**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                       |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                   |
| ** ** | ** ** | **For the quarterly period ended September 30,  2006**                                                                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                   |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE EXCHANGE ACT**                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                   |
| ** ** | ** ** | **For the transition  period                 to                 ** |

**Commission file number 000-51257**

**BIDZ.COM,INC.**

(Exact name of Registrant as specified in its charter)
| **Delaware**                     |   | **95-4728109**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

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

(Address, including zip code, of principal executiveoffice)

**(310)280-7373**

(Registrant’s telephone number, including area code)

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

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).o  Yes    x  No

Number of shares outstanding of Registrant’s commonstock, $0.001 par value, as of November 13, 2006: 23,348,904

 

 

----

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

 

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

1

----

 

**PART I. FINANCIAL INFORMATION**

** ITEM 1. FINANCIALSTATEMENTS**

**Bidz.com, Inc.**

**Condensed Balance Sheets**

 

*(In thousands, except share data)*

 
| ** **                                                                                                                                                                                                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **2005**         | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | ** **       | ** ** | **(Unaudited)**   | ** ** |
| **Assets**                                                                                                                                                                                                                       | ** ** | ** **       | ** ** | ** **        | ** ** |
| **Current assets:**                                                                                                                                                                                                              | ** ** | ** **       | ** ** | ** **        | ** ** |
| Cash                                                                                                                                                                                                                             |       | $                | 7          |              | $          | 2,236 |   |
| Accounts receivable,  net                                                                                                                                                                                                        |       | 886              |       | 881               |       |
| Inventories, net of  reserves of $331and $450 at December 31, 2005 and September 30, 2006  respectively                                                                                                                          |       | 15,921           |       | 21,512            |       |
| Prepaid inventory                                                                                                                                                                                                                |       |             |       | 1,037             |       |
| Other current assets                                                                                                                                                                                                             |       | 158              |       | 310               |       |
|                                                                                                                                                                                                                             |       |             |       |              |       |
| Total current assets                                                                                                                                                                                                             |       | 16,972           |       | 25,976            |       |
|                                                                                                                                                                                                                             |       |             |       |              |       |
| **Property and equipment, net**                                                                                                                                                                                                  |       | 384              |       | 504               |       |
| **Intangible asset**                                                                                                                                                                                                             |       | 150              |       | 150               |       |
| **Deposits**                                                                                                                                                                                                                     |       | 240              |       | 140               |       |
| ** **                                                                                                                                                                                                                       |       | $                | 17,746     |              | $          | 26,770 |   |
| ** **                                                                                                                                                                                                                       | ** ** | ** **       | ** ** | ** **        | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                    | ** ** | ** **       | ** ** | ** **        | ** ** |
| **Current liabilities:**                                                                                                                                                                                                         | ** ** | ** **       | ** ** | ** **        | ** ** |
| Post-dated check  financing (includes related party amounts of $2,184 and $420 at December 31,  2005 and September 30, 2006 respectively)                                                                                        |       | $                | 5,315      |              | $          | 1,906 |   |
| Accounts payable  (includes related party amounts of $2,712 and $4,069 at December 31, 2005 and  September 30, 2006 respectively)                                                                                                |       | 7,297            |       | 12,358            |       |
| Accrued expenses                                                                                                                                                                                                                 |       | 1,774            |       | 5,017             |       |
| Deferred revenue                                                                                                                                                                                                                 |       | 1,577            |       | 1,641             |       |
| Total current  liabilities                                                                                                                                                                                                       |       | 15,963           |       | 20,922            |       |
|                                                                                                                                                                                                                             |       |             |       |              |       |
| **Commitments and contingencies**                                                                                                                                                                                                |       | —           |       | —            |       |
| **Stockholders’ equity:**                                                                                                                                                                                                   | ** ** | ** **       | ** ** | ** **        | ** ** |
| Common Stock: no par  value; authorized 50,000,000 shares; issued and outstanding 23,312,500 at  December 31, 2005 and par value $0.001; authorized 100,000,000 shares; issued  and outstanding 23,348,904 at September 30, 2006 |       | 28,830           |       | 23                |       |
| Additional Paid in  capital                                                                                                                                                                                                      |       | —           |       | 29,026            |       |
| Shares Held in  Treasury, at cost, 115,000 shares at September 30, 2006                                                                                                                                                          |       | —           |       | (690              | )          |
| Deferred stock-based  compensation                                                                                                                                                                                               |       | (100             | )          | —            |       |
| Accumulated deficit                                                                                                                                                                                                              |       | (26,947          | )          | (22,511           | )          |
| Total stockholders  equity                                                                                                                                                                                                       |       | 1,783            |       | 5,848             |       |
| ** **                                                                                                                                                                                                                       |       | $                | 17,746     |              | $          | 26,770 |   |

 

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

2

----

 

**Bidz.com,Inc.**

**Condensed Statements of Operations(Unaudited)**

*(In thousands, except share and per share data)*
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September  30,**               | ** ** | **September  30,**              | ** ** | **September  30,** | ** ** | **September  30,** | ** ** |
| ** **                                              | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| **Net revenues:**                                       | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Merchandise  sales and shipping**                     | ** ** | **$**                            | 21,058     | ** **                      | **$**      | 27,061 | ** ** | **$** | 59,683 | ** ** | **$** | 94,132 | ** ** |
| **Commissions**                                         |       | 40                               |       | —                          |       | 186 |   | 55 |   |
| **Advertising**                                         |       | —                           |       | —                          |       | 2 |   | 2 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              |       | 21,098                           |       | 27,061                          |       | 59,871 |   | 94,189 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cost of revenues**                                    |       | 16,760                           |       | 20,399                          |       | 48,164 |   | 70,660 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross Profit**                                        |       | 4,338                            |       | 6,662                           |       | 11,707 |   | 23,529 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating expenses:**                                 | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative                             |       | 2,430                            |       | 3,052                           |       | 7,521 |   | 9,847 |   |
| Sales and  marketing                                    |       | 1,163                            |       | 2,531                           |       | 2,752 |   | 7,776 |   |
| Public offering  costs                                  |       | 442                              |       | —                          |       | 442 |   | 1,231 |   |
| Depreciation and  amortization                          |       | 40                               |       | 74                              |       | 116 |   | 195 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| **Total operating expenses**                            |       | 4,075                            |       | 5,657                           |       | 10,831 |   | 19,049 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income from operations**                              |       | 263                              |       | 1,005                           |       | 876 |   | 4,480 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Income-Interest Income**                        |       | 8                                |       | 19                              |       | 8 |   | 77 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| **Income before income taxes**                          |       | 271                              |       | 1,024                           |       | 884 |   | 4,557 |   |
| ** **                                              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income taxes**                                        |       | 27                               |       | 27                              |       | 27 |   | 121 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| **Net income**                                          | ** ** | **$**                            | 244        | ** **                      | **$**      | 997 | ** ** | **$** | 857 | ** ** | **$** | 4,436 | ** ** |
| Net income per share -  basic                           | ** ** | **$**                            | 0.01       | ** **                      | **$**      | 0.04 | ** ** | **$** | 0.03 | ** ** | **$** | 0.19 | ** ** |
| Net income per share -  diluted                         | ** ** | **$**                            | 0.01       | ** **                      | **$**      | 0.04 | ** ** | **$** | 0.03 | ** ** | **$** | 0.19 | ** ** |
| Weighted average number  of shares outstanding - basic  |       | 23,312,500                       |       | 23,310,791                      |       | 24,678,712 |   | 23,311,930 |   |
| Weighted average number of shares outstanding - diluted |       | 23,829,724                       |       | 23,800,934                      |       | 25,201,688 |   | 23,803,978 |   |

 

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

3

----

 

**Bidz.com, Inc.**

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

** **

*(inthousands)*

 
| ** **                                                                                         | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| ** **                                                                                         | ** ** | **2005**                        | ** ** | **2006** | ** ** |
|                                                                                               |       |                            |       |   |   |
| **Cash flows provided by (used  for) operating activities:**                                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                                         |       | $                               | 857        |   | $ | 4,436 |   |
| ** **                                                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Adjustments  to reconcile net income to net cash provided by (used for) operating  activities:** | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                                     |       | 116                             |       | 195 |   |
| Change in  inventory reserve                                                                       |       | (83                             | )          | 119 |   |
| Amortization of  deferred stock-based compensation                                                 |       | 150                             |       | 100 |   |
| Stock based  compensation                                                                          |       | 16                              |       | 219 |   |
| **Changes  in assets and liabilities: (Increase) decrease in assets:**                             | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                               |       | 59                              |       | 5 |   |
| Inventories                                                                                        |       | (2,129                          | )          | (5,710 | ) |
| Prepaid  Inventory                                                                                 |       | —                          |       | (1,037 | ) |
| Other current  assets                                                                              |       | 59                              |       | (152 | ) |
| Deposits                                                                                           |       | 250                             |       | 100 |   |
| **Increase  (decrease) in liabilities:**                                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Post-dated check  financing                                                                        |       | 997                             |       | (3,409 | ) |
| Accounts payable                                                                                   |       | (142                            | )          | 5,061 |   |
| Accrued expenses                                                                                   |       | 40                              |       | 3,243 |   |
| Deferred revenue                                                                                   |       | (56                             | )          | 64 |   |
| Net cash  provided by (used for) operating activities                                              |       | 134                             |       | 3,234 |   |
|                                                                                               |       |                            |       |   |   |
| **Cash flows (used for) investing  activities:**                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                              |       | (137                            | )          | (315 | ) |
| Net cash  provided by (used for) investing activities                                              |       | (137                            | )          | (315 | ) |
| **Cash flows provided by (used  for) financing activities:**                                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Payments for  repurchase of common stock                                                           |       | —                          |       | (690 | ) |
| Net cash  provided by (used for) financing activities                                              |       | —                          |       | (690 | ) |
|                                                                                               |       |                            |       |   |   |
| **Net increase (decrease) in cash**                                                                |       | (3                              | )          | 2,229 |   |
| **Cash, beginning of period**                                                                      |       | 5                               |       | 7 |   |
| **Cash, end of period**                                                                            |       | $                               | 2          |   | $ | 2,236 |   |
|                                                                                               |       |                            |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                             | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Interest paid                                                                                      |       | $                               | —     |   | $ | — |   |
| Income taxes  paid                                                                                 |       | $                               | 18         |   | $ | 185 |   |
|                                                                                               |       |                            |       |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Stock issued for asset  purchased                                                                  |       | $                               | 57         |   | $ | — |   |

 

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

4

----

 

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

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

**Basis of Presentation**

The accompanying unaudited financial statements havebeen prepared in accordance with the instructions to Form 10-Q and do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  These financial statements and related notes should be readin conjunction with the Company’s audited financial statements for the fiscalyear ended December 31, 2005 filed in the form 10-K Annual Report by theCompany on March 29, 2006. In the opinion of management, these financialstatements reflect all adjustments which are of a normal recurring nature andwhich are necessary to present fairly the financial position ofBidz.com, Inc. as of September 30, 2006 and the results of operationsfor the three month and nine month periods ended September 30, 2005 and2006 and the cash flows for the nine month periods ended September 30,2005 and 2006.  The results of operations for the three months and ninemonths ended September 30, 2006 are not necessarily indicative of the resultswhich may be expected for the entire fiscal year.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results coulddiffer from those estimates.

**Nature of Business Operations**

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

We sell our products throughout the United States andhave expanded the reach of our customer base to Europe and Asia in recentyears. Revenue generated from the United States accounted for approximately78.8% and 76.4% of net revenue for the three months ended September 30, 2005and 2006, respectively and 79.8% and 79.7% of net revenue for the nine monthsended September 30, 2005 and September 30, 2006, respectively.

For the nine month period September 30, 2006, wereported net income of $4.4 million and net cash provided from operatingactivities of $3.2 million. As of September 30, 2006, we had current assets of$ 26.0 million and current liabilities of $20.9 million or working capital of$5.1 million. Available cash was $ 2.5 million before post-dated checksand was $2.2 million net of post-dated checks.

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

5

----

 

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

**Recent Developments**

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

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

***Recent Accounting Pronouncements***

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

In September 2006,the FASB issued Statement SFAS No. 157 (“FAS 157”), “*Fair Value Measurements*,” which defines fair value,establishes guidelines for measuring fair value and expands disclosuresregarding fair value measurements. FAS 157 does not require any new fair valuemeasurements but rather eliminates inconsistencies in guidance found in variousprior accounting pronouncements. SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007. Earlier adoption is permitted, providedthe company has not yet issued financial statements, including for interimperiods, for that fiscal year. The Company is currently evaluating the impactof FAS 157, but does not expect the adoption of FAS 157 to have a materialimpact on its consolidated financial position, results of operations or cashflows.

In July 2006, the FASB issued Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes, an interpretation of FASB*Statement*109*”(“FIN48”) which clarifies the accounting for uncertainty in income taxes recognizedin accordance with SFAS No. 109, “*Accountingfor Income Taxes.”*FIN 48 is a comprehensive model for how a companyshould recognize, measure, present, and disclose in its financial statementsuncertain tax positions that the company has taken or expects to take on a taxreturn. If an income tax position exceeds a more likely than not (greater than50%) probability of success upon tax audit, the company will recognize anincome tax benefit in its financial statements. Additionally, companies arerequired to accrue interest and related penalties, if applicable, on all taxexposures consistent with jurisdictional tax laws. This interpretation iseffective on January 1, 2007.  Thisstatement currently has no impact on our financial statements.

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

In February of 2006, the FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments-an amendment of FASB Statements No.133 and 140.”  The pronouncement, amongother things, permits fair value measurements for hybrid financial instruments.  In March of 2006, the FASB issued SFAS No.156, “Accounting for Servicing of Financial Assets-an amendment of FASBStatement No. 140.”  This pronouncementrequires entities to recognize a servicing asset or servicing liability undercertain circumstances.  Neither of these pronouncements have any impact onour financial statements.

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

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

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

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

6

----

 

similarlyto basic earnings per common share, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif the potential common shares had been issued and if the additional commonshares were not anti-dilutive.

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

*(in thousands, except share and pershare data)*
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                               | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Basic and  diluted net income per share: |       |                             |       |                            |       |   |   |   |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Numerator:                               |       |                             |       |                            |       |   |   |   |   |
| Net income                               |       | $                                | 244        |                            | $          | 997 |   | $ | 857 |   | $ | 4,436 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Denominator:                             |       |                             |       |                            |       |   |   |   |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Weighted common shares outstanding       |       | 23,312,500                       |       | 23,310,791                      |       | 24,678,712 |   | 23,311,930 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Effect of dilutive securities            |       | 517,224                          |       | 490,143                         |       | 522,976 |   | 492,048 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Denominator for diluted calculation      |       | 23,829,724                       |       | 23,800,934                      |       | 25,201,688 |   | 23,803,978 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Net income per  share, basic             |       | $                                | 0.01       |                            | $          | 0..04 |   | $ | 0.03 |   | $ | 0.19 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Net income per share,  diluted           |       | $                                | 0.01       |                            | $          | 0.04 |   | $ | 0.03 |   | $ | 0.19 |   |

 

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

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

7

----

 

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

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

In December 2004, the FASB issued SFASNo. 123R, “Share Based payment: An Amendment of FASB Statements No. 123and 95.” This statement requires that we recognize in our financial statementsthe cost resulting from all share- based payment transactions. In addition, inMarch 2005 the Securities and Exchange Commission (“SEC”) released SECStaff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”),which provides the SEC staff’s position regarding the application of SFAS 123Rand certain SEC rules and regulations, and also provides the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. On January 1, 2006, we adopted SFAS 123R, which eliminates ourability to account for share-based compensation transactions, as we formerlydid, using the intrinsic value method as prescribed by APB 25 and generallyrequires that we recognize in our statements of operations all share-basedpayments to employees, including grants of stock options based on their fairvalues.

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

Under SFAS 123R stock-based compensation expenserecognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest. Compensationexpense for the stock-based payment awards granted subsequent toDecember 31, 2005, will be based on the grant date fair value estimated inaccordance with SFAS 123R. As stock-based compensation expense recognized inthe statements of income is based on awards ultimately expected to vest, itwill be reduced for estimated forfeitures. SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. In the pro forma informationrequired under SFAS 148 for the periods prior to 2006, we did not account forforfeitures, as all options granted were fully vested at the date of grant andwere not subject to any service period condition.

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

At September 30, 2006, the Company has onestock-based employee compensation plan (the 2006 Stock Option Plan replacingthe 2002 Stock Option Plan and the 2001 Stock Option Plan). The following tableillustrates the effect on net income and income per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation:

8

----

 

*(In thousands, except share and pershare data)*
| ** **                              | ** ** | **Three Months  Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**       | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2005**                     | ** ** | **2005**                        | ** ** |
| Net Income, as  reported                |       | $                            | 244        |                            | $          | 857 |   |
| Compensation  recognized under APB 25   |       | —                       |       | —                          |       |
| Compensation  recognized under SFAS 123 |       |                         |       | 178                             |       |
| Pro-forma net income (loss)             |       | $                            | 244        |                            | $          | 679 |   |
|                                    |       |                         |       |                            |       |
| Net Income  (loss) per share:           |       |                         |       |                            |       |
| Basic - as  reported                    |       | $                            | 0.01       |                            | $          | 0.03 |   |
| Basic -  pro-forma                      |       | $                            | 0.01       |                            | $          | 0.03 |   |
| Diluted - as  reported                  |       | $                            | 0.01       |                            | $          | 0.03 |   |
| Diluted - pro-forma                     |       | $                            | 0.01       |                            | $          | 0.03 |   |

 

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

**Deferred Stock Compensation**

On June30, 2001, we issued 250,000 shares of common stock to our CFO that became fullyvested on June 30, 2006.  The amount of the deferred stock compensationexpensed by us was based on the fair market value of our common stock on thedate of grant and was amortized on a straight-line basis over the five-yearvesting period.

To meetthe statutory obligation for the applicable income and other employment taxes,115,000 shares were surrendered back to us in the three months ended September30, 2006 and a net-share settlement was effected. Based on a fair market valueof $6.00 per share on the vesting date, the CFO’s tax obligations to the taxingauthorities were approximately $690,000. The fair market value of $6.00 pershare was determined based on a combination of factors that include recentshare transactions between shareholders and an independent valuation of the Company.The net-share settlement had the effect of share repurchases by us as theyreduced and retired the number of shares outstanding and did not represent anexpense to us. The 115,000shares  arereflected in the financial statements as “Treasury Shares.”  The CFO received no cash proceeds and taxeswere paid directly to the taxing authorities subsequent to the quarter endedSeptember 30, 2006.  We subsequentlyawarded the CFO in October 2006  optionsto purchase 115,000 shares at $6.00 per share.

**Stock Award**

We haveawarded and issued a total of 36,404 shares of common stock for the threemonths ended September 30, 2006. Man Jit Singh and Peter Hanelt received aninitial stock award of 10,000 shares each. In lieu of receiving stock options,non-employee directors may elect to receive one share of common stock for eachoption to purchase two shares of common stock. Upon joining the Board ofDirectors, each non-employee director will receive an initial grant of optionsto purchase 20,000 shares of common stock. The Marketing Director was granted astock award of 15,000 shares and an independent consultant was granted 1.404shares for services. The fair market value of the shares granted was at $6.00 ashare and this was determined based on a combination of factors that includerecent share transactions between shareholders and an independent valuation ofthe Company. The stock-based expense for the three months ended September 30,2006 totaled $219,000.

**4.****                                      StockOption Plan**

We adopted our 2001 Stock Option Plan, our 2002Special Stock Option Plan and our 2006 Award Plan (collectively, the ‘‘Plans’’),in January 2001, January 2002, and March 2006, respectively. The 2006 Planprovides for the granting of awards in the form of incentive stock options,nonqualified stock options, stock appreciation rights, shares of restrictedcommon stock, bonus stock in lieu of obligations, or other stock-based awardsto employees, directors, and independent contractors who provide valuableservices to our company.  The vesting requirements, performance thresholdsand other terms and conditions of options granted under the Plans will bedetermined by our Compensation Committee and Board of Directors.

The following is a summary of stock option activity asof September 30, 2006, and changes during the nine months ended September 30,2006 is presented below:

9

----

 
| **Options**                        | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Life of  Contract** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 8,342,000  |       | $                                           | 5.63       |                                                     |       |                            |       |   |
| Granted                            |       | 0          |       | —                                      |       |                                                     |       |                            |       |
| Exercised                          |       | 0          |       | —                                      |       |                                                     |       |                            |       |
| Forfeited                          |       | 0          |       |                                        |       |                                                     |       |                            |       |
| Expired                            |       | (46,500    | )          | $                                           | 4.87       |                                                     |       |                            |       |   |
| Outstanding at  September 30, 2006 |       | 8,295,500  |       | $                                           | 5.63       |                                                     | 3.99       |                            | $          | 3,048,375 |   |
| Vested at  September 30, 2006      |       | 8,295,500  |       | $                                           | 5.63       |                                                     | —     |                            | $          | 3,048,375 |   |
| Exercisable at  September 30, 2006 |       | 8,295,500  |       | $                                           | 5.63       |                                                     | 3.99       |                            | $          | 3,048,375 |   |

 

We did not issue any options in the three months andnine months ended September 30, 2006, and no options vested during this period,as all outstanding options were fully vested, and no options wereexercised.  Accordingly, no compensation cost has been charged againstincome for the three months and nine months ended September 30, 2006, and therewas no recognized tax benefit related thereto.

**5.             Concentrations**

            Purchases from two vendors amountedto $8.9 million, and $8.1 million representing 45% and 34% of the totalpurchases during the three months ended September 30, 2005 and 2006respectively. Purchases from two vendors amounted to $18.5 million, and $29.1million representing 42% and 39% of the total purchases during the nine monthsended September 30, 2005 and 2006 respectively. Outstanding accountspayable to the two major vendors (net of amounts of post dated checks) totaled$3.2 million and $4.3 million****as ofDecember 31, 2005 and September 30, 2006, respectively. Thesevendors were holding post-dated checks amounting to $2.5 million and $420,000as of December 31, 2005 and September 30, 2006, respectively.  Loss of anyof these vendors may have a negative impact on the operations of the Company.

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

Net revenue by geographic area presented based uponthe country of destination. No other foreign country represented 10% or more ofnet revenue for three-month and nine-month periods ended September 30, 2005and 2006. Net revenue by geographic area was as follows:

*(inthousands, except percentage data)*
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| ** **    | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United States |       | $                                | 16,619     |                            | 78.8       | % | $ | 20,687 |   | 76.4 | % | $ | 47,789 |   | 79.8 | % | $ | 75,041 |   | 79.7 | % |
| International |       | 4,479                            |       | 21.2                            |       | 6,374 |   | 23.6 |   | 12,082 |   | 20.2 |   | 19,148 |   | 20.3 |   |
|          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total         |       | $                                | 21,098     |                            | 100.0      | % | $ | 27,061 |   | 100.0 | % | $ | 59,871 |   | 100.0 | % | $ | 94,189 |   | 100 | % |

 

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

During the three months ended September 30, 2005and 2006, the Company purchased approximately 40% and 29%, respectively, ofmerchandise from LA Jewelers, Inc.  During the nine months endedSeptember 30, 2005 and 2006, the Company purchased approximately 37% and33%, respectively. One of the owners of Los Angeles Jewelers owns 1,200,000shares of the Company’s common stock as of September 30, 2006.

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

10

----

 

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

**8.****                                      Contingencies**

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business.  Although theCompany believes it has defenses to the allegations and intends to pursue themvigorously, currently, management does not currently have sufficientinformation to assess the validity of the claims or the amount of potentialdamages.  Company management currently believes, however, that resolutionof such legal matters will not have a material adverse impact on the Company’sfinancial position, results of operations or cash flows.

Yossi Gatlin v. Bidz.com

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

*Cartier v. Bidz.com*

We are a defendant in a lawsuit filed by Cartier, and CartierInternational, B.V., in the United States District Court Southern District ofNew York in April 2006. The lawsuit alleges that Cartier has proprietaryrights, including trade dress, patents, trademarks, copyrights and others, inwatch designs known as a Tank, Tank Francaise, Tank Americaine, Panthere andPasha De Cartier Grille, and Tank Devan, and further alleges that we haveinfringed upon those rights by selling watches bearing copies of one or more ofthe watch designs. We intend to defend the lawsuit vigorously. We do notbelieve the outcome of the case will have a materially adverse effect on ourfinancial position.  The court has yet toset a trial date.

*Prior Sales of Securities*

From our inception until mid-2003, we raised over$20.5 million in gross equity capital by selling shares of our common stock toapproximately 830 investors at prices ranging from $4.00 to $6.00 per sharewith a weighted average share price of $4.50. We also issued shares of commonstock to about 30 persons in exchange for services and other non-cashconsideration valued in excess of $5.5 million and issued options to purchasecommon stock to approximately 250 individuals at a weighted average exerciseprice of $4.45. After conducting these sales of our securities, we determinedthat these sales were not exempt from the registration requirements under theSecurities Act of 1933 and similar provisions of laws of the states in whichour stockholders reside, because certain of our employees who solicitedinvestors engaged in a “general solicitation” of securities. In addition, theseemployees received compensation for selling our common stock and were requiredto be licensed as broker-dealers with the Securities and Exchange Commission,or SEC, and various state authorities, but they were not so licensed. We alsodetermined that because investors did not receive information regarding ourpotential liability for these violations of federal and sate securities laws,the common stock was issued to persons who failed to receive adequateinformation under federal and state securities laws. In such situations, anumber of remedies may be available to regulatory authorities and the investorswho purchased common stock in those offerings, including a right of rescission,civil penalties, a restraining order or injunction, and a court order to payrestitution and costs.

If we were ordered to rescind all purchases of ourcommon stock by stockholders not affiliated with us, we could be required tomake an aggregate payment to the holders of these shares of up to approximately$20.5 million, in addition to statutory interest of $10.8 million, as ofSeptember 30, 2006. We may also be liable for the $5.5 million of servicesrendered and property exchanged in consideration for the 

11

----

 

issuanceof common stock, in addition to interest of approximately $2.7 million throughSeptember 30, 2006. In addition, we may be liable for the $1.3 million that weanticipate offering to non-management optionees. In addition, regulators couldimpose monetary fines or other sanctions as provided under these laws.

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

SFAS 5 par 8 provides that an estimated loss from aloss contingency shall be accrued by a charge to income if both**of the following conditions are met: 1)Information available prior to issuance of the financial statements indicatesthat it is probable that an asset had been impaired or a liability had beenincurred at the date of the financial statements.  It is implicit in thiscondition that it must be probable that one or more future events will occurconfirming the fact of the loss.  2) The amount of loss can be reasonablyestimated.

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

**9.****                                      SubsequentEvent**

On October 18, 2006 the company sold all its remainingart inventory to a certified merchant for $335,000 which constitute less thanone percent of the our third quarter 2006 net revenue. An ex-employee of ourcompany is a substantial owner of the certified merchant.

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

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

**Overview**

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

12

----

In assessing our business, we consider operational andnon-financial performance metrics, such as average selling price per order,average orders per day, average items sold per day, acquisition cost per newbuyer, and number of new buyers. We averaged daily sales of approximately 7,293items or 2,587 orders with an average sales transaction amount per order of$124 in the three month period ended September 30, 2006.

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

**Critical Accounting Policies**

The preparation of our financial statements requiresus to make certain estimates and judgments that affect amounts reported anddisclosed in our financial statements and related notes. We base our estimateson historical experience and on other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from theseestimates. The following are the critical accounting policies that we believerequire significant estimation and judgment.

*Revenue Recognition*

We derive our revenue from five sources: merchandisesales, shipping revenue, auction transaction fee revenue, commission revenueand advertising revenue. In accordance with SAB 104, we recognize revenue fromall five sources when the following revenue recognition criteria are met:(1) persuasive evidence of an arrangement exists; (2) the product hasbeen shipped or the service has been rendered and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured.

We recognize merchandise sales upon shipments made toconsumers that are fulfilled from our warehouse. We generally require onlinepayment by credit card or other electronic payment methods at the point ofsale. We record amounts received or billed prior to shipment of goods tocustomers as deferred revenue. We reduce gross sales by returns and chargebacks from customers.

We report shipping and handling fees and costs inaccordance with Emerging Issues Task Force (“EITF”) issue No. 00-10, “Accountingfor Shipping and Handling Fees and Costs.” As such, in the Statement ofOperations all amounts billed to customers by us related to shipping andhandling are included in “Net revenue” and our shipping costs are included in “Costof revenue.”

We include auction transaction fee revenue in netrevenue. The 3% auction transaction fee is applied to all merchandise sales,including shipping and handling, but not to sales tax or commissions.

We derive commission’s revenue from sales of CertifiedMerchant merchandise that is owned by third parties and recognize that revenuewhen services have been rendered. For commission revenue, we recognize asrevenue only the commission portion of the price our customers pay for thepurchased products because we are acting as an agent in such transactions.Commissions are also reduced by the impact of returns and other discountsredeemed to obtain such sales.

We recognize advertisingrevenue, which consists primarily of pop-unders, when the services are renderedand the advertising revenue is known and collectible.

13

----

*PrepaidInventory*

We record payments made to our suppliers for purchaseswe have yet to receive. These payments are recorded as prepaid inventory untilthey are in our physical procession and satisfactorily examined; we then categorizethem as inventory.

*Inventory Reserve*

We record reserves against our inventory for lower ofcost or market equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and marketconditions. Beginning from the three months ended June 30, 2006 we will onlyrecord reserves of 100% of the value of inventory held for more than one yearand will no longer record reserves for 50% of the value of inventory held forbetween six months and one year..

*Return and Allowance Reserve*

We estimate potential future product returns relatedto current period revenue. We analyze historical returns, current economictrends, and changes in customer demand and acceptance of our products whenevaluating the adequacy of the sales returns reserve and other allowances inany accounting period. If actual returns are greater than our estimates, wewill record additional returns and allowances in addition to our estimates,which will result in lower net revenue recorded during that period.

*Stock-Based Compensation*

Prior to January 1, 2006, we measured compensationexpense to employees for our stock option incentive plans under the recognitionand measurement provisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*andrelated interpretations. Utilizing the intrinsic value method prescribed by APBNo. 25, we did not record compensation expense when stock options were grantedto eligible participants as long as the exercise price was not less than thefair market value of the stock when the option was granted.

We recorded stock-based compensation representing thedifference between the option exercise price and the deemed fair value of ourcommon stock on the grant date for financial reporting purposes. We determinedthe deemed fair value of our common stock based upon the most recentthird-party sale of our common stock known to us. Had different assumptions orcriteria been used to determine the deemed fair value of our common stock,different amounts of stock-based compensation could have been reported.

In accordance with Statement of Financial AccountingStandards (‘‘SFAS’’) No. 123, ‘‘Accounting for Stock-Based Compensation,’’ andSFAS No. 148, ‘‘Accounting for Stock-Based Compensation-Transition andDisclosure,’’ which amended SFAS No. 123, we disclosed pro forma net income andnet income per share as if the fair value based method had been applied inmeasuring compensation expense. The disclosure provisions of SFAS No. 148 wereeffective for financial statements for interim periods beginning after December15, 2002. We adopted the disclosure requirements in the first quarter of 2003.This information is contained in Note 1 to our financial statements. The fairvalues of options and shares issued pursuant to our option plan at each grantdate were estimated using the Black-Scholes option pricing model. Because therehas been no public market for our common stock, we used the minimum valuemethod in determining the expected volatility of our common stock was zero. Thetransition provisions did not have an impact on our financial position orresults of operations as we did not elect to adopt the fair value-based methodof accounting for stock-based employee compensation under SFAS No. 123.

OnJanuary 1, 2006, we adopted SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’(‘‘SFAS 123R’’) requiring that share-based payment transactions be recognizedin the financial statements based on the fair value of the equity or liabilityinstrument issued. We intend to use the Black-Scholes option pricing model toestimate the value of our options in implementing SFAS 123R and will use thecalculated method to determine expected volatility, rather than the minimumvalue method, which we previously used to determine expected volatility. 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. Accordingly, stock-based compensation expense recognizedin the statements of income will be reduced for estimated forfeitures. SFAS123R requires forfeitures to be estimated at the time of grant and

14

----

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

We adopted SFAS 123R using the modified prospectivemethod which requires the application of the accounting standard as of January1, 2006. Under this transition method, we are required to recognizecompensation cost beginning January 1, 2006 for the portion of outstandingawards for which the requisite service has been rendered, based on thegrant-date fair value of those awards calculated under SFAS 123 for our proforma disclosures. As of September 30, 2006, all stock options outstanding werefully vested, and we did not issue any stock-based payment awards in the threemonths and nine months ended September 30, 2006. Therefore, the adoption ofSFAS 123R did not affect our results of operations. In accordance with themodified prospective method, the financial statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS 123R.

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 Sept 30,**                                          | ** ** | **Nine Months Ended Sept 30,**                                           | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **       2005       ** | ** ** | **       2006       ** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                            | * *   | * *                                                                                     |       |                                                                                         |       | * * | * * | * * | * * |
| Net Sales                       |       | 100.0                                                                                        | %          | 100.0                                                                                        | %          | 100.0 | % | 100.0 | % |
| Gross Profit                    |       | 20.6                                                                                         |       | 24.6                                                                                         |       | 19.6 |   | 25.0 |   |
| Operating  Expenses:            |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| General & Administrative    |       | 11.5                                                                                         |       | 11.2                                                                                         |       | 12.6 |   | 10.5 |   |
| Sales & Marketing           |       | 5.5                                                                                          |       | 9.4                                                                                          |       | 4.6 |   | 8.3 |   |
| Public Offering Costs           |       | 2.1                                                                                          |       | 0.0                                                                                          |       | 0.7 |   | 1.3 |   |
| Depreciation & Amortization |       | 0.2                                                                                          |       | 0.3                                                                                          |       | 0.2 |   | 0.2 |   |
| Total Operating  Expenses       |       | 19.3                                                                                         |       | 20.9                                                                                         |       | 18.1 |   | 20.3 |   |
| Profit from  Operations         |       | 1.3                                                                                          |       | 3.7                                                                                          |       | 1.5 |   | 4.7 |   |
| Interest income                 |       | 0.0                                                                                          |       | 0.1                                                                                          |       | 0.0 |   | 0.1 |   |
| Income tax  expense             |       | 0.1                                                                                          |       | 0.1                                                                                          |       | 0.0 |   | 0.1 |   |
| Net Income                      |       | 1.2                                                                                          | %          | 3.7                                                                                          | %          | 1.5 | % | 4.7 | % |

 

*Net Revenue*

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

The following tablepresents our sources of revenue for the periods indicated as a percentage ofnet revenue. 
| ** **              | ** ** | **Three Months Ended Sept 30,**                                          | ** ** | **Nine Months Ended Sept 30,**                                           | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **       2005       ** | ** ** | **       2006       ** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                    | * *   | * *                                                                                     |       | * *                                                                                     | * *   | * * | * * | * * | * * |
| Net Sales               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Merchandise sales       |       | 88.8                                                                                         | %          | 84.4                                                                                         | %          | 89.9 | % | 84.8 | % |
| Shipping & handling |       | 11.0                                                                                         |       | 12.6                                                                                         |       | 9.8 |   | 12.1 |   |
| Transaction fees        |       | —                                                                                       |       | 3.1                                                                                          |       | — |   | 3.1 |   |
|                    |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Commissions             |       | —                                                                                       |       | —                                                                                       |       | — |   | — |   |
|                    |       |                                                                                         |       |                                                                                         |       |   |   |   |   |
| Advertising             |       | —                                                                                       |       | —                                                                                       |       | — |   | — |   |
| Total Net Sales         |       | 100.0                                                                                        | %          | 100.0                                                                                        | %          | 100.0 | % | 100.0 | % |

 

15

----

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

*Gross Profit*

Our gross profit consists of net revenue less the costof sales. Our cost of sales consists of the cost of merchandise sold tocustomers, inbound and outbound shipping costs, shipping supplies, insurance onshipments, and credit card and other transaction fees associated with payments.

*General and Administrative Expenses*

Our general and administrative expenses consistprimarily of payroll and related benefit costs for our employees. Theseexpenses also include fulfillment, customer service, technology, professionalfees, other general corporate expenses, and stock-based compensation,consisting substantially of stock option grants and stock grants to employeesand consultants. We anticipate that our compensation expense under SFASNo. 123(R) will increase in future periods.

*Sales and Marketing Expenses*

Our marketing expenses consist primarily of costsassociated with paid website searches, contextual marketing, e-mail campaigns,affiliate programs and optimization services. These marketing programs, whichare designed to drive buyers to our website, are the most important factor inincreasing demand for our jewelry products and increasing net revenue.

*Public offering costs*

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

**Comparison of Three Months Ended September 30, 2005 toThree Months Ended September 30, 2006**

Net income in the three months endedSeptember 30, 2006 was $997,000, or $0.04 per basic and diluted share. Inthe three months ended September 30, 2005, net income was $244,000 and netincome per basic and diluted share was $0.01. Net revenue increased by 28.3% inthe three months ended September 30, 2006 compared to the three monthsended September 30, 2005 while the net income increased by 309% over thesame period. The increase in net income was due to increased revenue, improvedprofit margins and a reduction in accrued compensation of $250,000. Grossprofit margin in the third quarter of 2006 was 24.6% compared to 20.6% in thethird quarter of 2005.

*Net Revenue*

Net revenue increased 28.3% to $27.1 million in thethree months ended September 30, 2006 from $21.1 million in the threemonths ended September 30, 2005. This increase in net revenue was dueprimarily to the growth in demand for our jewelry products and the increase inaverage sales amount per order.

16

----

*Gross Profit*

Gross profit increased 53.6% to $6.7 million in thethree months ended September 30, 2006 from $4.3 million in the three monthsended September 30, 2005. The increase in gross profit resulted from theincrease in gross profit as a percentage of net sales to 24.6% for the threemonths ended September 30, 2006 compared to 20.6% for the three months endedSeptember 30, 2005 and from the increase in sales revenue which rose by $6.0million for the three months ended September 30, 2006 from the three monthsended September 30, 2005. The implementation of transaction fee charges of 3.0%since November 2005 has improved gross profit performance in the current threemonth period ended September 30, 2006.

*General and Administrative Expenses*

General and administrative expenses increased 25.6% to$3.1 million in the three months ended September 30, 2006 from$2.4 million in three months ended September 30, 2005. The increasein general and administrative expenses was due in general to our overall growthand includes increases in payroll and payroll related expenses. General andadministrative expenses would have increased by 40% if $250,000 in accruedcompensation had not been reduced.

*Sales & Marketing Expenses*

Sales and marketing expenses increased 118% to $2.5million in the three months ended September 30, 2006 from $1.2 million inthe three months ended September 30, 2005. This increase resultedprimarily from increased marketing campaigns and the increased cost of onlineadvertising to attract new buyers. Sales and marketing expenses as a percentageof net revenue increased to 9.4% in the three months ended September 30, 2006from 5.5% in 2005. We expect our sales and marketing expenses to continue toincrease in absolute dollars, as we intend to continue increasing our onlinemarketing campaign in order to attract new customers.

**Comparison of Nine Months Ended September 30, 2005 toNine Months September 30, 2006**

Netincome in the nine months ended September 30, 2006 was $4.4 million, or$0.19 per basic and $0.19 per diluted share. In the nine months endedSeptember 30, 2005, net income was $857,000 and net income per basic anddiluted share was $0.03. Net revenue increased by 57.3% in the nine monthsended September 30, 2006 compared to the nine months endedSeptember 30, 2005 and net income increased by 418% over the same period.

*Net Revenue*

Net revenue increased57.3% to $ 94.2 million in the nine months ended September 30, 2006from $59.9 million in the nine months ended September 30, 2005 Thisincrease in net revenue was due primarily to the increase in registered buyersat our website, growth in demand for our jewelry products and the increase inaverage sales amount per order.

17

----

*Gross Profit*

Gross profit increased 101% to $23.5 million in thenine months ended September 30, 2006 from $11.7 million in the ninemonths ended September 30, 2005 The increase in gross profit resulted fromthe increase in gross profit as a percentage of net sales to 25.0% for the sixmonths ended September 30, 2006 compared to 19.5% for the nine monthsended September 30, 2005 and from the increase in net revenue which roseby $34.3 million for the nine months ended September 30, 2005 from thenine months ended September 30, 2005. The implementation of transaction feecharges of 3.0% since November 2005 has improved gross profit performance inthe current nine month period ended September 30, 2006.

*General and Administrative Expenses*

General and administrative expenses increased 30.9% to$9.8 million in the nine months ended September 30, 2006 from$7.5 million in the nine months ended September 30, 2005. Theincrease in general and administrative expenses was in line with our overallgrowth and includes increases in payroll and payroll related expenses.

*Sales & Marketing Expenses*

Sales and marketing expenses increased 182% to $7.8million in the nine months ended September 30, 2006 from $2.8 millionin the nine months ended September 30, 2005. The increase in sales andmarketing expenses was attributable to increased marketing campaigns and to theincreased cost of such online marketing this period relative to thecorresponding period last year. Sales and marketing expenses as a percentage ofnet revenue increased to 8.3% in the nine months ended September 30, 2006 from4.6% in 2005. We expect our sales and marketing expenses to continue toincrease in absolute dollars, as we intend to continue increasing our onlinemarketing campaign in order to attract new customers.

**Additional Quarterly Data**

|                                         | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                                 | ** ** | **2006** | ** ** |
| Average sales  amount per order (gross) |       | $                                                        | 108        |   | $ | 124 |   |
| Average orders  per day                 |       | 2,381                                                    |       | 2,587 |   |
| Average items  sold per day             |       | 6,669                                                    |       | 7,293 |   |
| Acquisition cost  per new buyer         |       | $                                                        | 27         |   | $ | 51 |   |
| Number of new buyers                    |       | 42,875                                                   |       | 49,412 |   |

 

**Liquidity and Capital Resources**

Since inception, we have funded our operations throughthe sale of equity securities and cash generated from operations. Thesignificant components of our working capital are inventory and liquid assetssuch as cash and accounts receivable, reduced by post-dated check financing,accounts payable, accrued expenses and deferred revenue. Our business modelcontains beneficial working capital characteristics: while we collect cash fromsales to customers within several business days of the related sale, wetypically have extended payment terms with our suppliers.

18

----

As of September 30, 2006, we had a workingcapital surplus of $5.1 million and have no short or long-term debtobligations. The “post-dated check financing” reflected on our balance sheetsresults from post-dated checks outstanding. It is customary for our vendors toaccept checks post-dated by 60 days as extended payment for purchase ofmerchandise.

Our post-datedcheck financing procedures have changed this quarter. In prior periods we haverecorded post-dated checks to vendors as though the checks had cleared our bankand therefore reduced outstanding accounts payable. We now employ “positive pay”procedures with our financial institution, which preclude post-dated checksfrom clearing prior to the check date. Therefore, post-dated checks to vendors remainin accounts payable until the date of the check. The post-dated check financingreflected on our financial statements at September 30, 2006 reflects thosechecks that are not subject to our new procedures. By year end we anticipatethat all post-dated checks provided to vendors will be subject to “positivepay.” At September 30, 2006 our financial statements reflect post-dated checkfinancing of $1.9 million and outstanding accounts payable of $12.4 million.This compares with $5.3 million of post-dated check financing at December 31,2005 and outstanding accounts payable of $7.3 million. Accounts payable haveincreased proportionately as post-dated check financing has decreased.

Net cash provided by operating activities was$3.2million in the nine months ended September 30, 2006 compared to netcash provided of $134,000 in the nine months ended September 30,2005. The net cash in the nine months ended September 30, 2006 was affectedmainly by changes in net income, inventories, other assets, post-dated checkfinancing, accounts payable and accrued expenses. The net cash in the ninemonths ended September 30, 2005 was affected mainly by changes in net income,inventories and post-dated check financing. We recorded net income of $4.4million in the nine months ended September 30, 2006 compared to $857,000in the nine months ended September 30, 2005. Cash flows from net incomewere used to meet our working capital requirements. In the nine months endedSeptember 30, 2006, inventories increased by $5.7 million, prepaid inventoryincreased by 1.0 million, post-dated check financing decreased by $3.4 million,accounts payable increased by $5.1 million and accrued expenses increased by$3.2 million. The increase in accrued expenses was in large part attributableto accrued inventory purchases. In the nine months ended September 30, 2005,inventories increased by $2.1 million and post-dated check financing increasedby $997,000. Inventories and accounts payable generally increase in line withsales growth and changes in our inventory strategy. Our inventory strategy isinfluenced by our ability to secure inventory that we believe will improve ourmargins. We are building inventory in anticipation of increased sales duringthe holiday season in the fourth quarter.

Net cash used in investing activities was $315,000 inthe nine months ended September 30, 2006 compared to $137,000 in the ninemonths ended September 30, 2005. During the nine months endedSeptember 30, 2006, net cash used for investing activities was related tocapital expenditures mainly for computer equipment and in the nine months endedSeptember 30, 2005 was related to capital expenditures mainly for officeand computer equipment.

We believe that cash and cash equivalents currently onhand, cash flows from operations and the availability of a $10 millionrevolving line of credit will be sufficient to continue our operations and topursue our growth strategy for the foreseeable future. Our future capitalrequirements will depend on many factors, including the rate of our revenuegrowth; the timing and extent of spending to enhance our website, networkinfrastructure, and transaction processing systems; the extent of ouradvertising and marketing programs; the levels of the inventory we carry; andother factors relating to our business. Enhancement of our website, networkinfrastructure, and transaction processing systems will require us to spend significantlymore than we have in the past. Moreover, to date our spending in these areashas been lower than industry averages. We anticipate increasing our systemexpenditures to accommodate these needs in the future. We may requireadditional financing in the future in order to execute our operating plan. Wecannot predict whether this additional financing will be in the form ofequity, debt, or a combination of debt or equity. We may not be able toobtain any necessary additional funds on a timely basis, on acceptable terms,or at all.

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

Market risk represents the risk of loss arising fromadverse changes in market rates and foreign exchange rates. We do not believethat a change in market interest rates would have a material effect on ourresults of operations or financial condition. Although we derive a portion ofour sales outside of the United States, all of our sales are denominated inU.S. Dollars. We have limited exposure to financial market risks, includingchanges in interest rates and foreign currency exchange rates.

**ITEM 4 - CONTROLS AND PROCEDURES**

The Company conducted aninternal evaluation of its disclosure, controls, and procedures as of the endof the period covered by this report under the supervision and with theparticipation of management, including David Zinberg, President and ChiefExecutive Officer (CEO), and Lawrence Kong, Chief Financial Officer (CFO).Based upon that evaluation, the CEO and CFO concluded that the Company’s

19

----

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

**PART II.OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

*Yossi Gatlin v. Bidz.com*

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

*Cartier v. Bidz.com*

We are a defendant in a lawsuit filed by Cartier, andCartier International, B.V., in the United States District Court SouthernDistrict of New York in April 2006. The lawsuit alleges that Cartier hasproprietary rights, including trade dress, patents, trademarks, copyrights andothers, in watch designs known as a Tank, Tank Francaise, Tank Americaine, Panthereand Pasha De Cartier Grille, and Tank Devan, and further alleges that we haveinfringed upon those rights by selling watches bearing copies of one or more ofthe watch designs. We intend to defend the lawsuit vigorously. We do notbelieve the outcome of the case will have a materially adverse effect on ourfinancial position. The court has yet to set a trial date.

**ITEM 1.A. RISK FACTORS**

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

Our netrevenue depends to a significant extent on the number of customers who visitour website to purchase merchandise and the dollar amount of their purchases.Generating increased traffic to our website and converting that traffic intobuyers requires us to achieve effective results from our marketing campaigns;offer a wide variety of products that our customers can purchase at favorableprices; maintain a user-friendly shopping experience; ensure the satisfactoryavailability, performance, and reliability of our website, networkinfrastructure, and transaction processing systems; and provide high-qualitycustomer service. Our business will be harmed if we are unable to increase ourcustomer base and the dollar volume of the orders customers place with us.

***We do not have a guaranteed supply ofjewelry products, and we have a heavy concentration of inventory purchases fromour top five suppliers****.*

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

20

----

Inaddition, we have a heavy concentration of inventory purchases from a smallnumber of suppliers. Our top five suppliers accounted for approximately 53.8%and 50.1% of our total purchases in the nine months ended September 30, 2005,and 2006, respectively. In the three months ended September 30, 2005 and 2006,we purchased 40.3% and 28.9%, respectively, of our merchandise from Los AngelesJewelers, Inc., a jewelry manufacturer and liquidator.

***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.

***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, portal and website advertising,participation in affiliate programs, and direct advertising. We do not maintainlong-term contracts or arrangements with any companies, including any searchengines, Internet portals, or other websites, and we may not successfully enterinto additional relationships or maintain existing ones. Recently, we haveexperienced significantly higher rates for keyword search advertising. Weexpect that we will have to pay increasing fees to maintain, expand, or enterinto new relationships with third-party search engines, Internet portals, andwebsites. In addition, traffic to our website could decline if our onlinemarketing programs become less effective or the traffic decreases to the searchengines, Internet portals, and websites with which we advertise. Our businesscould be materially and adversely affected if any substantial number ofcompanies on which we advertise experience financial or operational difficultiesor experience other corporate developments that adversely affect theirperformance. A failure to maintain or expand existing online advertisingrelationships or to establish additional online advertising relationships thatgenerate a significant amount of traffic from other websites could result indecreased sales or limit the growth of our business.

***Competition from online auctioneers 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.

We currently compete with a number of other companies,and other competitors may appear in the future. Our competitors currentlyinclude various online auction services and retailers that offer jewelry,including eBay, Odimo, Blue Nile, Overstock, and uBid. We also encountercompetition from national jewelry retail chains, such as Zales, Kay Jewelers,and Finlay Fine Jewelry, and mass retailers and other enterprises that selljewelry, such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home ShoppingNetwork. Many of our competitors have greater brand recognition, longeroperating histories, larger customer bases, and significantly greaterfinancial, marketing, and other resources than we do. Smaller competitors mayenter

21

----

intostrategic or commercial relationships with larger, more established, andwell-financed companies. Other competitors may enter into exclusivedistribution agreements with our suppliers that deny us access to suppliers’products. Competitors may also devote greater resources to marketing andpromotional campaigns and to website and systems technology than we do. We maynot be able to compete successfully against current and future competitors oraddress increased competitive pressures.

Furthermore,attempts have been made in the past to develop and market synthetic stones andgems to compete in the market for gemstones and gemstone jewelry. We expectsuch efforts to continue in the future. If any such efforts are successful increating widespread demand for synthetic or alternative gemstone products,demand and price levels for our products could decline and our business andresults of operations would be substantially harmed.

***We rely heavily on the sale 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.

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

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

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

We had$ 21.5 million in inventory and $1.0 million of prepaid inventory as ofSeptember 30, 2006. If our sales increase, we will be required to increase ourinventory proportionately. Consumer tastes and preferences for jewelry productscan change rapidly, thereby exposing us to significant inventory risks.Currently, because the products we sell typically consist of closeoutmerchandise from manufacturers, distributors, and other suppliers, we have lesscontrol over the specific items that we offer for sale than we would if weprimarily ordered goods for manufacture for us. In addition, it is importantthat we are able to purchase jewelry that we perceive to be in demand. Thedemand for specific products can change between the time we order items andwhen we sell them. As a result, we may be required to take significantinventory markdowns, which could reduce our gross margin, if we do notaccurately predict these trends or if we overstock unpopular merchandise.

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

We rely on suppliers to deliver our orders promptly,which we then carry in inventory to ensure availability and expedited deliveryto our customers. We also rely on third-party carriers to ship our products toour customers. As a result, we are subject to various risks, including employeestrikes and inclement weather, associated with the ability of third-partycarriers to provide delivery services to meet our shipping needs and those ofour suppliers. The failure of our suppliers and third-party carriers to deliverproducts to us or

22

----

ourcustomers in a timely manner or otherwise to serve us or our customersadequately would damage our reputation and brand and substantially harm ourbusiness and results of operations.

***Increases in the cost of precious 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.

***Our business and results of operationswould be harmed in the event of any failure of our auction and bidding systemshardware, which is located at a single third-party co-location facility, or anyfailure of our fulfillment and administrative hardware.***

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

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

We maynot be able to accommodate any substantial growth in traffic or user demand onour website, network infrastructure, and transaction processing systems in atimely manner or without substantial costs. If we are unable to upgrade ourexisting technology, network infrastructure, and transaction processing systemsto accommodate any increased sales volume, our potential customers may bedissatisfied and may purchase merchandise from our competitors. We may alsofail to provide enough capacity in our customer service and sales supportfunctions to provide a high level of customer service. A failure to implementnew systems and increase customer service capacity effectively could adverselyaffect our sales. Enhancement of our website, network infrastructure, andtransaction processing systems will require us to spend a significantly higheramount than we have in the past. Moreover, to date our spending in these areasas a percentage of revenue has been lower than industry averages. We anticipateincreasing our system expenditures to accommodate these needs in the future.

We also intend to introduce additional or enhancedfeatures and services to retain current customers and attract new customers toour website. We may experience difficulties that could delay or prevent us fromintroducing new features and services. If we introduce a feature or a servicethat is not favorably received,

23

----

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

***Our growth will depend on 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 marketing budget and otherwise increase our financial commitmentto creating and maintaining brand loyalty among users. Brand promotionactivities may not yield increased revenue, and even if they do, any increasedrevenue may not offset the expenses we incur in building our website popularityand our brand. If we do attract new users to our website, they may not conducttransactions on a frequent basis or in sufficient dollar amounts. If we fail topromote and maintain our website or incur substantial expenses in anunsuccessful attempt to promote and maintain our brand, our business would beharmed.

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

In2005, and in the nine months ended September 30, 2006, 19.2% and 20.3%,respectively, of our net revenue was generated by shipments to customersoutside of the United States. We plan, over time, to expand our reach intointernational markets. We do not, however, currently have any overseasfulfillment, distribution, or server facilities or any website contentlocalized for foreign markets. We cannot be certain that we will be able toexpand our global presence. In addition, there are certain risks associatedwith doing business on an international basis, including regulatoryrequirements, legal uncertainty regarding liability, tariffs, and other tradebarriers, longer payment cycles, and potentially adverse tax consequences, anyof which could adversely affect our business. Although our foreign sales historicallyhave been denominated in U.S. dollars, we also may be subject to increasedrisks relating to foreign currency exchange rate fluctuations to the extent wedecide to denominate our sales in foreign currencies.

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

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

***We depend on the continued growth andacceptance of online commerce, and our business will be substantially impairedif the growth of online commerce slows or does not grow as expected.***

The business of buying and selling goods over theInternet is relatively new and dynamic. Our success depends on the widespreadacceptance and use of the Internet as an effective medium for commerce byconsumers. The acceptance and use of the Internet may not continue to expand asexpected, and a sufficient broad base of consumers necessary for its continuedgrowth may not adopt the Internet as a medium for commerce.

24

----

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

***Our failure to protect confidentialinformation of our customers and our network against security breaches coulddamage our reputation and substantially harm our business and results ofoperations****.*

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

***We are vulnerable to fraudulent activitieson our website, including unauthorized use of customer information and identitytheft by third parties****.*

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

***Increased product returns and the failureto predict product returns could substantially harm our business and results ofoperations****.*

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

***Our inventory is vulnerable to damage orloss caused by fire, flood, earthquakes, and similar events, and we face therisk of theft of our products from inventory or during shipment.***

All our inventory is stored at our warehouse/officefacility in Culver City, California. Consequently, our merchandise supply isvulnerable to fire, flood, earthquakes, and similar events that may impact ourfacility. Any damage to or loss of all or a significant portion of ourinventory could cause significant delays

25

----

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

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

***Increases in credit card processing feescould increase our costs.***

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

***Our limited operating history makes itdifficult for us to forecast accurately net revenue and appropriately plan ourexpenses.***

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

***We incurred losses from operations prior tofiscal 2004 and have accumulated a significant deficit.***

Priorto fiscal year 2004 we experienced significant operating losses. At September30, 2006, we had an accumulated deficit of $22.5 million. We cannot becertain that the improvements in our operations resulting since 2004 willcontinue in the future. See “Management’s discussion and analysis of financialcondition and results of operations—Liquidity and Capital Resources.”

***We may default on our obligations, if weare unable to generate sufficient cash through sales in a timely manner.***

Since our formation, we have funded our operationsthrough the sale of equity securities and cash generated from operations. Theworking capital characteristics of our business have allowed us to collect cashfrom sales to customers within several business days of the related sale, whilewe typically have extended payment terms with our suppliers. We do not,however, have any formal or binding supply agreements with any of oursuppliers, manufacturers, distributors, or other suppliers or any other formalagreements with them on payment terms. Accordingly, there is a risk that we maydefault on our obligations if we are unable to generate sufficient cash throughsales in a timely manner or through our credit facility.

26

----

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

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

***Sales growth in prior periods may not beindicative of our future growth.***

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

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

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

***Descriptions of our jewelry items are notguarantees and may confuse, mislead, or disappoint our customers****.*

In aneffort to provide accurate descriptions of jewelry posted on our website, weprovide appraisal summaries from third-party gemological laboratories for someof our jewelry items. All other jewelry and watch descriptions are provided byour full-time Gemological Institute of America, or GIA, trained gemologists andseveral experienced product specialists. Nevertheless, there is a subjectivecomponent involved with respect to assessing the clarity, color, and caratcharacteristics of diamonds and other gemstones. In addition, mistakes 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 asa courtesy to resellers, we provide “Compare” and/or “Close Now” prices forjewelry items listed on our website. Compare and Close Now prices are not meantto reflect fair market values or manufacturer suggested retail prices, and infact, may be higher than prices found in local retail stores. As a consequence,perceived misrepresentations in item descriptions by disappointed buyers mayoccur, resulting in negative publicity about and diminished customer confidencein our website.

27

----

***We may not be able to maintain our domainname uniqueness.***

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

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

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

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

***We may be unable to enforce protection ofour intellectual property rights under the laws of other countries.***

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

***Various legal rules and regulations relatedto privacy and the collection, dissemination, and security of personalinformation may adversely affect our marketing efforts.***

We are subject to increasing regulation at thefederal, state, and international levels relating to privacy and the use ofpersonal user information designed to protect the privacy of personallyidentifiable information as well as to protect against its misuse. These lawsinclude the Federal Trade Commission Act, the CAN-SPAM Act of 2003, theChildren’s Online Privacy Protection Act, the Fair Credit Reporting Act, theHomeland Security Act, and related regulations. Several states have proposedlegislation that would limit the use of personal information gathered online orrequire online services to establish privacy policies. Moreover, proposedlegislation in the United States and existing laws in foreign countries requirecompanies to establish procedures to notify users of privacy and securitypolicies, obtain consent from users for collection and use of personalinformation, and/or provide users with the ability to access, correct, anddelete personal information stored by companies. These regulations and otherlaws, rules, and

28

----

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

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

***We may be subject to regulations governingthe conduct and liability of auctioneers, which could affect the way in whichwe conduct our business or otherwise increase our cost of doing business.***

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

***We are subject to regulations relating toconsumer privacy, which could increase the cost of our doing business, exposeus to litigation costs, increase our service or delivery costs, and otherwiseharm our business.***

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

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

***New and existing regulations could harm ourbusiness****.*

We are subject to the same foreign and domestic lawsas other companies conducting both online and offline business. There are stillrelatively few laws specifically directed towards online business. However,

29

----

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

Inaddition, because our products are available over the Internet in multiplestates and because we sell merchandise to consumers residing in multiplestates, we could be required to qualify to do business as a foreign corporationin each state in which our products are available. Our failure to qualify as aforeign corporation in a jurisdiction in which we are required to do so couldsubject us to penalties. Any new legislation or regulation, or the applicationof laws or regulations from jurisdictions whose laws do not currently apply toour business could have a material adverse affect on our business.

***We depend to a very significant extent onDavid Zinberg, our Chairman of the Board, President, and Chief ExecutiveOfficer.***

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

***Holders of common stock issued by us inprior offerings are entitled to rescind their purchases.***

Fromour inception until mid-2003, we raised over $20.5 million in gross equitycapital by selling shares of our common stock to approximately 830 investors atprices ranging from $4.00 to $6.00 per share with a weighted average shareprice of $4.50. We also issued shares of common stock to about 30 persons inexchange for services and other non-cash consideration valued in excess of$5.5 million and issued options to purchase common stock to approximately250 individuals at a weighted average exercise price of $4.45. After conductingthese sales of our securities, we determined that these sales were not exemptfrom the 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 “general solicitation”of securities. In addition, these employees received compensation for sellingour common stock and were required to be licensed as broker-dealers with theSecurities and Exchange Commission, or SEC, and various state authorities, butthey were not so licensed. In such situations, a number of remedies may beavailable to regulatory authorities and the investors who purchased commonstock in those offerings, including a right of rescission, civil penalties, arestraining order or injunction, and a court order to pay restitution andcosts.

If we were ordered to rescind all purchases of ourcommon stock by stockholders not affiliated with us, we could be required tomake an aggregate payment to the holders of these shares of up to approximately$20.5 million, in addition to statutory interest of $10.8****million, as of September 30, 2006. We may also be liablefor the $5.5 million of services rendered and property exchanged inconsideration for the issuance of common stock, in addition to interest ofapproximately $2.7 million through September 30, 2006. In addition, we

30

----

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

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

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

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 of our capital stockownership with our founder and executive officers and directors and theiraffiliates will limit your ability to influence corporate matters.***

Ourfounder, executive officers, and directors will together own approximately 37.0%of our common stock as of September 30, 2006. As a result, they will havesignificant influence over our management and affairs and over all mattersrequiring stockholder approval, including the election of directors and theapproval of significant corporate transactions, such as a merger or a sale ofour company or its assets, for the foreseeable future. This concentratedcontrol will limit the ability of other stockholders to influence corporatematters. Because of this, we may take actions that some of our stockholders donot view as beneficial. As a result, the market price of our common stock couldbe adversely affected because stockholders may not view favorably theconcentration of control in the hands of management.

***Our charter documents and Delaware lawcould make it more difficult for a third party to acquire us, and discourage atakeover****.*

During June 2006, we reincorporated in Delaware, andthe Delaware certificate of incorporation and the Delaware General CorporationLaw, or DGCL, contain provisions that may have the effect of making moredifficult or delaying attempts by others to obtain control of our company, evenwhen these attempts may be in the best interests of our stockholders. TheDelaware certificate of incorporation also authorizes our Board of Directors,without stockholder approval, to issue one or more series of preferred stock,which could have voting and conversion rights that adversely affect or dilutethe voting 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 may maintainthe incumbency of our Board of Directors, as this structure generally increasesthe difficulty of, or may delay, replacing a majority of directors. TheDelaware bylaws authorize our Board of Directors to fill vacancies or newlycreated directorships. A majority of the directors then in office may elect asuccessor to fill any vacancies or newly created directorships.

31

----

ITEM6. EXHIBITS.
| 31.1   |   | Principal Executive Officer Certification Pursuant  to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                   |
| 31.2   |   | Principal Financial Officer Certification Pursuant  to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
|   |   |                                                                                                                   |
| 32.1   |   | Certifications Pursuant to  Rule 13a-14(b) of the Securities Exchange Act of 1934                            |

 

32

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                           |       | BIDZ.COM, INC.                             |
|---------------------------|------------|--------------------------------------------|
|                      |       |                                       |
|                      | By:        | /s/ DAVID ZINBERG                          |
|                      |       |                                       |
| ** **                | ** ** | **David  Zinberg**                         |
| ** **                | ** ** | **President  and Chief Executive Officer** |
|                      |       |                                       |
|                      | By:        | /s/ LAWRENCE  KONG                         |
|                      |       |                                       |
| ** **                | ** ** | **Lawrence  Kong**                         |
| ** **                | ** ** | **Principal  Accounting Officer**          |
|                      |       |                                       |
| Dated: November 13,  2006 |       |                                       |

 

33

----