UNITED STATES

SECURITIES 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, 2007

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

		For the transition period to

Commission file number 000-51257

BIDZ.COM, INC.

(Exact name of Registrant as specified in its charter)

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

3562 Eastham Drive

Culver City, California

90232

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

(310) 280-7373

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

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

o Yes x No

Number of shares outstanding of Registrant’s common stock, $0.001 par value, as of November 7, 2007: 23,844,478

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Balance Sheets as of December 31, 2006 and September 30, 2007 (unaudited)	3
	Condensed Statements of Income for the three month and nine month periods ended September 30, 2006 and 2007 (unaudited)	4
	Condensed Statements of Cash Flows for the nine month periods ended September 30, 2006 and 2007 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
Item 4T	Controls and Procedures	20

PART II. OTHER INFORMATION		21
Item 1.	Legal Proceedings	21
Item 1A	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34
SIGNATURES		35

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Bidz.com, Inc.

Condensed Balance Sheets

(In thousands, except share data)

	December 31,			September 30,
	2006			2007
				(Unaudited)
Assets
Current assets:
Cash	$	359		$	1,100
Accounts receivable, net of reserves of $0 and $100 at December 31, 2006 and September 30, 2007, respectively	1,930			1,994
Inventories, net of reserves of $461 and $794 at December 31, 2006 and September 30, 2007, respectively	34,308			46,273
Other current assets	1,192			2,125
Total current assets	37,789			51,492
Property and equipment, net	478			1,293
Intangible asset	150			161
Deposits	125			104
Total assets	$	38,542		$	53,050

Liabilities and Stockholders’ Equity
Current liabilities:
Revolving credit line	$	3,941		$	—
Accounts payable (includes related party amounts of $4,331 and $5,285 at December 31, 2006 and September 30, 2007, respectively)	21,987			27,614
Accrued expenses	1,952			3,031
Deferred revenue	3,935			2,183
Total current liabilities	31,815			32,828

Commitments and contingencies

Stockholders’ equity:
Preferred stock: par value $0.001; authorized 4,000,000 shares; none issued and outstanding at December 31, 2006 and September 30, 2007, respectively	—			—
Common stock: par value $0.001; authorized 100,000,000 shares; issued and outstanding 23,233,904 and 23,814,978 at December 31, 2006 and September 30, 2007, respectively	23			24
Additional paid in capital	28,352			31,933
Shares held in treasury, at cost, 15,000 shares at December 31, 2006 and September 30, 2007	(90		)	(90		)
Accumulated deficit	(21,558		)	(11,645		)
Total stockholders’ equity	6,727			20,222
	$	38,542		$	53,050

The accompanying notes form an integral part of these condensed financial statements.

Bidz.com, Inc.

Condensed Statements of Income (Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2007			2006		2007

Net revenue:
Merchandise sales	$	27,061	$	39,973		$	94,132	$	123,661
Other revenue	—		78			57		237
	27,061		40,051			94,189		123,898
Cost of revenue	20,399		27,356			70,660		89,201
Gross Profit	6,662		12,695			23,529		34,697
Operating expenses:
General and administrative	3,052		4,945			9,847		14,774
Sales and marketing	2,531		2,406			7,776		7,026
Public offering costs	—		—			1,231		—
Depreciation and amortization	74		160			195		346
Total operating expenses	5,657		7,511			19,049		22,146
Income from operations	1,005		5,184			4,480		12,551
Other income - interest income	19		28			77		33
Other expense - interest (expense)	—		(1		)	—		(165		)
Income before income tax expense	1,024		5,211			4,557		12,419
Income tax expense	27		1,648			121		2,506
Net income	$	997	$	3,563		$	4,436	$	9,913
Net income per share available to common shareholders - basic	$	0.04	$	0.15		$	0.19	$	0.42
Net income per share available to common shareholders - diluted	$	0.04	$	0.14		$	0.19	$	0.40
Weighted average number of shares outstanding - basic	23,310,791		23,593,325			23,311,930		23,371,838
Weighted average number of shares outstanding - diluted	23,819,549		26,324,387			23,822,649		25,031,607

The accompanying notes form an integral part of these condensed financial statements.

Bidz.com, Inc.

Condensed Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2006			2007

Cash flows provided by (used for) operating activities:
Net income	$	4,436		$	9,913

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization	195			346
Change in inventory reserve	119			333
Amortization of deferred stock-based compensation	100			—
Stock-based compensation	219			507
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable	5			(64		)
Inventories	(6,747		)	(12,298		)
Other current assets	(152		)	(933		)
Deposits	100			21
Increase (decrease) in liabilities:
Post-dated check financing	(3,409		)	—
Accounts payable	5,061			5,627
Accrued expenses	3,243			1,079
Deferred revenue	64			(1,752		)
Net cash provided by operating activities	3,234			2,779

Cash flows (used for) investing activities:
Capital expenditures	(315		)	(1,172		)
Cash flows provided by (used for) financing activities:
Payments on revolving credit line balance	—			(3,941		)
Payments for repurchase of common stock	(690		)	—
Proceeds from exercise of stock options	—			1,978
Tax benefit from exercise of stock options	—			1,097
Net cash used for financing activities	(690		)	(866		)

Net increase in cash	2,229			741
Cash, beginning of period	7			359
Cash, end of period	$	2,236		$	1,100

Supplemental disclosure of cash flow information:

Interest paid	$	—		$	165

Income taxes paid	$	185		$	502

The accompanying notes form an integral part of these condensed financial statements.

BIDZ.COM, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation and Nature of Business Operations

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended December 31, 2006 filed in the form 10-K Annual Report by the Company on March 12, 2007. In the opinion of management, these financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of Bidz.com, Inc. as of September 30, 2007 and the results of operations for the three month and nine month periods ended September 30, 2006 and 2007 and the cash flows for the nine month periods ended September 30, 2006 and 2007. The results of operations for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. We have made estimates for accounts receivable reserve, return and allowance reserve, inventory reserve, inventory vendor marketing reserves, accrued expenses, stock price volatility, stock option forfeiture rate, expected stock option term and utilization of tax net operating loss carryforwards.

Nature of Business Operations

Bidz.com, Inc. was founded in November of 1998 as a California corporation with its principal location of business in Los Angeles, California. We operate a website located at www.bidz.com for the purpose of selling merchandise, utilizing our unique sales auction platform.

We sell our products throughout the United States and have expanded the reach of our customer base to Europe, Asia, Canada, Australia and other Countries. Revenue generated from the United States accounted for approximately 76.4% and 75.7% of net revenue for the three months ended September 30, 2006 and 2007, respectively and 79.7% and 77.6% of net revenue for the nine months ended September 30, 2006 and 2007, respectively.

For the three and nine month periods ended September 30, 2007, we reported net income of $3.6 million and $9.9 million, respectively and for the nine month period ended September 30, 2007 we reported net cash provided from operating activities of $2.8 million. As of September 30, 2007, we had current assets of $51.5 million and current liabilities of $32.8 million or working capital of $18.7 million.

Recent Developments

We filed a registration statement on Form S-8 with the Securities and Exchange Commission on June 29, 2007, in connection with the registration under the Securities Act of 1933, as amended, of 3,400,000 shares of the Company’s common stock, par value $0.001 per share, issuable pursuant to the Company’s 2001 Stock Option Plan, 2002 Special Stock Option Plan and 2006 Stock Award Plan.

On May 1, 2007 our common stock began trading under the symbol BIDZ on the OTC Bulletin Board and on June 6, 2007 we began trading on the NASDAQ Capital Market.

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement No. 159 (“FAS 159”) which expanded FAS No. 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 159 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 159 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of FAS 159, but does not expect the adoption of FAS 159 to have a material 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 disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007.

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

2. Earnings per Common Share

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

The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method excluding the impact of pro forma deferred tax benefits for the three month and nine month periods ended September 30, 2006 and 2007. The following table sets forth the computation of basic and diluted net income per share.

(In thousands, except share and per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2007		2006		2007

Basic and diluted net income per share:
Numerator:
Net income	$	997	$	3,563	$	4,436	$	9,913
Denominator:
Weighted common shares outstanding	23,310,791		23,593,325		23,311,930		23,371,838
Effect of dilutive securities	508,758		2,731,062		510,719		1,659,769
Denominator for diluted calculation	23,819,549		26,324,387		23,822,649		25,031,607
Net income per share, basic	$	0.04	$	0.15	$	0.19	$	0.42
Net income per share, diluted	$	0.04	$	0.14	$	0.19	$	0.40

3. Inventories

Inventories consist of the following (In thousands):

	December 31, 2006			September 30, 2006

Fine jewelry, watches and other	$	29,511		$	35,970
Loose diamonds and semi-precious stones	2,133			1,458
Prepaid inventory	3,125			1,141
Inventory with manufacturing vendors	—			8,498
Product inventories	34,769			47,067
Less: Inventory reserve	(461		)	(794		)
	$	34,308		$	46,273

4. Revolving Credit Line

In July 2006, we entered into a revolving credit line agreement with LaSalle Bank, ABN AMRO, to provide working capital financing secured by inventories and tangible assets. The agreement allows for us to initially draw on a line of credit up to $10 million, with a provision to increase the limit up to $15 million with the future consent of the bank’s loan committee. During the first quarter of 2007 we successfully increased the limit to $15 million. The revolving credit line agreement expires in July 2010. As of September 30, 2007, there was no outstanding balance under the revolving credit line. The credit line had a remaining availability of $13.5 million after deducting a reserve of $1.5 million for minimum required excess availability which is a reserve of the $15 million credit line that we cannot utilize. The Company is subject to certain restrictive covenants for which it was in compliance at September 30, 2007.

5. Stock Based Compensation

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

The Company adopted SFAS 123R using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The Company’s financial statements as of and for the three months and nine months ended September 30, 2006 and 2007, reflect the impact of adopting SFAS 123R.

Under SFAS 123R stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Compensation expense for the stock-based payment awards granted subsequent to December 31, 2005, will be based on the grant date fair value estimated in accordance with SFAS 123R. As stock-based compensation expense recognized in the statements of income is based on awards ultimately expected to vest, it will be reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Under SFAS 123R, we will continue to use the Black-Scholes-Merton model to estimate the fair value of options. Our assessment of the estimated compensation charges will be affected by our stock price as well as assumption regarding a number of subjective variables and the related tax impact. These variables include, but are not limited to, our stock price volatility and employee stock option exercise behaviors (or expected term). The stock-based compensation expense from stock options for the three months ended September 30, 2006 and 2007 totaled $0 and $181,000, respectively, and for the nine months ended September 30, 2006 and 2007 totaled $0 and $308,000, respectively.

Stock Award

The stock-based expense from stock awards for the three months ended September 30, 2006 and 2007 totaled $0 and $76,000, respectively, and for the nine months ended September 30, 2006 and 2007 totaled $219,000 and $199,000, respectively.

As of September 30, 2007 we had 110,000 shares of restricted common stock that were not fully vested. The unamortized stock-based compensation expense from restricted stock awards totaled $1.0 million as of September 30, 2007.

On February 2, 2007, we awarded and issued, as director compensation, a total of 18,750 shares of common stock to our non-employee directors, Man Jit Singh and Peter Hanelt, with stock awards of 8,750 and 10,000 shares, respectively, in lieu of stock options. On June 15, 2007, we awarded and issued, as director compensation, a total of 110,000 restricted shares of common stock with 25% vesting at the end of each year over a four year period to our non-employee directors, Peter Hanelt, Man Jit Singh and Garry Itkin, with restricted stock awards of 40,000, 35,000 and 35,000 shares, respectively, in lieu of stock options. The fair market value of the shares on grant date was used to determine the value of the share awards.

We grant, annually, to each non-employee director options to purchase 10,000 shares of our common stock. In lieu of receiving such stock options, non-employee directors may elect to receive one share of common stock for each option to purchase two shares of common stock. Non-employee directors also will receive stock options (or restricted stock in lieu thereof) for committee service per year in addition to the standard non-employee director compensation: options to purchase an additional 5,000 shares of common stock to the Chairman of the Audit Committee, and options to purchase an additional 2,500 shares of common stock to each member of our Audit Committee (other than the Chairman), Compensation Committee and Corporate Governance and Nominating Committee.

Stock Option

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

The following is a summary of stock option activity as of September 30, 2007, and changes during the nine months ended September 30, 2007.

Options	Shares		Weighted- Average Exercise Price		Weighted Average Remaining Life of Contract	Aggregate Intrinsic Value
Outstanding at December 31, 2006	8,353,000		$	5.64	3.8	$	2,976,750
Granted	1,000,000		$	8.23
Exercised	(452,324	)	$	4.37
Forfeited	—		—
Expired	(29,000	)	$	6.00
Outstanding at September 30, 2007	8,871,676		$	6.00	3.3	$	66,189,724
Vested and Exercisable at September 30, 2007	7,756,676		$	5.71	3.1	$	60,105,824

The following table summarizes information about stock options outstanding and exercisable at September 30, 2007.

					Options Outstanding and Exercisable as of September 30, 2007
					Options Exercisable			Options Outstanding
Range of Exercise Prices				Number Outstanding As of 09/30/07	Weighted Average Remaining Contractual	Weighted Average Exercise Price		Number Exercisable As of 09/30/2007	Weighted Average Exercise Price
$	3.01	$	4.00	731,676	0.21	$	3.75	731,676	$	3.75
$	4.01	$	5.00	396,500	1.18	$	4.50	396,500	$	4.50
$	5.01	$	6.00	6,743,500	3.58	$	6.00	6,628,500	$	6.00
$	6.01	$	7.00	490,000	4.44	$	6.50	0	$	—
$	9.01	$	10.00	510,000	4.70	$	9.90	0	$	—
$	3.01	$	10.00	8,871,676	3.30	$	6.00	7,756,676	$	5.71

As of September 30, 2007, stock options to purchase 1,115,000 shares were not fully vested. The unamortized stock-based compensation expense from stock options as of September 30, 2007 is $2.5 million.

During the nine months ended September 30, 2007, we issued 1,000,000 stock options to purchase shares in our common stock. During the nine months ended September 30, 2007, 452,324 options to purchase shares were exercised with total proceeds of $2.0 million. The stock options were granted at prices not less than the fair market value of our common stock on the date of grant and have a four year vesting period with 25% vesting on each subsequent anniversary of the grant date. The stock options expire 5 years from the grant date. We recognize compensation expense on a straight-line basis over the requisite service period for each stock option grant.

The weighted-average grant date fair value of options granted during the nine months ended September 30, 2007 was $2.59. Options granted during the nine months ended September 30, 2007 were valued in accordance with SFAS 123R. The fair value of these options was calculated using a Black-Scholes Merton option pricing model using the following assumptions: (1) risk-free interest rates of 4.3-4.9%, (2) an expected term of four to five years, (3) expected volatility of 31-33%, (4) expected forfeitures of 0%, and (5) a dividend yield of 0%. No stock options were granted in the three months ended September 30, 2007.

6. Segment Information:

Net revenue by geographic area is presented based upon the country of destination. No foreign country represented 10% or more of net revenue for three month and nine month periods ended September 30, 2006 and 2007. Net revenue by geographic area was as follows:

(In thousands, except percentage data)

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2006				2007				2006				2007
Geographic Area	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
United States	$	20,687	76.4	%	$	30,324	75.7	%	$	75,041	79.7	%	$	96,144	77.6	%
International	6,374		23.6	%	9,727		24.3	%	19,148		20.3	%	27,755		22.4	%
Total	$	27,061	100.0	%	$	40,051	100.0	%	$	94,189	100.0	%	$	123,899	100.0	%

7. Concentrations

Purchases from two vendors amounted to $8.1 million and $7.8 million representing 34.0% and 17.3% of the total purchases during the three months ended September 30, 2006 and 2007, respectively, and $29.1 million and $14.6 million representing 39.0% and 17.1% of the total purchases during the nine months ended September 30, 2006 and 2007, respectively. Outstanding accounts payable to the two vendors totaled $4.5 million and $5.2 million as of December 31, 2006 and September 30, 2007, respectively.

8. Related Party Transactions

During the three months ended September 30, 2006 and 2007, we purchased approximately 29.0% and 11.6%, respectively, of our merchandise from LA Jewelers, Inc. During the nine months ended September 30, 2006 and 2007, we purchased approximately 33.0% and 12.2%, respectively. LA Jewelers participates in our inventory co-op marketing program. For the three months ended September 30, 2007 we earned $134,000 from LA Jewelers relating to co-op marketing contributions and $194,000 was unamortized as of September 30, 2007.

In May, 2007 we entered into an understanding with LA Jewelers whereby they will guarantee that we will earn a certain minimum gross profit margin on their merchandise. This agreement provides that in the event of a gross profit margin shortfall we will be compensated for the difference between our actual gross profit margin and the guaranteed minimum gross profit margin. As of September 30, 2007, $122,000 was outstanding and accrued under this gross profit margin guarantee. One of the owners of LA Jewelers, Saied Aframian, owns 1,228,000 shares of our common stock as of September 30, 2007.

9. Income Tax — FIN 48

We adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, we had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied Interpretation 48 to all tax positions for which the statute of limitations remained open. Our preliminary analysis of the implementation of Interpretation 48 reveals that there is no material effect on our financial statements.

The amount of unrecognized tax benefits as of January 1, 2007, was $5.9 million (without regard to impact from alternative minimum tax in a future period) which, if ultimately recognized, will reduce our annual effective tax rate. There has been no material changes in unrecognized tax benefits, except for utilization of net operating loss carryforwards applied against net income for the nine months ended September 30, 2007.

We are subject to income taxes in the U.S. federal jurisdiction and California. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.

With few exceptions, we are no longer subject to U.S. federal and California examinations by tax authorities for the years before 2003.

We are under examination by the Internal Revenue Service for the 2004 and 2005 tax years. We expect the examination to be concluded and settled in the next 12 months. The Company, which has recorded unrecognized tax benefits of $5.9 million as of January 1, 2007 related primarily to tax net operating loss deductions, believes it is reasonably possible that the resolution of these examinations could result in minimal or no additional tax due. Accordingly, we have not accrued interest and penalties at September 30, 2007.

10. Contingencies

We are subject to various legal proceedings and claims that arise in the ordinary course of business. Although the Company believes it has defenses to the allegations and intends to pursue them vigorously, management does not currently have sufficient information to assess the validity of the claims or the amount of potential damages. Company management currently believes, however, that resolution of such legal matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Cartier v. Bidz.com

We are a defendant in a lawsuit filed by Cartier, and Cartier International, B.V., in the United States District Court Southern District of New York in April 2006. The lawsuit alleges that Cartier has proprietary rights, including trade dress, patents, trademarks, copyrights and others, in watch designs known as a Tank, Tank Francaise, Tank Americaine, Panthere and Pasha De Cartier Grille, and Tank Devan, and further alleges that we have infringed upon those rights by selling watches bearing copies of one or more of the watch designs. We intend to defend the lawsuit vigorously. We do not believe the outcome of the case will have a materially adverse effect on our financial position. The court has yet to set 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 to approximately 830 investors at prices ranging from $4.00 to $6.00 per share with a weighted average share price of $4.50. We also issued shares of common stock to about 30 persons in exchange for services and other non-cash consideration valued in excess of $5.5 million and issued approximately 250 stock option grants to purchase common stock at a weighted average exercise price of $4.45. After conducting these sales of our securities, we determined that these sales were not exempt from the registration requirements under the Securities Act of 1933. A number of remedies may be available to regulatory authorities and the investors who purchased common stock in those offerings, including a right of rescission, civil penalties, a restraining order or injunction, and a court order to pay restitution and costs.

The probability that stockholders would assert a claim against us and the extent of the our liability, if any, are contingent on a number of factors, including a stockholder’s desire to rescind his or her investment, applicable legal precedent, and statutes of limitation. Based on current facts known to management at this time, and considering the market price and trading price range of our common stock, management does not believe that assertion of any such claims in a material amount by the Company’s shareholders is probable. Accordingly, no accruals for either potential amounts payable or reserves have been made at this time.

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

The following discussion should be read in conjunction with the financial statements and related notes which appear elsewhere in this form. This discussion contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including various risks and uncertainties discussed below and throughout this report.

Overview

We are a leading online retailer of jewelry, featuring a live auction format. We have established our retail brand in the online marketplace by offering high-quality merchandise, a unique user-friendly shopping experience, and the opportunity for buyers to achieve significant cost savings versus traditional retail channels. A key to our success has been our ability to efficiently and effectively source closeout and regular merchandise, and rapidly respond to changing consumer demands for certain jewelry. We offer our products through a continuous live format, featuring “no reserve” auctions, a $1 minimum opening bid and a unique 15-second auction extension period that allows our auctions to continue until all bids are received. The majority of our auctions are short-term, often lasting less than one hour, providing immediate gratification to our customers and encouraging frequent visits and active viewing of our website. Our product inventory includes gold, platinum, and silver jewelry set with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones; and watches. We believe we are the second largest online retailer of jewelry based on revenue and the largest online jewelry auction site based on web traffic.

In assessing our business, we consider operational and non-financial performance metrics, such as average order value, average orders per day, average items sold per day, acquisition cost per new buyer, and number of new buyers. We averaged daily sales of approximately 8,814 items, or 2,699 orders, with an average order value of $173 in the three month period ended September 30, 2007.

We sell to consumers and resellers looking for reliable bargains on jewelry. Because we purchase and retain all of our jewelry inventory onsite, we can provide our customers with timely service and delivery of their purchases. In addition, each item is inspected by one of our trained product specialists prior to its placement on our website, which assures our customers of the quality of our products. We operate in a highly competitive market with low barriers to entry. By selling our own merchandise, we provide a buying environment in which we minimize fraudulent activity and questionable product quality frequently associated with purchase transactions from third-party sellers. We also provide a 15-day return policy on all merchandise. We believe that many of our customers resell merchandise that they purchase from our auctions on eBay, at local auctions, and through other retail channels. Our auctions are conducted 24 hours a day, seven days a week. We also offer 24-hour online customer support.

We have provided financial guidance in our press releases. Our most recent press release provided for expected net revenue of $170 million to $180 million and income before income tax of $14 million to $15 million for the 2007 fiscal year. Over the next 3-5 years, we expect net revenue to grow annually by 25-30% and pre-tax income margins to reach 10-12%.

Critical Accounting Policies

The preparation of our financial statements requires us to make certain estimates and judgments that affect amounts reported and disclosed in our financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. The following are the critical accounting policies that we believe require significant estimation and judgment.

Revenue Recognition

We derive our revenue from four sources: merchandise sales, shipping revenue, auction transaction fee revenue and other revenue. In accordance with SAB 104, we recognize revenue from all four sources when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped or the service has been rendered and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.

We recognize merchandise sales upon shipments made to consumers that are fulfilled from our warehouse. We generally require online payment by credit card or other electronic payment methods before we ship.

We record amounts received or billed prior to shipment of goods to customers as deferred revenue. We reduce gross sales by returns and chargebacks from customers.

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

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

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

Other revenue includes commissions and advertising revenue. We derive commission revenue from sales of Certified Merchant merchandise that is owned by third parties and recognize that revenue when services have been rendered. For commission revenue, we recognize as revenue only the commission portion of the price our customers pay for the purchased products because we are acting as an agent in such transactions. Commissions are also reduced by the impact of returns and other discounts redeemed to obtain such sales. We recognize advertising revenue from allowing other companies to advertise on our web site when the services are rendered and the advertising revenue is known and collectible.

Return and Allowance Reserve

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

Prepaid Inventory

We record payments made to our suppliers for purchases we have yet to receive as prepaid inventory until they are in our physical possession and satisfactorily examined. Prepaid inventory is included in inventories is $3.1 million and $1.1 million at December 31, 2006 and September 30, 2007, respectively.

Inventory Reserve

We record reserves against our inventory equal to the difference between the cost of inventory and the lower of estimated market value based upon assumptions about future demand and market conditions. We also record reserves of 100% of the value of inventory held for more than one year. Inventory reserve is $461,000 and $794,000 at December 31, 2006 and September 30, 2007, respectively.

Inventory Co-op Marketing Reserve

Beginning in third quarter 2007 we record reserves against our inventory for co-op marketing contributions from our vendors that have yet to be amortized to cost of sales. The co-op marketing contributions are amortized as a reduction to cost of sales over the estimated inventory turnover period. In accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor, the co-op marketing contributions that cannot be identified specifically to benefit the vendors are a reduction in cost of sales. Unamortized inventory co-op marketing reserve is $0 and $1.5 million at December 31, 2006 and September 30, 2007, respectively.

14 Receivable from vendors for co-op marketing contributions is included in other current assets and amounted to $0 and $1.2 million at December 31, 2006 and September 30, 2007, respectively.

Stock-Based Compensation

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

Description of Our Revenue, Costs, and Expenses

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2007		2006		2007

Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross Profit	24.6		31.7		25.0		28.0
Operating Expenses:
General & Administrative	11.2		12.4		10.5		11.9
Sales & Marketing	9.4		6.0		8.3		5.7
Public Offering Costs	0.0		—		1.3		—
Depreciation & Amortization	0.3		0.4		0.2		0.3
Total Operating Expenses	20.9		18.8		20.3		17.9
Profit from Operations	3.7		12.9		4.7		10.1
Interest income	0.1		0.1		0.1		0.0
Interest expense	—		0.0		—		0.1
Income tax expense	0.1		4.1		0.1		2.0
Net Income	3.7	%	8.9	%	4.7	%	8.0	%

Net Revenue

Substantially all of our net revenue consists of jewelry sold via the Internet, net of returns. We also generate net revenue from shipping and handling, auction transaction fee, and other revenue.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2007		2006		2007

Net Sales
Merchandise sales	84.4	%	84.2	%	84.8	%	84.7	%
Shipping & handling	12.6		12.6		12.1		12.0
Transaction fees	3.0		3.0		3.0		3.1
Other revenue	0.0		0.2		0.1		0.2
Total Net Sales	100.0	%	100.0	%	100.0	%	100.0	%

Gross Profit

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

General and Administrative Expenses

Our general and administrative expenses consist primarily of payroll and related benefit costs for our employees. These expenses also include fulfillment, customer service, technology, professional fees, other general corporate expenses, and stock-based compensation, consisting substantially of stock option grants and stock awards to employees and directors.

Sales and Marketing Expenses

Our marketing expenses consist primarily of costs associated with paid website search marketing, online banner marketing, e-mail campaigns, affiliate programs and optimization services. These marketing programs, which are designed to drive buyers to our website, are important factors in increasing demand for our jewelry products and increasing net revenue.

Comparison of Three Months Ended September 30, 2006 to Three Months Ended September 30, 2007

Net income in the three months ended September 30, 2007 was $3.6 million, or $0.15 and $0.14 per basic and diluted share, respectively. In the three months ended September 30, 2006, net income was $997,000 and net income per basic and diluted share was $0.04. Net income increased by $2.6 million or 257% in the three months ended September 30, 2007 compared to the three months ended September 30, 2006. The increase in net income was due primarily to the increase in net revenue and higher gross profit margins.

Net Revenue

Net revenue increased by $13.0 million or 48.0% to $40.1 million in the three months ended September 30, 2007 from $27.1 million in the three months ended September 30, 2006. This increase in net revenue was due primarily to the growth in demand for our jewelry products and the increase in average order value. We have also implemented three initiatives that generated more demand from our customers. In certain circumstances, including satisfaction of our gross profit criteria and availability of multiple quantities of items, we allow customers who did not have the winning bid to purchase items at their last bid price, we allow customers to purchase multiple quantities of items and we allow customers viewing the item to purchase the item at the winning bid price.

Gross Profit

Gross profit increased $6.0 million or 90.6% to $12.7 million in the three months ended September 30, 2007 from $6.7 million in the three months ended September 30, 2006. The increase in gross profit resulted from the increase in sales revenue of 48.0% for the three months ended September 30, 2007 from the three months ended September 30, 2006 and from the higher gross profit margin of 31.7% in three months ended September 30, 2007 compared to 24.6% in the three months ended September 30, 2006.

Beginning in the three months ended September 30, 2007, gross profit margins benefited from the amortized co-op marketing contributions that reduced our cost of sales by $833,000 or 2.1% of net revenue. We expect the co-op marketing contributions to improve our gross profit margins for the remainder of the fiscal year compared to the corresponding period of the prior year.

In the three months ended September 30, 2007, there are no free shipping promotions compared to free promotions offered in the three months ended September 30, 2006. Since we do not anticipate any major free shipping promotions in the foreseeable future, gross profit margins for the remainder of the fiscal year are expected to be better than the corresponding period of the prior year, when we had free shipping promotions that started from the second quarter of 2006.

The three new revenue initiatives which are based on meeting our gross profit criteria also contributed to a higher gross profit margin in the three months ended September 30, 2007 compared to the corresponding prior year period.

General and Administrative Expenses

General and administrative expenses increased by $1.8 million or 62.0% to $4.9 million in the three months ended September 30, 2007 from $3.1 million in three months ended September 30, 2006. The increase in general and administrative expenses was due mainly to increases in payroll and payroll related expenses, SOX compliance costs, outsourcing and other administrative expenses. General and administrative expenses as a percentage of net revenue increased to 12.4% in the three months ended September 30, 2007 from 11.2% in the three months ended September 30, 2006.

Sales & Marketing Expenses

Sales and marketing expenses decreased by $125,000 or 4.9% to $2.4 million in the three months ended September 30, 2007 from $2.5 million in the three months ended September 30, 2006. Our efforts to control the sales and marketing expenses and improve the effectiveness of our marketing campaigns have been successful in lowering the costs despite the growth in net revenue. Sales and marketing expenses as a percentage of net revenue decreased to 6.0% in the three months ended September 30, 2007 from 9.4% in the three months ended September 30, 2006.

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2007

Net income in the nine months ended September 30, 2007 was $9.9 million, or $0.42 and $0.40 per basic and diluted share, respectively. In the nine months ended September 30, 2006, net income was $4.4 million, or $0.19 per basic and diluted share. Net income increased by $5.5 million or 123% in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The increase in net income was due primarily to the increase in net revenue and higher gross profit margins.

Net Revenue

Net revenue increased by $29.7 million or 31.5% to $123.9 million in the nine months ended September 30, 2007 from $94.2 million in the nine months ended September 30, 2006. This increase in net revenue was due primarily to the growth in demand for our jewelry products and the increase in average order value. We have also implemented three initiatives that generated more demand from our customers. In certain circumstances, including satisfaction of our gross profit critieria and availability of multiple quantities of items, we allow customers who did not have the winning bid to purchase items at their last bid price, we allow customers to purchase multiple quantities of items and we allow customers viewing the item to purchase the item at the winning bid price.

Gross Profit

Gross profit increased by $11.2 million or 47.5% to $34.7 million in the nine months ended September 30, 2007 from $23.5 million in the nine months ended September 30, 2006. The increase in gross profit resulted from the increase in gross profit as a percentage of net sales to 28.0% for the nine months ended September 30, 2007 compared to 25.0% for the nine months ended September 30, 2006 and from the increase in net revenue which rose by 31.5% for the nine months ended September 30, 2007 from the nine months ended September 30, 2006.

Beginning in the third quarter of 2007, gross profit margins benefited from the amortized co-op marketing contributions that reduced our cost of sales by $833,000 or 0.7% of net revenue. We expect the co-op marketing contributions and our three new revenue initiatives to improve our gross profit margins for the remainder of the fiscal year compared to the corresponding period of the prior year.

Gross profit margins also improved starting in February 2007 after we stopped free shipping promotions at the end of January 2007. Since we do not anticipate any major free shipping promotions in the foreseeable future, gross profit margins for the remainder of the fiscal year are expected to be better than the corresponding period of the prior year, when we had free shipping promotions that started in the second quarter of 2006.

General and Administrative Expenses

General and administrative expenses increased by $4.9 million or 50.0% to $14.7 million in the nine months ended September 30, 2007 from $9.8 million in the nine months ended September 30, 2006. The increase in general and administrative expenses was primarily due to the increase in payroll and payroll related expenses, outsourcing, SOX compliance costs, legal fees, IT related expenses and other administrative expenses. General and administrative expenses as a percentage of net revenue increased to 11.9% in the nine months ended September 30, 2007 from 10.5% in the nine months ended September 30, 2006.

Sales & Marketing Expenses

Sales and marketing expenses decreased by $750,000 or 9.6 % to $7.0 million in the nine months ended September 30, 2007 from $7.8 million in the nine months ended September 30, 2006. The decrease in sales and marketing expenses was attributable to the improved effectiveness of our marketing campaigns in this period relative to the corresponding period last year. Sales and marketing expenses as a percentage of net revenue decreased to 5.7% in the nine months ended September 30, 2007 from 8.3% in the nine months ended September 30, 2006. We continue to expect our sales and marketing expenses to increase in absolute dollars in future periods, as we intend to continue increasing our online marketing campaigns in order to attract new customers.

Public offering costs

On June 29, 2006, we decided to postpone our initial public offering in order to reduce the initial public offering overhang (shares available for sale following the initial public offering) by requesting that our shareholders enter into a lock-up agreement for a period of 180 days. Accordingly, in the nine months ended September 2006, we expensed $1.2 million, consisting of offering costs related to an initial public offering. We have since withdrawn the Form S-1 registration statement for an initial public offering prior to the public trading of our common stock on May 1, 2007.

Additional Quarterly Data

	Quarter Ended
	March 31,		June 30,		September 30,		March 31,		June 30,		September 30,
	2006		2006		2006		2007		2007		2007

Average order value (gross)	$	142	$	133	$	124	$	154	$	171	$	173
Average orders per day	2,901		2,832		2,587		3,317		2,678		2,699
Average items sold per day	7,173		7,730		7,293		9,482		8,678		8,814
Acquisition costs per new buyer	$	38	$	49	$	51	$	45	$	38	$	43
Number of new buyers	63,618		57,520		49,412		58,056		53,637		55,423

Liquidity and Capital Resources

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

As of September 30, 2007, we had a working capital surplus of $18.7 million and no long-term debt obligations. Net cash provided by operating activities was $2.8 million in the nine months ended September 30, 2007 compared to net cash provided of $3.2 million in the nine months ended September 30, 2006. Cash in the nine months ended September 30, 2007 was primarily affected by changes in net income, inventories, accounts payable and deferred revenue. The net cash in the nine months ended September 30, 2006 was affected mainly by changes in net income, inventories, post-dated check financing, accounts payable and accrued expenses.

We recorded net income of $9.9 million in the nine months ended September 30, 2007 compared to $4.4 million in the nine months ended September 30, 2006. Cash flows from net income were used to meet our working capital requirements. In the nine months ended September 30, 2007, inventories increased by $14.1 million, accounts payable increased by $5.6 million and deferred revenue decreased by $1.8 million. In the nine months ended September 30, 2006, inventories increased by $6.7 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. Inventories and accounts payable are affected by our revenue growth and changes in our inventory strategy. Our inventory strategy is influenced by our ability to secure inventory that we believe will improve our margins and the current revenue trend.

Net cash used in investing activities was $1.2 million in the nine months ended September 30, 2007 compared to $315,000 in the nine months ended September 30, 2006. During the nine months ended September 30, 2006 and 2007, net cash used for investing activities related mainly to capital expenditures for office and computer equipment and software. We expect capital expenditures in 2007 to be significantly higher than in 2006 as we upgrade our technology infrastructure. The sources of funds will be provided from our operating cash flows and a line of credit available from our lender.

Net cash of $866,000 and $690,000 were used for financing activities in the nine months ended September 30, 2007 and 2006, respectively. The financing activities were primarily related to reducing our revolving credit line by $3.9 million net against proceeds from exercise of stock options of $2.0 million and tax benefit from exercise of stock options of $1.1 in the nine months ended September 30, 2007 and payments for the repurchase of common stock of $690,000 in the nine months ended September 30, 2006.

We believe that cash currently on hand, cash flows from operations and the availability of a $15 million revolving line of credit will be sufficient to continue our operations and to pursue our growth strategy for the foreseeable future.

Our future capital requirements will depend on many factors, including the rate of our revenue growth; the timing and extent of spending to enhance our website, network infrastructure, and transaction processing systems; the extent of our advertising and marketing programs; the levels of the inventory we carry; relocation to a new corporate office; and other factors relating to our business. Enhancement of our website, network infrastructure, and transaction processing systems will require us to spend significantly more than we have in the past. Moreover, to date our spending in these areas has been lower than industry averages. We anticipate increasing our system expenditures to accommodate these needs in the future.

Related Party Transactions

During the three months ended September 30, 2006 and 2007, we purchased approximately 29.0% and 11.6%, respectively, and during the nine months ended September 30, 2006 and 2007, we purchased approximately 33.0% and 12.2%, respectively, of our merchandise from LA Jewelers, Inc. LA Jewelers participates in our inventory co-op marketing program. For the three months ended September 30, 2007 we earned $134,000 from LA Jewelers relating to co-op marketing contributions and $194,000 was unamortized as of September 30, 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. We do not believe that a change in market interest rates would have a material effect on our results of operations or financial condition. Although we derive a portion of our sales outside of the United States, all of our sales are denominated in U.S. dollars. We have limited exposure to financial market risks, including changes in interest rates and foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the date of their evaluation, our disclosure controls and procedures were effective. There were no significant changes made in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure pursuant to this Item is applicable to us for the fiscal year ended on December 31, 2007 since we are an “accelerated filer,” as those terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934,

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Cartier v. Bidz.com

ITEM 1.A. RISK FACTORS

We believe the risks and uncertainties described below are the most significant we face. The occurrence of any of the following risks could harm our business. In that case, the value of our common stock could decline, and you may lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.

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

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

Future changes in our accounting, financial reporting, and regulatory environment may create new areas of risk exposure. Failure to modify our existing control environment accordingly may impair our controls over financial reporting and cause our investors to lose confidence in the reliability of our financial reporting, which may adversely affect our stock price.

We have established a public market for our common stock on the NASDAQ Capital Market; trading in our common stock may be illiquid and the market price may be volatile.

We have established a public market for our common stock on the NASDAQ Capital Market. Our common stock may trade in low volumes, which would result in an illiquid market for our securities. If the trading volume of our common stock is low, sales of even small amounts of our common stock may cause the price of our common stock to fluctuate greatly. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices. Moreover, sales of a substantial number of shares in the public market, or the perception that such sales may occur, could result in significant downward pressure on the price of our common stock.

We have registered for offer and sale the shares of common stock that are reserved for issuance pursuant to stock options covered by our incentive stock option plans. Shares covered by such registration statements upon the exercise of stock options or warrants generally will be eligible for sale in the public market,

except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144. The issuance or sale of such shares could depress the market price of our common stock.

Shares held by management and affiliates of our company are subject to the resale limitations of Rule 144. In general, under Rule 144 as currently in effect, any person, or persons whose shares are aggregated for purposes of Rule 144, who beneficially owns restricted securities with respect to which at least one year has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock and the average weekly trading volume in common stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions and notice requirements and to the availability of current public information about us.

We have given substantial deposits of inventory to our manufacturing vendors to produce finished jewelry products.

We may be at risk of loss for the diamonds, precious and semi-precious gems that we have given to our manufacturing vendors to produce into finished jewelry products. If the businesses of the vendors fail, the diamond inventory is lost or stolen, the vendors do not have adequate insurance coverage or if the vendors fail to produce and deliver finished jewelry products, we would incur substantial losses that would have a material impact on our net income and financial position.

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

Our net revenue depends to a significant extent on the number of customers who visit our website to purchase merchandise and the dollar amount of their purchases. Generating increased traffic to our website and converting that traffic into buyers requires us to achieve effective results from our marketing campaigns; offer a wide variety of products that our customers can purchase at favorable prices; maintain a user-friendly shopping experience; ensure the satisfactory availability, performance, and reliability of our website, network infrastructure, and transaction processing systems; and provide high-quality customer service. Our business will be harmed if we are unable to increase our customer base and the dollar volume of the orders customers place with us.

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

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

Quarterly financial results may not be consistent and impact our stock price.

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

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

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

In addition, we have a heavy concentration of inventory purchases from a small number of suppliers. Our top two suppliers accounted for approximately 34.0% and 17.3% of our total purchases during the three months ended September 30, 2006 and 2007, respectively and approximately 39.0% and 17.1% of our total purchases during the nine months ended September 30, 2006 and 2007, respectively.

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

Any problems with the availability, performance, or reliability of our website, network infrastructure, or transaction processing systems could result in decreased customer traffic, reduced orders, reduced order fulfillment performance, and lower net revenue as well as negative publicity and damage to our reputation. In order to remain competitive, we must continually seek to improve and expand the functionality and features of our website, network infrastructure, transaction processing systems, and delivery and shipping functions to accommodate any substantial increase in the volume of traffic to and orders from our website. We may not be successful in these efforts, and we may 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 our website, 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 in part on third parties for such availability, performance, and reliability.

Our business and results of operations could be harmed due to the lack of a comprehensive test bed for quality assurance and software application implementation.

Our business depends in part on the efficient and uninterrupted operation of our electronic data processing systems. We do not employ a comprehensive test bed that would ensure high quality assurance when implementing changes to our internally developed application systems. Any problems with implementing software upgrades without going through a proper test environment could impact our business by decreasing customer traffic, reducing selling prices, reducing order fulfillment, or lowering net revenue and gross margins, all of which could produce negative publicity and damage our reputation. We plan to build a full featured test environment that will support all changes to our production applications. We are in the process of evaluating and implementing a test and staging environment for validating all changes to our production environment.

Our business operations could be disrupted due to the lack of documentation of our internally developed software application systems and dependence on key system developers to maintain the system.

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

We may face increasing costs to acquire new customers.

The acquisition of new customers is a key factor in increasing demand for our jewelry products and increasing our revenue. We currently attract new customers by driving traffic to our website using a marketing and advertising strategy that includes targeted keyword searches, online banner advertising, targeted e-mail advertising, and participation in affiliate programs. We do not maintain long-term contracts or arrangements with any companies, including any search engines, Internet portals, or other websites, and we may not successfully enter into additional relationships or maintain existing ones. In addition, traffic to our website could decline if our online marketing programs become less effective or the traffic decreases to the search engines, Internet portals, and websites with which we advertise. Our business could be materially and adversely affected if any substantial number of companies on which we advertise experience financial or operational difficulties or experience other corporate developments that adversely affect their performance. A failure to maintain or expand existing online advertising relationships or to establish additional online advertising relationships that generate a significant amount of traffic from other websites could result in decreased sales or limit the growth of our business.

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

The market for online auctions is rapidly evolving and intensely competitive. We expect competition to intensify further in the future. Barriers to entry are relatively low, and current and new competitors can launch new websites at relatively 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 currently include various online auction services and retailers that offer jewelry, including eBay, Blue Nile, Overstock, and uBid. We also encounter competition from national jewelry retail chains, such as Zales, Kay Jewelers, and Finlay Fine Jewelry, and mass retailers and other enterprises that sell jewelry, such as Wal-Mart, Target, J. C. Penney, Costco, QVC, and Home Shopping Network. Many of our competitors have greater brand recognition, longer operating histories, larger customer bases, and significantly greater financial, marketing, and other resources than we do. Smaller competitors may enter into strategic or commercial relationships with larger, more established, and well-financed companies. Other competitors may enter into exclusive distribution agreements with our suppliers that deny us access to suppliers’ products. Competitors may also devote greater resources to marketing and promotional campaigns and to website and systems technology than we do. We may not be able to compete successfully against current and future competitors or address increased competitive pressures. Furthermore, attempts have been made in the past to develop and market synthetic stones and gems to compete in the market for gemstones and gemstone jewelry. We expect such efforts to continue in the future. If any such efforts are successful in creating widespread demand for synthetic or alternative gemstone products, demand and price levels for our products could decline and our business and results of operations would be substantially harmed.

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

Luxury products, such as jewelry, are discretionary purchases for consumers. The volume and dollar amount of such purchases may be affected by adverse trends in the general economy and consumer perceptions of those trends, and purchases may significantly decrease during economic downturns. The success of our business depends in part on macroeconomic factors, such as employment levels, salary levels, tax rates, and credit availability, all of which affect disposable income and consumer spending. Any reduction in disposable income or consumer spending may affect us more significantly than companies in other industries.

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

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

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

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

We rely on suppliers and third-party carriers as part of our fulfillment process, and these third parties may fail to 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 delivery to our customers. We also rely on third-party carriers to ship our products to our customers. As a result, we are subject to various risks, including employee strikes and inclement weather, associated with the ability of third-party carriers to provide delivery services to meet our shipping needs and those of our suppliers. The failure of our suppliers and third-party carriers to deliver products to us or our customers in a timely manner or otherwise to serve us or our customers adequately would damage our reputation and brand and substantially harm our business and results of operations.

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

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

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

Our business depends in part on the efficient and uninterrupted operation of our computer and communications hardware. The servers and other hardware necessary to operate our website, including our auction and bidding systems, are located at a single third-party co-location facility in downtown Los Angeles. We rely on that facility to provide Internet access with the speed, capacity, and reliability we require. Our servers and other hardware that run our transaction processing, order fulfillment, and office administration tasks are located at our headquarters. Our servers and other hardware are vulnerable to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquakes, and similar events. We do not currently have redundant systems in multiple locations or a formal disaster recovery plan, and our business interruption insurance may be insufficient to compensate us for any losses that may occur. In addition, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of critical data, the inability to accept and fulfill customer orders, or the unauthorized disclosure of confidential customer data. System disruptions or failures would also create a

large number of customer questions and complaints that need to be addressed by our customer service support personnel. The occurrence of any of the foregoing risks could substantially harm our business and results of operations. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events.

We may not be able to increase our capacity or respond to rapid technological changes in a timely manner or without service interruptions, which may harm our business.

We may not be able to accommodate any substantial growth in traffic or user demand on our website, network infrastructure, and transaction processing systems in a timely manner or without substantial costs. If we are unable to upgrade our existing technology, network infrastructure, and transaction processing systems to accommodate any increased sales volume, our potential customers may be dissatisfied and may purchase merchandise from our competitors. We may also fail to provide enough capacity in our customer service and sales support functions to provide a high level of customer service. A failure to implement new systems and increase customer service capacity effectively could adversely affect our sales. Enhancement of our website, network infrastructure, and transaction processing systems will require us to spend a significantly higher amount than we have in the past. Moreover, to date our spending in these areas as a percentage of revenue has been lower than industry averages. We anticipate increasing our system expenditures to accommodate these needs in the future.

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

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

We believe that continuing to increase the popularity of our website will be critical to expanding our business. Promoting and positioning our website will depend largely on the success of our marketing efforts and our ability to provide a variety and sufficient quantity of high-quality products at attractive prices in a convenient manner. Promoting our website will require us to increase our marketing budget and otherwise increase our financial commitment to creating and maintaining brand loyalty among users. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our website popularity and our brand. If we do attract new users to our website, they may not conduct transactions on a frequent basis or in sufficient dollar amounts. If we fail to promote and maintain our website or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business would be harmed.

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

In the three months ended September 30, 2006 and 2007, 23.6% and 24.3%, respectively, of our net revenue was generated by shipments to customers outside of the United States. In the nine months ended September 30, 2006 and 2007, it was 20.3% and 22.4%, respectively. We plan, over time, to expand our reach into international markets. We do not, however, currently have any overseas fulfillment, distribution, or server facilities or any website content localized for foreign markets. We cannot be certain that we will be able to expand our global presence. In addition, there are certain risks associated with doing business on an international basis, including regulatory requirements, legal uncertainty regarding liability, tariffs, and other trade barriers, longer payment cycles, and potentially adverse tax consequences, any of which could adversely affect our business. Although our foreign sales historically have been denominated in U.S.

dollars, we also may be subject to increased risks relating to foreign currency exchange rate fluctuations to the extent we decide to denominate our sales in foreign currencies.

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

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

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

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

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

A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Third parties may have the technology or expertise to breach the security of customer transaction data. Our security measures may not prevent security breaches that could result in substantial harm to our business and results of operations and damage to our reputation. Currently, a majority of our sales are billed to our customers’ credit card accounts directly. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain cardholder signatures. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. We do not currently carry insurance against this risk. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or breach of the technology we use to protect customer transaction data. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Any such compromise of our security could damage our reputation and brand 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 activities on our website, including unauthorized use of customer information and identity theft by third parties.

Our network security measures to prevent third parties from penetrating our network and improperly accessing our customers’ personal information or credit card information may not be successful. Although we have not experienced any theft of our customers’ credit card information to date, as new discoveries in the field of cryptography and advances in computer capabilities occur, our security measures may not

effectively prevent others from obtaining improper access to our customer information. In addition, third parties may target our customers directly with fraudulent identity theft schemes designed to appear as legitimate e-mails from us. In March 2006, one such third party attempted to solicit customer information through a tactic, commonly known as “phishing,” whereby an e-mail purporting to be from us solicited customer information from recipients of the e-mail. Any such security breach or fraud perpetrated on our customers could expose us to increased costs and could harm our business and results of operations.

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

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

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

Our inventory is stored at our warehouse/office facility in Culver City, California. Consequently, our merchandise supply is vulnerable to fire, flood, earthquakes, and similar events that may impact our facility. Any damage to or loss of all or a significant portion of our inventory could cause significant delays in shipment of goods to our customers, resulting in negative publicity about and diminished customer confidence in our website. In addition, we may experience theft of our products while they are being held in inventory or during the course of their shipment to our customers by third-party carriers. We have implemented security measures to prevent such theft and maintain insurance to cover losses resulting from theft. Nevertheless, we could incur significant losses from theft, which would substantially harm our business and results of operations, if our security measures fail, losses exceed our insurance coverage, or we are not able to maintain insurance at a reasonable cost.

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

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

Increases in credit card processing fees could increase our costs.

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

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

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

Seasonal fluctuations in our net revenue could cause our quarterly results to fluctuate and cause our results of operations to be below expectations.

Historically, sales in the jewelry industry are seasonal and have been higher in the fourth quarter of the calendar year as a result of higher consumer spending during the December holiday season. Approximately 29.3%, 33.9% and 28.5% of our net revenue in 2004, 2005 and 2006, respectively, was generated during the fourth quarter. As we continue to grow, we expect to experience more pronounced seasonal fluctuations in our net revenue and anticipate a disproportionate amount of our revenue will occur in the fourth quarter. In anticipation of any increased sales activity during the fourth quarter, we may incur significant additional expenses, including higher sales and marketing costs and additional staffing in our fulfillment and customer support operations. If we were to experience lower than expected sales during any future fourth quarter, it would have a disproportionately large impact on our results of operations for that year. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and fulfillment activities, and may cause a shortfall in sales compared with expenses in a given period, which would substantially harm our business and results of operations.

Sales growth in prior periods may not be indicative of our future growth.

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

We have grown quickly, and our business will suffer if we fail to manage our growth.

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

Descriptions of our jewelry items are not guarantees and may confuse, mislead, or disappoint our customers.

In an effort to provide accurate descriptions of jewelry posted on our website, we provide appraisal summaries from third-party gemological laboratories for some of our jewelry items. All other jewelry and watch descriptions are provided by our full-time Gemological Institute of America, or GIA, trained gemologists and several experienced product specialists. Nevertheless, there is a subjective component involved with respect to assessing the clarity, color, and carat characteristics of diamonds and other gemstones. In addition, mistakes or omissions of important information in our descriptions may occur. Even if our descriptions are accurate, buying a product online may lead to disappointment resulting in returned merchandise. For example, a customer may determine that a piece does not have the expected look, feel, and overall appearance of the merchandise that the buyer envisioned from the website photograph.

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

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

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

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

Our Internet domain name is critical to our success. Under current domain name registration 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 nor have we registered our name in any other jurisdiction. As a result, third parties may use domain names that are similar to our domain name, which may result in confusion to potential customers and lost sales. We are aware that other businesses have registered the name “bidz” with other suffixes and in other countries.

We may be subject to assertions by third parties for infringement on their intellectual property rights.

Third parties may in the future assert that we have infringed on their intellectual property rights as we self-develop our auction platform, sales transaction system, and inventory control system. We have a larger exposure of being accused of intellectual property rights infringements than if we had purchased our technology off the shelf. We also may be at risk for selling items that infringe on other third party trade dress rights, copyright, or patent rights that may cause the offended party to bring action against us. In either event of deemed infringement rights, we would face substantial litigation cost to defend ourselves and utilization of our management and personnel resources.

We may be unable to protect or enforce our own intellectual property rights adequately, and we may become subject to intellectual property litigation.

We regard the protection of our trademarks, copyrights, domain name, trade dress, and trade secrets as critical to our success. We rely on a combination of common law as well as trademark, copyright, trade dress, and trade secret laws to protect our intellectual property rights. We also have entered into confidentiality and invention assignment agreements with our employees and relevant contractors and nondisclosure agreements with relevant parties with whom we conduct business in order to limit access to and disclosure of our proprietary information. These contractual arrangements and other steps we have taken to protect our intellectual property may not prevent misappropriation of our intellectual property or deter independent development of similar intellectual property 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 domain name protection is very expensive to maintain and may require litigation. We must protect our trademarks, copyrights, patents, and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location.

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

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

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

Various legal rules and regulations related to privacy and the collection, dissemination, and security of personal information may adversely affect our marketing efforts.

We are subject to increasing regulation at the federal, state, and international levels relating to privacy and the use of personal user information designed to protect the privacy of personally identifiable information as well as to protect against its misuse. These laws include the Federal Trade Commission Act, the CAN-SPAM Act of 2003, the Children’s Online Privacy Protection Act, the Fair Credit Reporting Act, the Homeland Security Act, and related regulations. Several states have proposed legislation that would limit the use of personal information gathered online or require online services to establish privacy policies. Moreover, proposed legislation in the United States and existing laws in foreign countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct, and delete personal information stored by companies. These regulations and other laws, rules, and regulations enacted in the future may adversely affect our ability to collect, disseminate, or share demographic and personal information about users and our ability to e-mail or telephone users, which could be costly and adversely affect our marketing efforts .

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

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

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

Numerous states and foreign jurisdictions, including California, where our headquarters are located, have regulations regarding how auctions may be conducted and the liability of auctioneers in conducting such auctions. No final legal determination has been made whether the California regulations apply to our business, and little precedent exists in this area. Several states and some foreign jurisdictions have attempted, and may attempt in the future, to impose regulations that could affect us or our users, which could harm our business.

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

Several states have proposed, and California, Minnesota, Utah, and Vermont have recently passed, legislation that would limit the uses of personal user information gathered online or offline. Many states already have such laws and continually consider strengthening them, especially against online services. However, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in 1970 to protect consumer privacy, includes a provision preempting conflicting state laws on the sharing of information between corporate affiliates. The preemptive provisions of FCRA were permanently extended in 2002, thereby ensuring that we are not subject to the laws of each individual state with respect to matters within the scope of FCRA, but remain subject to the other provisions of FCRA.

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

New and existing regulations could harm our business.

We are subject to the same foreign and domestic laws as other companies conducting both online and offline business. There are still relatively few laws specifically directed towards online business. However, due to the increasing popularity and use of the Internet and online services, many laws relating to the Internet are being debated at all levels of government around the world, and it is possible that such laws and regulations will be adopted. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation, advertising, intellectual property rights, and information security. Applicability to the Internet of existing laws governing issues, such as 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 Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Those laws that do reference the Internet, such as the U.S. Digital Millennium Copyright Act and the European Union’s Directive on Distance Selling and Electronic Commerce, have only recently begun to be interpreted by the courts and implemented by the European Union member states, so their applicability and scope remain uncertain. As our activities and the types of goods listed on our website expand, regulatory agencies may claim that we or our users are subject to licensure in their jurisdiction, either with respect to our business in general, or in order to allow the sale of certain items, such as real estate, event tickets, boats, and automobiles.

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

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

Our performance depends substantially upon David Zinberg, our Chairman of the Board, President, and Chief Executive Officer, who has extensive experience with the purchase and sale of jewelry. We rely on Mr. Zinberg to make critical operational decisions on a daily basis, such as product offerings and purchases, and to make key strategic plans. We have an employment agreement with Mr. Zinberg extending through 2009. The loss of the services of Mr. Zinberg would adversely affect our business and operations.

Holders of common stock issued by us in prior offerings are entitled to rescind their purchases.

$4.45. After conducting these sales of our securities, we determined that these sales were not exempt from the registration requirements under the Securities Act of 1933 and similar provisions of laws of the states in which our stockholders reside, because certain of our employees who solicited investors engaged in a “general solicitation” of securities. In addition, these employees received compensation for selling our common stock and were required to be licensed as broker-dealers with the Securities and Exchange Commission, or SEC, and various state authorities, but they were not so licensed. In such situations, a number of remedies may be available to regulatory authorities and the investors who purchased common stock in those offerings, including a right of rescission, civil penalties, a restraining order or injunction, and a court order to pay restitution and costs.

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

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

The concentration of our capital stock ownership with our founder and executive officers and directors and their affiliates will limit your ability to influence corporate matters.

Our founder, executive officers, and directors together own approximately 34.1% of our common stock as of September 30, 2007. Marina Zinberg, our Vice President, who is the sister of David Zinberg, our Chairman, President and Chief Executive Officer, owns an additional 32.3% of our common stock. As a result, these individuals will have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as a merger or a sale of our company or its assets, for the foreseeable future. This concentrated control will limit the ability of other stockholders to influence corporate matters. Because of this, we may take actions that some of our stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected because stockholders may not view favorably the concentration of control in the hands of management.

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

On June 22, 2006, we reincorporated in Delaware, and the Delaware certificate of incorporation and the Delaware General Corporation Law, or DGCL, contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of our stockholders. The Delaware 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 dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” The Delaware certificate of incorporation divides our Board of Directors into three classes, with one class to stand for election each year for a three-year term after the initial election. The classification of directors tends to discourage a third party from initiating a proxy solicitation or otherwise attempting to obtain control of our company and may maintain the incumbency of our Board of Directors, as this structure generally increases the difficulty of, or may delay, replacing a majority of directors. The Delaware bylaws authorize our Board of Directors to fill vacancies or newly created directorships. A majority of the directors then in office may elect a successor to fill any vacancies or newly created directorships.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 2, 2007, we awarded and issued as director compensation a total of 18,750 shares of common stock to our non-employee directors, Man Jit Singh and Peter Hanelt, with stock awards of 8,750 and

10,000 shares, respectively, in lieu of stock options. On June 15, 2007, we awarded and issued as director compensation a total of 110,000 restricted shares of common stock with 25% vesting at the end of each year over a four year period to our non-employee directors, Peter Hanelt, Man Jit Singh and Garry Itkin, with restricted stock awards of 40,000, 35,000 and 35,000 shares, respectively in lieu of stock options. These shares were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933. We grant annually to each non-employee director options to purchase 10,000 shares of our common stock. In lieu of receiving such stock options, non-employee directors may elect to receive one share of common stock for each option to purchase two shares of common stock. Non-employee directors also will receive stock options (or restricted stock in lieu thereof) for committee service per year in addition to the standard non-employee director compensation: options to purchase an additional 5,000 shares of common stock to the Chairman of the Audit Committee, and options to purchase an additional 2,500 shares of common stock to each member of our Audit Committee (other than the Chairman), Compensation Committee and Corporate Governance and Nominating Committee.

The stock-based expense from stock awards for the three months ended September 30, 2006 and 2007 totaled $0 and $76,000, respectively and for the nine months ended September 30, 2006 and 2007 totaled $0 and $199,000, respectively.

During the nine months ended September 30, 2007, we issued 1,000,000 stock options to purchase shares in our common stock under our 2006 Award Plan. The stock options were granted at prices not less than the fair market value of our common stock on the date of grant and have a four year vesting period with 25% vesting on each subsequent anniversary of the grant date. The stock options expire 5 years from the grant date. These options to purchase common stock were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933.

The stock-based expense from stock options for the three months ended September 30, 2006 and 2007 totaled $0 and $181,000, respectively and for the nine months ended September 30, 2006 and 2007 totaled $0 and $308,000, respectively. During the nine months ended September 30, 2007, 452,324 options to purchase shares were exercised with total proceeds of $2.0 million.

ITEM 6. EXHIBITS.

31.1	Principal Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2	Principal Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1	Certifications Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934

SIGNATURES

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

		BIDZ.COM, INC.

	By:	/s/ DAVID ZINBERG

		David Zinberg
		President and Chief Executive Officer

	By:	/s/ LAWRENCE KONG

		Lawrence Kong
		Principal Accounting Officer

Dated: November 12, 2007

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Bidz.com (BIDZ) Inactive 10-Q2007 Q3 Quarterly report

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Receivable from vendors for co-op marketing contributions is included in other current assets and amounted to $0 and $1.2 million at December 31, 2006 and September 30, 2007, respectively.