutional knowledge of our key system developers to provide ongoing supportand functional enhancements. If we were to lose the services of these keysystems support personnel, operations may suffer from system down time thatwould take longer than desirable to correct and return to normal operations.

 

***Our business andresults of operations would be harmed in the event of any failure of ourauction and bidding systems hardware, which is located at a single third-partyco-location facility, or any failure of our fulfillment and administrativehardware.***

 

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

 

***We may not be ableto increase our capacity or respond to rapid technological changes in a timelymanner or without service interruptions, which may harm our business.***

 

We may not be able to accommodate any substantial growth in traffic oruser demand on our website, network infrastructure, and transaction processingsystems in a timely manner or without substantial costs. If we are unable toupgrade our existing technology, network infrastructure, and transactionprocessing systems to accommodate any increased sales volume, our potentialcustomers may be dissatisfied and may purchase merchandise from ourcompetitors. We may also fail to provide enough capacity in our customerservice and sales support functions to provide a high level of customerservice. A failure to implement new systems and increase customer servicecapacity effectively could adversely affect our sales. Enhancement of ourwebsite, network infrastructure, and transaction processing systems willrequire us to spend a significantly higher amount than we have in the past.Moreover, to date, our spending in these areas as a percentage of revenue hasbeen lower than industry averages. We have increased significantly in 2007 oursystem expenditures to accommodate these needs.

 

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

 

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

 

A significant barrier to online commerce and communications is thesecure transmission of confidential information over public networks. Thirdparties may have the technology or expertise to breach the security of customertransaction data. Our security measures may not prevent security breaches thatcould result in substantial harm to our business and results of operations anddamage to our reputation. Currently, a majority of our sales are billed to ourcustomers’ credit card accounts directly. Under current credit card practices,we are liable for fraudulent credit card transactions because we do not obtain cardholdersignatures. We rely on encryption

 

22

----

 

and authentication technology licensed from third parties to effectsecure transmission of confidential information, including credit card numbers.We do not currently carry insurance against this risk. Advances in computercapabilities, new discoveries in the field of cryptography, or otherdevelopments may result in a compromise or breach of the technology we use toprotect customer transaction data. In addition, anyone who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. Any such compromise of our securitycould damage our reputation and brand and expose us to a risk of loss or litigationand possible liability, which would substantially harm our business and resultsof operations.

 

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

 

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

 

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

 

Our success depends on the continued growth and maintenance of theInternet. The Internet has experienced, and is likely to continue to experience,significant growth in the numbers of users and amount of traffic. If Internetusage continues to grow as anticipated, the infrastructure may not be able tosupport the level of usage and its performance and reliability may decline. Ifoutages or delays on the 

Internet increase, overall Internet usage could grow more slowly ordecline. In addition, the performance of the Internet may be harmed byincreased number of users or bandwidth requirements or by viruses, worms, andsimilar 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 thecontinued growth and acceptance of online commerce, and our business will besubstantially impaired if the growth of online commerce slows or does not growas expected.***

 

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

 

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

 

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

 

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

 

Our inventory is stored at our warehouse/office facility in CulverCity, California. Consequently, our merchandise supply is vulnerable to fire,flood, earthquakes, and similar events that may impact our facility. Any damageto or loss of all or a significant portion of our inventory could causesignificant delays in shipment of goods to our customers, resulting in negativepublicity about and diminished customer confidence in our website. In addition,we may experience theft of our products while they are being held in inventoryor during the course of their shipment to our customers by third-partycarriers. We have implemented security measures to prevent such theft andmaintain insurance to cover losses resulting from theft. Nevertheless, we couldincur significant losses from theft, which would substantially harm ourbusiness and results of operations, if our security measures fail, lossesexceed our insurance coverage, or

 

23

----

 

we are not able to maintain insurance at a reasonable cost.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In an effort to provide accurate descriptions of jewelry posted on ourwebsite, we provide appraisal summaries from third-party gemologicallaboratories for some of our jewelry items. All other jewelry and watchdescriptions are provided by our

 

full-time Gemological Institute of America, or GIA, trained gemologistsand several experienced product specialists. Nevertheless, there is asubjective component involved with respect to assessing the clarity, color, andcarat characteristics of diamonds and other gemstones. In addition, mistakes oromissions of important information in our descriptions may occur. Even if ourdescriptions are accurate, buying a product online may lead to disappointmentresulting in returned merchandise. For example, a customer may determine that apiece does not have the expected look, feel, and overall appearance of themerchandise that the buyer envisioned from the website photograph.

 

Additionally, in response to customer requests and as a courtesy to resellers,we provide “Compare” and/or “Close Now” prices for jewelry items listed on ourwebsite. Compare and Close Now prices are not meant to reflect fair marketvalues or manufacturer suggested retail prices, and in fact, may be higher thanprices found in local retail stores. As a consequence, perceivedmisrepresentations in item descriptions by disappointed buyers may occur,resulting in negative publicity about and diminished customer confidence in ourwebsite.

 

24

----

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are subject to increasing regulation at the federal, state, andinternational levels relating to privacy and the use of personal userinformation designed to protect the privacy of personally identifiableinformation as well as to protect against its misuse. These laws include theFederal Trade Commission Act, the CAN-SPAM Act of 2003, the Children’s OnlinePrivacy Protection Act, the Fair Credit Reporting Act, the Homeland SecurityAct, and related regulations. Several states have proposed legislation thatwould

 

25

----

 

limit the use of personal information gathered online or require onlineservices to establish privacy policies. Moreover, proposed legislation in theUnited States and existing laws in foreign countries require companies toestablish procedures to notify users of privacy and security policies, obtainconsent from users for collection and use of personal information, and/orprovide users with the ability to access, correct, and delete personalinformation stored by companies. These regulations and other laws, rules, andregulations enacted in the future may adversely affect our ability to collect,disseminate, or share demographic and personal information about users and ourability to e-mail or telephone users, which could be costly and adverselyaffect our marketing efforts**.**

 

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

 

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

 

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

 

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

 

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

 

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

 

We are subject to the same foreign and domestic laws as other companiesconducting both online and offline business. There are still relatively fewlaws specifically directed towards online business. However, due to theincreasing popularity and use of the Internet and online services, many lawsrelating to the Internet are being debated at all levels of government aroundthe world, and it is possible that such laws and regulations will be adopted.These laws and regulations could cover issues such as user privacy, freedom ofexpression, pricing, fraud, content and quality of products and services,taxation, advertising, intellectual property rights, and information security.Applicability to the Internet of existing laws governing issues, such asproperty ownership, copyrights and other intellectual property issues,taxation, libel and defamation, obscenity, and personal privacy is uncertain.The vast majority of these laws was adopted prior to the advent of the Internetand related technologies and, as a result, do not contemplate or address theunique issues of the Internet and related technologies. Those laws that 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 inmultiple states and because we sell merchandise to consumers residing inmultiple states, we could be required to qualify to do business as a foreigncorporation in each state in which our products are available. Our failure toqualify as a foreign corporation in a jurisdiction in which we are required todo so could subject us to penalties. Any new legislation or regulation, or theapplication of laws or regulations from jurisdictions whose laws do notcurrently

 

26

----

 

apply to our business could have a material adverse affect on ourbusiness.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our founder, executive officers, and directors together ownapproximately 33.7% of our common stock as of March 31, 2008. MarinaZinberg, our Vice President, who is the sister of David Zinberg, our Chairman,President and Chief Executive Officer, owns an additional 31.2% of our commonstock.  As a result, these individualswill have significant influence over our management and affairs and over allmatters requiring stockholder approval, including the election of directors andthe approval of significant corporate transactions, such as a merger or a saleof our company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporatematters. Because of this, we may take actions that some of our stockholders donot view as beneficial. As a result, the market price of our common stock couldbe adversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

 

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

 

On June 22, 2006, we reincorporated in Delaware, and the Delawarecertificate of incorporation and the Delaware General Corporation Law, or DGCL,contain provisions that may have the effect of making more difficult ordelaying attempts by others to obtain control of our company, even when theseattempts may be in the best interests of our stockholders. The Delawarecertificate of incorporation also authorizes our Board of Directors, withoutstockholder approval, to issue one or more series of preferred stock, whichcould have voting and conversion rights that adversely affect or dilute thevoting power of the holders of common stock. Delaware law also imposesconditions on certain business combination transactions with “interestedstockholders.” The Delaware certificate of incorporation divides our Board ofDirectors into three classes, with one class to stand for election each yearfor a three-year term after the initial election. The classification ofdirectors tends to discourage a third party from initiating a proxysolicitation or otherwise attempting to obtain control of our company and maymaintain the incumbency of our Board of Directors, as this structure generallyincreases the difficulty of, or may delay, replacing a majority of directors.The Delaware bylaws authorize our Board of 

 

27

----

 

Directors to fill vacancies or newly created directorships. A majorityof the directors then in office may elect a successor to fill any vacancies ornewly created directorships.

 

**ITEM 2.           UNREGISTEREDSALES AND PURCHASES OF EQUITY SECURITIES**

 

No stock awards and stock options were granted during the three monthsended March 31, 2008.

 

**Issuer Purchases of Equity Securities**

 

The following table contains information about purchases of our commonstock during the three months ended March 31, 2008:

 
| ** **                               | ** ** | ** **    | ** ** | ** **  | ** ** | **Total Number of** | ** ** | **Maximum**                    | ** ** |
|------------------------------------------|------------|---------------|------------|-------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | ** **    | ** ** | ** **  | ** ** | **Shares**                    | ** ** | **Dollar  Value**              | ** ** |
| ** **                               | ** ** | **Total**     | ** ** | **Average** | ** ** | **Purchased as**         | ** ** | **of Shares that**   | ** ** |
| ** **                               | ** ** | **Number**    | ** ** | **Price**   | ** ** | **Part of a**       | ** ** | **May**                        | ** ** |
| ** **                               | ** ** | **of**        | ** ** | **Paid**    | ** ** | **Publicly**                  | ** ** | **yet be Purchased** | ** ** |
| ** **                               | ** ** | **Shares**    | ** ** | **per**     | ** ** | **Announced**                 | ** ** | **Under the**             | ** ** |
| **2008**                                 | ** ** | **Purchased** | ** ** | **Share**   | ** ** | **Program**                   | ** ** | **Program  (1)**               | ** ** |
| January 1  – January 31   |       | 38,270        |       | $           | 7.59       |                          | 138,270    |                           | $          | 3,823,576 |   |
| February 1  – February 29 |       | —        |       | —      |       | 138,270                       |       | $                              | 18,823,576 |   |
| March 1  – March 31       |       | 433,827       |       | $           | 8.11       |                          | 572,097    |                           | $          | 15,306,389 |   |
| Total                                    |       | 472,097       |       |        |       |                          |       |                           |       |

 

----

(1)                                  In June 2007, weauthorized the stock buyback program for up to $5 million of our outstandingcommon stock to be repurchased through the open market at prices deemedappropriate by management.  In February 2008, we authorized anincrease in the stock buyback program to $20 million from $5 million. The stockbuyback will be at prices deemed appropriate by management over a 24 monthperiod.

 

28

----

 

**ITEM 6. EXHIBITS.**

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

 

29

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this registration statement to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                         |       | BIDZ.COM, INC.                             |
|-------------------------|------------|--------------------------------------------|
|                    |       |                                       |
|                    | By:        | /s/ DAVID  ZINBERG                         |
|                    |       |                                       |
| ** **              | ** ** | **David  Zinberg**                         |
| ** **              | ** ** | **President  and Chief Executive Officer** |
|                    |       |                                       |
|                    | By:        | /s/ LAWRENCE  KONG                         |
|                    |       |                                       |
| ** **              | ** ** | **Lawrence  Kong**                         |
| ** **              | ** ** | **Principal  Accounting Officer**          |
|                    |       |                                       |
| Dated: May 6, 2008 |       |                                       |

 

30

----