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 cost effectively source closeout and regular jewelry merchandise, and rapidly respond to changing consumer

demands for jewelry, watches and accessories. We offer our products through a continuous live format, featuring a $1 minimum opening bid, and a unique 15-second auction extension period that allows our auctions to continue until all bids are received. On select auctions we maintain a reserve price that must be met before a sale will be consummated. 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.

In addition to our auction site we have a fixed pricing format that offers similar merchandise as those listed for auction. This online store provides us access to different types of consumers and we will plan to offer customers the ability to design their own jewelry including diamond earrings and rings in the near future.

Our product inventory includes gold, platinum, and silver jewelry set with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones; watches, accessories and brand name merchandise. 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.

We sell to consumers looking for reliable bargains on jewelry, watches, accessories and brand name merchandise. Because we purchase and retain all of our 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 their purchases 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 and fixed price sales are conducted 24 hours a day, seven days a week. We also offer daily telephone customer support, 24-hour online live-help and e-mail customer support.

In line with our growth plans, we have completed a major upgrade of our auction platform at the end of 2007. The new auction LiveBid system supports a broad range of leading browser software including Microsoft Internet Explorer, FireFox and Safari. The new system touts high availability, faster end-user response time and greater scalability among the key features delivered in this release. We have leveraged this new software solution to launch additional site features and the new online retail store. We have launched the Spanish, Arabic and German versions of our website in 2008.

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, which include wholesale merchandise sales, shipping revenue, 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.

For online sales through our website, we recognize merchandise sales upon shipments made to consumers that are fulfilled from our warehouse. We require payment before we ship and the payment is generally made online by credit card or other electronic payment methods. We record amounts received or billed prior to shipment of goods to customers as deferred revenue. We reduce gross sales by returns and charge-backs from customers. For wholesale merchandise sales, we recognize sales when the merchandise is delivered to the customer and credit terms may be offered to such customers.

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

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 became effective for interim and annual reporting periods beginning after December 15, 2006.

Other revenue consists primarily of commissions we derive from hosting sales of Certified Merchant merchandise that is owned by third parties and we recognize only the commission portion of the price our customers pay for the purchased products because we are acting as an agent in such transactions.

Cost of Revenue

Cost of revenue includes product costs, inbound and outbound shipping charges, packaging and shipping supplies, insurance on shipments, product repair and service costs, and credit card and other electronic payment fees, and is recorded in the same period in which related revenue has been recorded. The cost of revenue is reduced by amortized co-op marketing contributions from our vendors.

Outbound shipping costs on merchandise sales totaled $3.1 million and $1.7 million in the three months ended March 31, 2008 and 2009, respectively.

Returns and Allowances Reserve

We estimate potential future product returns and charge-backs 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 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. Reserves for returns and charge-backs are included in accrued expenses.

Inventories

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

Inventory Reserve

The unique nature of our business model where customers set the prices they are willing to pay may result in items selling below our cost, and we provide reserves against our inventory based on the estimated difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory. We also provide reserves for obsolescence and slow moving inventory.

Inventory Co-op Marketing Contributions

In the third quarter of 2007, we started to bill and collect from our inventory vendors co-op marketing contributions as an incentive for us to market and sell their merchandise on the Bidz website. 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 and will result in an increase in gross profit. We cannot specifically identify the benefit to each vendor; consequently, co-op marketing contributions are charged against inventory as a reduction of costs and amortized as a reduction of cost of sales. For the three months ended March 31, 2008 and 2009, we have recognized $3.6 million and $2.3 million of co-op marketing contributions, respectively. Approximately $3.8 million remain unamortized and is included as an offset to inventory at March 31, 2009. Receivable from vendors for co-op marketing contributions, less allowance for doubtful accounts, is included in other current assets and amounted to $954,000 at March 31, 2009.

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
                                                   March 31,
                                               2008         2009

               Net revenue                       100.0 %      100.0 %
               Gross profit                       29.1         32.7
               Operating expenses:
               General & administrative            9.5         15.6
               Sales & marketing                   6.8          8.4
               Depreciation & amortization         0.3          0.6
               Total operating expenses           16.6         24.6
               Income from operations             12.5          8.1
               Interest income                     0.0          0.0
               Interest expense                    0.0          0.0
               Income tax expense                  5.1          3.3
               Net income                          7.4 %        4.8 %

Net Revenue

Substantially all of our net revenue consists of jewelry sold via the Internet, net of returns. We also generate net revenue from wholesale merchandise sales that is not online, 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
                                                   March 31,
                                               2008         2009

               Merchandise sales                  78.2 %       85.8 %
               Wholesale merchandise sales         6.8          0.7
               Shipping & handling                11.8         10.2
               Transaction fees                    3.0          3.0
               Commissions                         0.2          0.3
               Total net revenue                 100.0 %      100.0 %

Gross Profit

Our gross profit consists of net revenue less the cost of revenue. Our cost of revenue 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 restricted 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 the most important factors in increasing demand for our jewelry products and increasing net revenue.

Comparison of Three Months Ended March 31, 2009 to Three Months Ended March 31, 2008

Net income in the three months ended March 31, 2009 was $1.5 million, or $0.07 per basic and diluted share and net income in the three months ended March 31, 2008 was $4.6 million, or $0.19 and $0.18 per basic and diluted share, respectively. Net income decreased by 67.1% in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

Net Revenue

Net revenue decreased 49.7% to $31.2 million in the three months ended March 31, 2009 from $61.9 million in the three months ended March 31, 2008. Merchandise wholesale sales were $206,000 in the three months ended March 31, 2009 compared to $4.2 million in the three months ended March 31, 2008.

The continuing economic decline resulted in a major slowdown in our revenue in the first quarter of 2009 compared to the first quarter of 2008. There was an overall decrease in online demand for our jewelry as consumers reduced their discretionary spending. If the economy continues to decline it will cause a decline in demand and have a negative effect on our revenue. We anticipate that net revenue will be lower for the second and third quarters of 2009 compared to the first quarter as the second and third quarters are seasonally weak periods for jewelry sales.

Gross Profit

Gross profit decreased 43.5% to $10.2 million in the three months ended March 31, 2009 from $18.0 million in the three months ended March 31, 2008. The decrease in gross profit resulted from the decrease in sales revenue which declined by 49.7% for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 and offset by the increase in gross profit margin to 32.7% in the three months ended March 31, 2009 from 29.1% in the three months ended March 31, 2008. Gross profit margins benefited from the amortized co-op marketing contributions that reduced our cost of sales by $2.3 million and $3.6 million in the three months ended March 31, 2009 and 2008, respectively.

General and Administrative Expenses

General and administrative expenses decreased 17.7% to $4.9 million in the three months ended March 31, 2009 from $5.9 million in three months ended March 31, 2008. The decrease in general and administrative expenses was due to our decline in revenue and corresponding decreases in payroll and payroll related expenses and administrative expenses. General and administrative expenses as a percentage of net revenue increased to 15.6% in the three months ended March 31, 2009 from 9.5% in the three months ended March 31, 2008.

An impairment charge of $89,000 was recorded in the three months ended March 31, 2009 on advances made to employees to purchase shares of our common stock when the value of our common stock held as collateral for the advances fell below the amount of the advances. The 154,000 shares of the common stock held as collateral were valued based on the closing price at March 31, 2009.

Sales & Marketing Expenses

Sales and marketing expenses decreased 37.9% to $2.6 million in the three months ended March 31, 2009 from $4.2 million in the three months ended March 31, 2008. Sales and marketing expenses as a percentage of net revenue increased to 8.4% in the three months ended March 31, 2009 from 6.8% in the three months ended March 31, 2008.

Income Tax Expense

Income tax expense decreased to $1.0 million in the three months ended March 31, 2009 from $3.2 million in the three months ended March 31, 2008 and the effective tax rates are 40.2% and 40.7%, respectively.

Additional Quarterly Data



                                          Three Months Ended
                                              March 31,
                                          2008         2009

Average gross selling price per order   $     182    $     181
Average orders per day                      3,734        2,043
Average items sold per day                 12,186        6,110
Acquisition costs per new buyer         $      50    $      51
Number of new buyers                       83,179       51,021

Wholesale merchandise sales are excluded in computing additional quarterly data.

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 March 31, 2009, we had a working capital surplus of $33.4 million and have no long-term debt obligations. Net cash provided by operating activities was $484,000 in the three months ended March 31, 2009 compared to $11.7 million in the three months ended March 31, 2008. Cash in the three months ended March 31, 2009 was primarily affected by changes in net income and inventories and in the three months ended March 31, 2008 was primarily affected by changes in net income, accounts receivable, inventories and accounts payable.

We recorded net income of $1.5 million in the three months ended March 31, 2009 compared to $4.6 million in the three months ended March 31, 2008. Cash flows from net income were used to meet our working capital requirements. In the three months ended March 31, 2009, inventories increased by $1.8 million. In the three months ended March 31, 2008, accounts receivable increased by $2.6 million, inventories decreased by $22.0 million and accounts payable decreased by $14.4 million. Inventories and accounts payable is 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 $625,000 in the three months ended March 31, 2009 compared to $203,000 in the three months ended March 31, 2008. In the three months ended March 31, 2009, we made a prepayment of $490,000 for intangible asset. During the three months ended March 31, 2009 and 2008, cash used for capital expenditures of $135,000 and $203,000, respectively, related mainly to acquisition of office and computer equipment and software.

In the three months ended March 31, 2009, net cash of $1.2 million was used in financing activities when $1.1 million was used to repurchase our common stock shares. In the three months ended March 31, 2008, net cash of $9.7 million was used in financing activities when $5.9 million was used to repay our revolving credit facility and $3.8 million was used to repurchase our common stock shares.

We believe that cash and cash equivalents currently on hand, cash flows from operations and the availability of a $25 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 inventories we carry; acquisition and relocation to a new corporate office; and other factors relating to our business. Enhancement of our website, network infrastructure, transaction processing systems and a new ERP system 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. We may require additional financing in the future in order to execute our operating plan and we may not be able to obtain such financing. We cannot predict whether this additional financing will be in the form of equity, debt, or a combination of debt and equity.

Lease Obligations



The following table presents our contractual obligations at March 31, 2009, over
the next five years and thereafter (in thousands):



                      Total     Less than    1 to 3     3 to 5     After 5
Payments by period   amount      1 year       years     years       years

Property lease       $ 3,791   $     1,157   $ 2,313   $    321   $       -
Equipment lease          193            56       103         34           -
                     $ 3,984   $     1,213   $ 2,416   $    355   $       -

We are obligated for the lease of our office and warehouse space. We lease a 50,000 square-foot office and warehouse and a separate 12,000 square-foot warehouse space in Culver City, California. The leases expire in June 2012 and August 2012, respectively. In March 2009, we extended the lease on our 50,000 square-foot office and warehouse by 32 months to expire in June 2012.

Reclassification

Certain amounts from prior years have been reclassified to conform to the current year's presentation.