##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number:
    000-31376
  ZIPREALTY, INC.
 (Exact name of registrant as
    specified in its charter)
  DELAWARE

94-3319956(State of
    incorporation)

(IRS employer identification
    number)2000 POWELL STREET,
    SUITE 300

94608EMERYVILLE, CA

(Zip Code)(Address of principal executive
    offices)   (510) 735-2600 (Registrants
    telephone number)
  Securities
    registered pursuant to section 12(b) of the Act:
  Title of Each Class:

Name of Each Exchanged on Which Registered:Shares of Common Stock,
    $0.001 par value

The Nasdaq Global Market   Securities
    registered pursuant to section 12(g) of the Act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



TABLE OF
    CONTENTS
  
  PagePART IItem 1.


Business


4Item 1A.


Risk
    Factors


17Item 1B.


Unresolved Staff
    Comments


32Item 2.


Properties


32Item 3.


Legal
    Proceedings


33Item 4.


Submission of
    Matters to a Vote of Security Holders


33PART IIItem 5.


Market for Our
    Common Stock, Related Stockholder Matters and Issuer Purchases
    of Equity Securities


33Item 6.


Selected Financial
    Data


36Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


37Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


53Item 8.


Financial
    Statements and Supplementary Data


54Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


82Item 9A.


Controls and
    Procedures


82Item 9B.


Other
    Information


82PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


83Item 11


Executive
    Compensation


83Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


83Item 13.


Certain
    Relationships and Related Transactions


84Item 14.


Principal
    Accountant Fees and Services


84PART IVItem 15.


Exhibits and
    Financial Statement Schedule


85Signatures


86EXHIBIT 10.20EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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Statement
    regarding forward-looking statements
    
    our future financial results;
    our future growth and expansion into new markets;
    our future advertising and marketing activities; and
    our future investment in technology.      Trademarks
  ®
  Internet
    Site
  www.ziprealty.com. Form 10-K, Form 10-Q, Form 8-K, Form 10-K.
  Where You
    Can Find Additional Information
  Form 10-K, 20549-0102. 1-800-SEC-0330.
 3




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PART I  Item 1.
    Business:  OVERVIEW
  ®
  word-of-mouth
  ®
    INDUSTRY
    BACKGROUND
  The
    U.S. residential real estate market
  Trends Trends Trends
 4




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Trends
  Trends.
  Traditional
    real estate transaction process
        Increasing
    use of the Internet in the residential real estate transaction
    process
   5




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Challenges
    and limitations of the traditional residential real estate
    process
    Challenges for home buyers and sellers.
  
    limited access to, and transparency of, information;
    high commissions;
    lack of client control over the process; and
    low levels of agent responsiveness and accountability.  Challenges for agents.
  
    need to spend considerable personal time and money generating
    potential clients;
    limited resources to properly manage client relationships and
    transaction processes; and
    responsibility for other business expenses and personal benefits.  Challenges for brokerage firms.
  
    independent contractor nature of agent relationship limits
    accountability and managerial effectiveness;
    ownership and management of client relationships resides with
    the agents; and
    low levels of client and agent loyalty.  OUR
    BUSINESS MODEL
    Addressing
    challenges for home buyers and sellers
  We use the Internet to empower
    consumers.
  We focus on delivering high-quality service with a
    client-centric approach.
 6




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We offer a compelling consumer value
    proposition.
  Addressing
    challenges for agents and brokerage firms
  We use proprietary business management technologies and
    processes to increase operational efficiency and provide
    excellent client service.
  We offer a compelling value proposition to
    agents.
  
    our ZipAgents receive a steady flow of qualified leads without
    individual marketing efforts, allowing them to rapidly develop a
    good pipeline of clients;
    our ZAP technology, with its proprietary CRM tools, allows our
    ZipAgents to remain organized and communicate and sell
    effectively with numerous clients at the same time; and
    our system includes closing support infrastructure that allows
    our ZipAgents to spend less time on closing tasks and more time
    on new clients than they would otherwise be able to without this
    support in place.   7




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OUR
    STRATEGY
    Broaden
    and deepen our presence in existing markets
    Enhance
    the ZipRealty brand
  word-of-mouth
  Continue
    to invest in technology and our people to increase operational
    efficiency
    Expand
    operations into new geographic markets
    Continue
    to improve the client experience
   8




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OUR
    CONSUMER WEBSITE AND SERVICES
  easy-to-use step-by-step
  Comprehensive
    MLS access for home listings data
    ZipNotify
    Neighborhood
    data and related information
    Online
    images and virtual tours
   9




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Schedule
    visits
    Home
    offers
    Financing
    pre-approval
  E-LOAN, E-LOAN E-LOAN
  ZIPAGENT
    PLATFORM
      ZIPAGENTS
   10




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Compensation
    structure
    
    Commissions.  As is customary in the real
    estate brokerage industry, ZipAgents earn a portion of the
    commissions they generate for us, which is known as their split.
    Currently, our commission splits to ZipAgents vary from as low
    as 35% to as high as 80% of our net revenues, after deducting
    certain other items.
    Expense reimbursement.  All California and
    other eligible ZipAgents (including, where applicable, ZipAgents
    who have met certain levels of productivity) receive expense
    reimbursement. This reimbursement covers many expenses typically
    related to their business, such as automobile usage, cell phone
    usage and Internet connectivity.
    Company-paid marketing expenses.  In the
    traditional independent contractor model, agents are typically
    responsible for covering all of their own marketing expenses,
    including the cost of lead generation, advertising and marketing
    costs associated with selling homes and production of collateral
    materials. In our model, we cover these costs for all of our
    ZipAgents.
    Benefits.  One of the advantages of our
    employee-based model for our ZipAgents is that we provide them
    with a broad array of benefits that are uncommon in the real
    estate brokerage industry, including company-sponsored health,
    welfare and 401(k) plans. In addition, ZipAgents have the
    ability to earn stock options in connection with performance
    levels.  Recruiting
    and training
    CLIENT
    ACQUISITION
  Lead
    generation
    cost-per-click, cost-per-lead, cost-per-impression,
 11




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PRODUCT
    DEVELOPMENT AND ENGINEERING
        around-the-clock back-up back-up
  REGULATORY
    MATTERS
    Government
    regulation
    State regulation.
 12




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Federal regulation.
  Local regulation.
  Federal and state labor regulation. case-by-case
       13




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case-by-case
  Third-party
    regulation
  ® ®
    brick-and-mortar ®
  ®
 14




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®
  COMPETITION
  Trends. Trends
    
    quality of the home data available to clients;
    quality of the agents;
    level of client responsiveness;
    level of commissions charged sellers or incentives provided to
    buyers;
    local knowledge;
    ease of product usability; and
    overall client service.    INTELLECTUAL
    PROPERTY
     15




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EMPLOYEES
    EXECUTIVE
    OFFICERS
    Name

Age

PositionRichard F. Sommer


45


Chief Executive Officer and
    DirectorJoseph Patrick Lashinsky


40


PresidentWilliam C. Sinclair


58


Executive Vice President,
    Operations and Business DevelopmentGenevieve C. Combes


39


Senior Vice President, Planning
    and OperationsDavid A. Rector


61


Senior Vice President and Interim
    Chief Financial OfficerThomas M. Perrault


41


Vice President, Human ResourcesKaren B. Seto


42


Vice President, General Counsel
    and Secretary   Richard F. Sommer
  Joseph Patrick Lashinsky
  William C. Sinclair
  Genevieve C. Combes
 16




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cum laude
  David A. Rector
  Thomas M. Perrault
  Karen B. Seto cum laude
  Item 1A.
    Risk
    Factors:  RISK
    FACTORS
    RISKS
    RELATED TO OUR BUSINESS AND INDUSTRY
  We
    have been profitable in only nine quarters and may incur losses
    in the future, and our limited operating history makes our
    future financial performance difficult to assess.
     17




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Our
    business model requires access to real estate listing services
    provided by third parties that we do not control, and the demand
    for our services may be reduced if our ability to display
    listings on our website is restricted.
      ®
  brick-and-mortar ®
  ®
 18




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Our
    business could be harmed by transitions in the real estate
    markets and economic events that are out of our control and may
    be difficult to predict.
      Consumer
    access to mortgage financing has been affordable and widely
    available by historic standards. Any tightening in the
    availability of credit will have the potential to negatively
    impact the housing market.
    Our
    business model is new and unproven, and we cannot guarantee our
    future success.
   19




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If we
    fail to recruit, hire and retain qualified agents, we may be
    unable to service our clients and our growth could be
    impaired.
      We may
    incur additional expenses or liabilities if our compensation or
    expense reimbursement policies are found to violate federal or
    state wage and hour laws.
    Our
    failure to effectively manage the growth of our ZipAgents and
    related technology could adversely affect our ability to service
    our clients.
   20




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Our
    failure to effectively manage the growth of our control systems
    could adversely affect our ability to maintain legal
    compliance.
    If we
    fail to comply with real estate brokerage laws and regulations,
    we may incur significant financial penalties or lose our license
    to operate.
  and/or
  We may
    have liabilities in connection with real estate brokerage
    activities.
  standard-of-care
 21




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We may
    have liabilities if any of our employees violates laws
    concerning settlement procedures.
    If any
    of our core services fails to comply with applicable federal and
    state law and regulations, we may incur significant financial
    penalties or lose licenses require to provide these
    services.
  E-LOAN,
     22




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We may
    have liabilities in connection with our performance of core
    services.
  standard-of-care
  If our
    arrangements for providing core services become impaired, we may
    lose sources of revenue that may be difficult to replace and we
    may be less likely to engage in related transactions with our
    clients.
  E-LOAN, E-LOAN E-LOAN
  If
    consumers do not continue to use the Internet as a tool in their
    residential real estate buying or selling process, we may be
    unable to attract new clients and our growth and financial
    results may suffer.
  face-to-face
  Our
    success depends in part on our ability to successfully expand
    into additional real estate markets.
   23




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
    the economic conditions and demographics of a market;
    the general prices of real estate in a market;
    Internet use in a market;
    competition within a market from local and national brokerage
    firms;
    rules and regulations governing a market;
    the ability and capacity of our organization to manage expansion
    into additional geographic areas, additional headcount and
    increased organizational complexity;
    the existence of local MLSs; and
    state laws governing cash rebates and other regulatory
    restrictions.  start-up
  Unless
    we develop, maintain and protect a strong brand identity, our
    business may not grow and our financial results may
    suffer.
      We
    have numerous competitors, many of which have valuable industry
    relationships, innovative business models and access to greater
    resources than we do.
   24




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Trends.
      Changes
    in federal and state real estate laws and regulations, and rules
    of industry organizations such as the National Association of
    REALTORS®,
    could adversely affect our business.
   25




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We
    derive a significant portion of our leads through third parties,
    and if any of our significant lead generation relationships are
    terminated, impaired or become more expensive, our ability to
    attract new clients and grow our business may be adversely
    affected.
    Our
    ability to expand our business may be limited by state laws
    governing cash rebates to home buyers.
    We may
    be unable to integrate our technology with each MLS on a
    cost-effective basis, which may harm our operating results and
    adversely affect our ability to service clients.
    We may
    be subject to liability for the Internet content that we
    publish.
   26




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We
    monitor and evaluate the use of our website by our registered
    users, which could raise privacy concerns.
    We may
    need to change the manner in which we conduct our business if
    government regulation of the Internet increases.
        Our
    operating results are subject to seasonality and vary
    significantly among quarters during each calendar year, making
    meaningful comparisons of successive quarters
    difficult.
  45-day
 27




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
    timing of widely observed holidays and vacation periods and
    availability of home buyers and sellers, real estate agents and
    related service providers during these periods;
    a desire to relocate prior to the start of the school year;
    inclement weather which can influence consumers desire or
    ability to visit properties;
    timing of employment compensation changes, such as raises and
    bonuses;
    the time between entry into a purchase contract for real estate
    and closing of the transaction; and
    the levels of housing inventory available for sale.    Our
    reputation and client and agent service offerings may be harmed
    by system failures and computer viruses.
  back-up
  Our
    business is geographically concentrated, which makes us more
    susceptible to business interruption and financial loss due to
    natural disasters, inclement weather, economic or market
    conditions or other regional events outside of our
    control.
    Our
    intellectual property rights are valuable and our failure to
    protect those rights could adversely affect our
    business.
   28




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We may
    in the future be subject to intellectual property rights
    disputes, which could divert management attention, be costly to
    defend and require us to limit our service
    offerings.
      
    pay damages;
    stop using the technology found to be in violation of a third
    partys rights;
    seek a license for the infringing technology; or
    develop alternative non-infringing technology.    If we
    fail to attract and retain our key personnel, our ability to
    meet our business goals will be impaired and our financial
    condition and results of operations will suffer.
    We
    intend to evaluate acquisitions or investments in complementary
    technologies and businesses and we may not realize the
    anticipated benefits from, and may have to pay substantial costs
    related to, any acquisitions or investments that we
    undertake.
   29




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
    our inability to successfully integrate acquired technologies or
    operations;
    diversion of managements attention;
    problems maintaining uniform standards, procedures, controls and
    policies;
    potentially dilutive issuances of equity securities or the
    incurrence of debt or contingent liabilities;
    expenses related to amortization of intangible assets;
    risks associated with operating a business or in a market in
    which we have little or no prior experience;
    potential write offs of acquired assets;
    loss of key employees of acquired businesses; and
    our inability to recover the costs of acquisitions or
    investments.  Accounting
    for employee stock options using the fair value method could
    significantly reduce our net income in future
    periods.
    The
    value of our services could be diminished if anti-spam software
    filters out an increasing portion of the emails we
    send.
    As we
    implement changes in our agent compensation policies, we may
    incent behaviors that cause a decrease in our profit margin with
    the goal of increasing our profits.
    OTHER
    RISKS RELATED TO OUR STOCK PRICE
  Our
    stock price may be volatile.
    
    variations in our quarterly results of operations; 30




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
    announcements by us or our competitors or lead source providers;
    the relatively low level of public float and average daily
    trading volumes of our common stock;
    changes in estimates of our performance or recommendations, or
    termination of coverage by securities analysts;
    inability to meet quarterly or yearly estimates or targets of
    our performance;
    the hiring or departure of key personnel (such as the recent
    departures of our former Chief Executive Officer, Eric A.
    Danziger and our former President and Chief Financial Officer,
    Gary M. Beasley), including agents or groups of agents or key
    executives;
    changes in our reputation;
    acquisitions or strategic alliances involving us or our
    competitors;
    changes in the legal and regulatory environment affecting our
    business; and
    market conditions in our industry and the economy as a whole.    Our
    share price could decline due to the large number of outstanding
    shares of our common stock eligible for future
    sale.
       31




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Our
    principal stockholders, executive officers and directors own a
    significant percentage of our stock, and as a result, the
    trading price for our shares may be depressed and these
    stockholders can take actions that may be adverse to your
    interests.
    Our
    charter documents and Delaware law could prevent a takeover that
    stockholders consider favorable and could also reduce the market
    price of our stock.
    
    providing for a classified board of directors with staggered,
    three-year terms;
    not providing for cumulative voting in the election of directors;
    authorizing the board to issue, without stockholder approval,
    preferred stock with rights senior to those of common stock;
    prohibiting stockholder action by written consent;
    limiting the persons who may call special meetings of
    stockholders; and
    requiring advance notification of stockholder nominations and
    proposals.      Item 1B.
    Unresolved
    Staff Comments:    Item 2.
    Properties:   32




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Item 3.
    Legal
    Proceedings:    Item 4.
    Submission
    of Matters to a Vote of Security Holders:   PART II  Item 5.
    Market
    for Our Common Stock, Related Stockholder Matters and Issuer
    Purchases of Equity Securities:  Market
    information
    High


Low2005 Calendar yearFirst Quarter

$
18.34


$
13.35Second Quarter

$
15.92


$
12.30Third Quarter

$
14.17


$
12.13Fourth Quarter

$
13.73


$
7.872006 Calendar yearFirst Quarter

$
10.26


$
8.16Second Quarter

$
9.71


$
7.11Third Quarter

$
8.39


$
5.89Fourth Quarter

$
8.16


$
7.08    33




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Stock
    Performance Graph
    
    the Goldman Sachs Internet Index (our Peer Group Index), and
    the Total Return Index for The Nasdaq Stock Market (U.S. and
    Foreign).      Comparative
    Returns
 
  TotalNasdaqDate


ZipRealty


Peer Group


ReturnsNovember 10, 2004



100.00




100.00




100.00December 31, 2004



109.63




112.22




106.92December 30, 2005



51.66




129.13




108.39December 29, 2006



45.95




125.71




118.71     Dividend
    policy
   34




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Use of
    proceeds
  Form S-1 No. 333-115657)
       35




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Item 6.
    Selected
    Financial Data:    Year Ended December 31,Statements of Operations Data

2006


2005


2004


2003


2002(In thousands except per share data)Net transaction revenues

$
92,659


$
91,082


$
60,749


$
32,679


$
16,795Referral and other revenues


2,728



2,323



1,539



1,128



368Net revenues


95,387



93,405



62,288



33,807



17,163Operating expenses:Cost of revenues


52,166



51,122



33,903



19,937



13,451Product development


5,380



2,754



2,257



1,740



1,584Marketing and customer acquisition


12,589



12,306



8,827



5,021



4,470General and administrative


32,177



22,033



14,438



9,500



10,417Litigation






4,164











Total operating expenses


102,312



92,379



59,425



36,198



29,922Income (loss) from operations


(6,925
)


1,026



2,863



(2,391
)


(12,759
)Other income (expense):Interest expense














(2,273
)


(2,118
)Interest income


3,907



2,741



411



60



126Other income (expense), net


(16
)


(14
)


(1
)


21



(14
)Total other income (expense), net


3,891



2,727



410



(2,192
)


(2,006
)Income (loss) before income taxes


(3,034
)


3,753



3,273



(4,583
)


(14,765
)Provision for (benefit from)
    income taxes


17,560



(16,714
)


89







Net income (loss)

$
(20,594
)

$
20,467


$
3,184


$
(4,583
)

$
(14,765
)Cumulative preferred stock
    dividends










552



631



631Amount allocated to participating
    preferred shares










2,632







Net income (loss) available to
    common stockholders

$
(20,594
)

$
20,467


$



$
(5,214
)

$
(15,396
)Net income (loss) per share:Basic

$
(1.00
)

$
1.02


$



$
(3.57
)

$
(10.63
)Diluted

$
(1.00
)

$
0.82


$



$
(3.57
)

$
(10.63
)Weighted average common shares
    outstanding:Basic


20,542



20,089



3,798



1,459



1,448Diluted


20,542



25,080



3,798



1,459



1,448   Share-Based Payment
 36




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December 31,Balance Sheet Data

2006


2005


2004


2003


2002(In thousands)Cash, cash equivalents and
    short-term investments

$
88,808


$
88,909


$
83,497


$
10,357


$
8,961Working capital


83,794



84,047



80,923



8,183



7,817Total assets


98,357



113,953



88,126



12,430



12,047Total long-term liabilities


513



38



90



157



17,082Total liabilities


10,488



10,172



5,855



3,535



19,827Redeemable convertible preferred
    stock and warrants














63,556



42,392Total stockholders equity
    (deficit)


87,869



103,781



82,271



(54,660
)


(50,172
)   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations:  The following discussion should be read together with our
    financial statements and related notes appearing elsewhere in
    this report. This discussion contains forward-looking statements
    based upon current expectations that involve numerous risks and
    uncertainties. Our actual results could differ materially from
    those anticipated in these forward-looking statements for many
    reasons, including but not limited to those set forth in
    Risk Factors in Item 1A of Part I of this
    report and elsewhere in this report. Except as otherwise
    required by law, we do not intend to update any information
    contained in these forward-looking statements.
  OVERVIEW
  General
    E-LOAN,
   37




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Trends
    in our business
    ®
  and/or
   38




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Market
    seasonality, cyclicality and interest rate
    influences
  45-day
   39




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CRITICAL
    ACCOUNTING POLICIES AND ESTIMATES
      E-LOAN
 40




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Internal-use
    software and website development costs
  98-1, Accounting for the Cost of Computer Software Developed or
    Obtained for Internal Use No. 00-02, Accounting for Website Development Costs.
  Stock-based
    compensation
  Share-Based Payment Accounting
    for Stock Issued to Employees
  
    compensation cost for all unvested stock-based awards as of
    January 1, 2006 that were granted subsequent to our filing
    of the registration statement for an initial public offering in
    May 2004, and prior to January 1, 2006, based on the grant
    date fair value estimated in accordance with the original
    provisions of SFAS 123;
    compensation cost for stock-based awards granted subsequent, to
    January 1, 2006, based on the grant date fair value
    estimated in accordance with the provisions of
    SFAS 123(R); and
    compensation cost for options granted prior to our filing of the
    registration statement for an initial public offering in May
    2004, based on the intrinsic value method.    No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services (EITF 96-18).
   41




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
    comparable values of similar companies and the pricing of recent
    rounds of financing;
    revenue growth and profitability milestones achieved and as
    measured to budget;
    continued growth in experience of our management team;
    marketplace activity and competition;
    barriers to entry; and
    status of capital markets.  Income
    taxes
           42




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RESULTS
    OF OPERATIONS
    Year Ended December 31,Statements of Operations Data

2006


2005


2004(In thousands, except pershare amounts)Net transaction revenues

$
92,659


$
91,082


$
60,749Referral and other revenues


2,728



2,323



1,539Net revenues


95,387



93,405



62,288Operating expenses:Cost of revenues


52,166



51,122



33,903Product development


5,380



2,754



2,257Marketing and customer acquisition


12,589



12,306



8,827General and administrative


32,177



22,033



14,438Litigation






4,164



Total operating expenses


102,312



92,379



59,425Income (loss) from operations


(6,925
)


1,026



2,863Other income (expense):Interest income


3,907



2,741



411Other income (expense), net


(16
)


(14
)


(1
)Total other income (expense), net


3,891



2,727



410Income (loss) before income taxes


(3,034
)


3,753



3,273Provision (benefit) for income
    taxes


17,560



(16,714
)


89Net income (loss)

$
(20,594
)

$
20,467


$
3,184Cumulative preferred stock
    dividends










552Amount allocated to participating
    preferred stockholders










2,632Net income (loss) available to
    common stockholders

$
(20,594
)

$
20,467


$
Net income (loss) per share:Basic

$
(1.00
)

$
1.02


$
Diluted

$
(1.00
)

$
0.82


$
Weighted average common shares
    outstanding:Basic


20,542



20,089



3,798Diluted


20,542



25,080



3,798     Other
    financial data (unaudited)
  Pro forma
    net income (loss) per share
   43




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##### Table of Contents



and/or
    Year Ended December 31,2006


2005


2004(In thousands except pershare amounts)Numerator (for basic and
    diluted)Net income (loss) available to
    common stockholders

$
(20,594
)

$
20,467


$
Add:Cumulative preferred stock
    dividends










552Amount allocated to participating
    preferred shares










2,632Numerator (for basic and
    diluted)  pro forma net income (loss)


(20,594
)


20,467



3,184DenominatorWeighted average common shares
    outstanding


20,542



20,089



3,798Add:Weighted average of convertible
    preferred stock










10,324Pro forma denominator for basic
    calculation:


20,542



20,089



14,122Effect of dilutive securitiesAdd:Weighted average of warrants
    outstanding






3,273



3,272Weighted average of stock options
    outstanding






1,718



1,968Pro forma denominator for diluted
    calculation:


20,542



25,080



19,362Pro forma net income (loss) per
    share:Basic

$
(1.00
)

$
1.02


$
0.23Diluted

$
(1.00
)

$
0.82


$
0.16  44




---



##### Table of Contents



Year Ended December 31,Statements of Operations Data

2006


2005


2004Net transaction revenues


97.1
%


97.5
%


97.5
%Referral and other revenues


2.9



2.5



2.5Net revenues


100.0



100.0



100.0Operating expenses:Cost of revenues


54.7



54.7



54.5Product development


5.6



2.9



3.6Marketing and customer acquisition


13.2



13.2



14.2General and administrative


33.7



23.6



23.2Litigation






4.5



Total operating expenses


107.2



98.9



95.5Income (loss) from operations


(7.2
)


1.1



4.5Other income (expense):Interest income


4.1



2.9



0.7Other income (expense)










Total other income (expense), net


4.1



2.9



0.7Income (loss) before income taxes


(3.1
)


4.0



5.2Provision (benefit) for income
    taxes


18.4



(17.9
)


0.1Net income (loss)


(21.5
)%


21.9
%


5.1
%   Year Ended December 31,Other Operating Data

2006


2005


2004Number of ZipAgents at end of
    period


1,794



1,366



914Total value of real estate
    transactions closed during period (in billions)

$
4.4


$
4.4


$
3.0Number of transactions closed
    during period(1)


12,683



12,317



8,500Average net revenue per
    transaction during period(2)

$
7,306


$
7,395


$
7,147     (1)
    
    The term transaction refers to each representation
    of a buyer or seller in a real estate purchase or sale.(2)
    
    Average net revenue per transaction equals net transaction
    revenues divided by number of transactions with respect to each
    period.  Comparison
    of the years ended December 31, 2006 and December 31,
    2005
  Net
    Revenues
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Net revenues

$
95,387


$
93,405


$
1,982



2.1
%    45




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##### Table of Contents



year-over-year
  Cost
    of revenues
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Cost of revenues

$
52,166


$
51,122


$
1,044



2.0
%         Product
    development
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Product development

$
5,380


$
2,754


$
2,626



95.4
%        46




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##### Table of Contents



Marketing
    and customer acquisition
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Marketing and customer acquisition

$
12,589


$
12,306


$
283



2.3
%         General
    and administrative
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)General and administrative

$
32,177


$
22,033


$
10,144



46.0
%         Litigation
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Litigation

$



$
4,164


$
(4,164
)


(100.0
)%    47




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##### Table of Contents



Interest
    income
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Interest income

$
3,907


$
2,741


$
1,166



42.6
%     Other
    income (expense), net
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Other income (expense), net

$
(16
)

$
(14
)

$
(2
)


(18.2
)%     Provision
    for income taxes
  Year EndedDecember 31,


Increase


Percent2006


2005


(Decrease)


Change(In thousands)Provision (benefit) for income
    taxes

$
17,560


$
(16,714
)

$
34,274



205.1
%     Comparison
    of the years ended December 31, 2005 and December 31,
    2004
  Net
    revenues
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Net revenues

$
93,405


$
62,288


$
31,117



50.0
%    48




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##### Table of Contents



Cost
    of revenues
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Cost of revenues

$
51,122


$
33,903


$
17,219



50.8
%       Product
    development
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Product development

$
2,754


$
2,257


$
497



22.0
%       Marketing
    and customer acquisition
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Marketing and customer acquisition

$
12,306


$
8,827


$
3,479



39.4
%      49




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##### Table of Contents



General
    and administrative
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)General and administrative

$
22,033


$
14,438


$
7,595



52.6
%       Litigation
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Litigation

$
4,164


$



$
4,164



100.0
%     Interest
    income
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Interest income

$
2,741


$
411


$
2,330



566.8
%     Other
    income (expense), net
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Other income (expense), net

$
(14
)

$
(1
)

$
(13
)


2,410.3
%    50




---



##### Table of Contents



Provision
    for income taxes
  Year EndedDecember 31,


Increase


Percent2005


2004


(Decrease)


Change(In thousands)Provision (benefit) for income
    taxes

$
(16,714
)

$
89


$
(16,803
)


(18,837.1
)%     LIQUIDITY
    AND CAPITAL RESOURCES
      Operating
    activities
        Investing
    activities
   51




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##### Table of Contents



Financing
    activities
      Future
    needs
    CONTRACTUAL
    OBLIGATIONS AND COMMITMENTS
    Payments Due by PeriodLess Than


1 to 3


3 to 5


More Than1 Year


Years


Years


5 Years


Total(In thousands)Operating lease commitments

$
1,699


$
2,415


$
1,702


$
68


$
5,884   OFF-BALANCE
    SHEET ARRANGEMENTS
   52




---



##### Table of Contents



EFFECT OF
    RECENT ACCOUNTING PRONOUNCEMENTS
  .
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk:  Interest
    rate sensitivity
      Exchange
    rate sensitivity
   53




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data:  Financial
    Statements Table of Contents
  PageNumberReport of
    Independent Registered Public Accounting Firm


55Consolidated
    Balance Sheets


57Consolidated
    Statements of Operations


58Consolidated
    Statements of Redeemable Convertible Preferred Stock and
    Stockholders Equity (Deficit)


59Consolidated
    Statements of Cash Flows


60Notes to
    Consolidated Financial Statements


61Financial Statement
    Schedule  Valuation and Qualifying Accounts


85  54




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       Consolidated
    financial statements and financial statement
    schedules
      Internal
    control over financial reporting
  Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   55




---



##### Table of Contents



56




---



##### Table of Contents



ZIPREALTY,
    INC.



CONSOLIDATED
    BALANCE SHEETS  December 31,2006


2005(In thousands)ASSETSCurrent assetsCash and cash equivalents

$
8,575


$
6,868Short-term investments


80,233



82,041Accounts receivable, net of
    allowance of $30 and $42 at December 31, 2006 and 2005,
    respectively


1,781



1,634Prepaid expenses and other current
    assets


3,151



3,138Current and deferred income taxes


29



500Total current assets


93,769



94,181Restricted cash


90



90Property and equipment, net


4,114



2,538Investment in non-consolidated
    companies


17



Deferred tax assets, net






17,053Other assets


367



91Total assets

$
98,357


$
113,953LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable

$
2,184


$
1,631Accrued expenses


7,791



8,503Total current liabilities


9,975



10,134Other long-term liabilities


513



38Total liabilities


10,488



10,172Commitments and contingencies
    (Note 5)Stockholders equityCommon stock: $0.001 par
    value; 100,000 shares authorized; 21,627 and
    20,273 shares issued and outstanding at December 31,
    2006 and 2005, respectively


22



20Additional paid-in capital


134,813



130,077Common stock warrants


5,519



6,094Deferred stock-based compensation


(71
)


(257
)Accumulated other comprehensive
    loss


(157
)


(490
)Accumulated deficit


(52,257
)


(31,663
)Total stockholders equity


87,869



103,781Total liabilities and
    stockholders equity

$
98,357


$
113,953    57




---



##### Table of Contents



ZIPREALTY,
    INC.



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended December 31,2006


2005


2004(In thousands, except per share amounts)Net transaction revenues

$
92,659


$
91,082


$
60,749Referral and other revenues


2,728



2,323



1,539Net revenues


95,387



93,405



62,288Operating expensesCost of revenues


52,166



51,122



33,903Product development


5,380



2,754



2,257Marketing and customer acquisition


12,589



12,306



8,827General and administrative


32,177



22,033



14,438Litigation






4,164



Total operating expenses


102,312



92,379



59,425Income (loss) from operations


(6,925
)


1,026



2,863Other income (expense), netInterest income


3,907



2,741



411Other income (expense), net


(16
)


(14
)


(1
)Total other income (expense), net


3,891



2,727



410Income (loss) before income taxes


(3,034
)


3,753



3,273Provision for (benefit from)
    income taxes


17,560



(16,714
)


89Net income (loss)

$
(20,594
)

$
20,467


$
3,184Cumulative preferred stock
    dividends










552Amount allocated to participating
    preferred stockholders










2,632Net income (loss) available to
    common stockholders

$
(20,594
)

$
20,467


$
Net income (loss) per share:Basic

$
(1.00
)

$
1.02


$
Diluted

$
(1.00
)

$
0.82


$
Weighted average common shares
    outstanding:Basic


20,542



20,089



3,798Diluted


20,542



25,080



3,798    58




---



##### Table of Contents



ZIPREALTY,
    INC.



CONSOLIDATED
    STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS
    EQUITY (DEFICIT)  RedeemableRedeemable


Convertible














Deferred


Accumulated





TotalConvertible


Preferred








Additional


Common


Stock-


Other





Stockholders


ComprehensivePreferred Stock


Stock


Common Stock


Paid-In


Stock


Based


Comprehensive


Accumulated


Equity


IncomeShares


Amount


Warrants


Shares


Amount


Capital


Warrants


Compensation


Loss


Deficit


(Deficit)


(Loss)(In thousands)Balance at December 31,
    2003


10,805


$
56,170



7,386



1,469


$
2


$
928


$



$
(276
)

$



$
(55,314
)

$
(54,660
)Issuance of common stock upon
    exercise of stock options














152







177



















177Issuance of common stock upon
    exercise of common stock warrants














1







2



(2
)














Issuance of preferred stock upon
    exercise of
    Series E-1
    preferred stock warrants


2,221



9,573



(1,015
)






























Conversion of preferred stock to
    common stock


(13,026
)


(65,743
)


(6,371
)


13,026



13



65,730



6,371















72,114Issuance of common
    stock  Initial Public Offering














5,232



5



61,397



















61,402Deferred stock-based compensation






















430







(430
)










Amortization of deferred
    stock-based compensation






























159











159Reversal of deferred stock-based
    compensation upon employee terminations






















(109
)






109











Comprehensive income:Net income






































3,184



3,184


$
3,184Unrealized loss on
    available-for-sale
    securities, net of tax


































(105
)






(105
)


(105
)Total comprehensive income













































$
3,079Balance at December 31,
    2004














19,880



20



128,555



6,369



(438
)


(105
)


(52,130
)


82,271Issuance of common stock upon
    exercise of stock options














239







571



















571Issuance of common stock upon
    exercise of common stock warrants














154







285



(275
)














10Amortization of deferred
    stock-based compensation






























140











140Reversal of deferred stock-based
    compensation upon employee terminations






















(41
)






41











Tax benefit from employee stock
    plans






















707



















707Comprehensive income:Net income






































20,467



20,467


$
20,467Unrealized loss on
    available-for-sale
    securities, net of tax


































(385
)






(385
)


(385
)Total comprehensive income













































$
20,082Balance at December 31,
    2005














20,273



20



130,077



6,094



(257
)


(490
)


(31,663
)


103,781Issuance of common stock upon
    exercise of stock options














1,151



2



1,562



















1,564Issuance of common stock upon
    exercise of common stock warrants














203







575



(575
)














Amortization of deferred
    stock-based compensation






























100











100Reversal of deferred stock-based
    compensation upon employee terminations






















(86
)






86











Stock-based compensation expense






















2,685



















2,685Comprehensive loss:Net loss






































(20,594
)


(20,594
)

$
(20,594
)Unrealized loss on
    available-for-sale
    securities, net of tax


































333







333



333Total comprehensive loss













































$
(20,261
)Balance at December 31,
    2006













$
21,627


$
22


$
134,813


$
5,519


$
(71
)

$
(157
)

$
(52,257
)

$
87,869     59




---



##### Table of Contents



ZIPREALTY,
    INC.



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activitiesNet income (loss)

$
(20,594
)

$
20,467


$
3,184Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating activitiesDeferred income tax expense
    (benefit)


17,496



(17,496
)


Tax benefit from employee stock
    plans






707



Depreciation and amortization


2,391



1,518



847Stock-based compensation expense


2,785



140



159Provision for doubtful accounts


(12
)


19



9Amortization of short-term
    investment premium (discount)


(115
)


630



71Loss on disposal of property and
    equipment


15







Changes in operating assets and
    liabilitiesAccounts receivable


(135
)


(564
)


(591
)Prepaid expenses and other current
    assets


15



(1,093
)


(1,406
)Other assets


(133
)


(79
)


Accounts payable


553



153



502Accrued expenses


(712
)


4,216



1,885Other long-term liabilities


475



(52
)


(66
)Net cash provided by operating
    activities


2,029



8,566



4,594Cash flows from investing
    activitiesRestricted cash






100



Purchases of short-term investments


(58,537
)


(37,550
)


(72,148
)Proceeds from sale and maturity of
    short-term investments


60,793



26,465



Purchases of property and equipment


(3,975
)


(2,820
)


(1,415
)Purchase of intangible asset


(150
)






Investment in non-consolidated
    companies


(17
)






Net cash used in investing
    activities


(1,886
)


(13,805
)


(73,563
)Cash flows from financing
    activitiesProceeds from stock option exercises


1,564



571



176Proceeds from common stock warrant
    exercises






11



Proceeds from
    Series E-1
    preferred stock warrant exercises










8,558Proceeds from issuance of common
    stock-Initial Public Offering, net of issuance costs










61,403Net cash provided by financing
    activities


1,564



582



70,137Net increase (decrease) in cash and
    cash equivalents


1,707



(4,657
)


1,168Cash and cash equivalents at
    beginning of period


6,868



11,525



10,357Cash and cash equivalents at end of
    period

$
8,575


$
6,868


$
11,525Supplemental cash flow
    informationNon-cash investing and financing
    activitiesReversal of deferred stock-based
    compensation upon employee terminations

$
86


$
41


$
109Conversion of preferred stock into
    common stock

$



$



$
(65,743
)Conversion of preferred stock
    warrants into common stock warrants

$



$



$
(6,371
)Recognition of preferred stock
    additional paid-in capital from preferred stock warrants due to
    exercise of
    Series E-1
    preferred stock warrants

$



$



$
1,015Recognition of common stock
    additional paid-in capital from common stock warrants due to
    exercise of common stock warrants

$
575


$
275


$
2Deferred stock-based compensation

$



$



$
430    60




---



##### Table of Contents



ZIPREALTY,
    INC.



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  1.
    THE
    COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Nature
    of operations
    Principles
    of consolidation
        Stock
    split
    Initial
    public offering
  Form S-1 No. 333-115657)
   61




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Reclassifications
    Risks
    and uncertainties
    
    regulatory changes;
    the continued use and adoption of the Internet by consumers
    which allows the Company to compete with established real estate
    firms, many of which have long operating histories and
    substantial client bases; and
    entry into market of companies attempting to replicate the
    Companys business model.  Net
    income (loss) per share
    Use of
    estimates
    Revenue
    recognition
   62




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   E-LOAN
  Expense
    recognition
    Cost
    of revenues
    Cash
    and cash equivalents
    Short-term
    investments
  available-for-sale
  Restricted
    cash
    Fair
    value of financial instruments
    Concentration
    of credit risk, significant customers and significant
    suppliers
   63




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           Property
    and equipment
    Computer hardware and software

1-3 yearsFurniture, fixtures and equipment

4-5 yearsLeasehold improvements

Shorter of the lease period or
    estimated useful life      64




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Impairment
    of Long-Lived Assets
  Accounting for the Impairment or Disposal of
    Long-Lived Assets
  Stock-Based
    Compensation
  Share-Based
    Payment Accounting
    for Stock Issued to Employees
  
    compensation cost for all unvested stock-based awards as of
    January 1, 2006 that were granted subsequent to our filing
    of the registration statement for an initial public offering in
    May 2004, and prior to January 1, 2006, based on the grant
    date fair value estimated in accordance with the original
    provisions of SFAS 123;
    compensation cost for stock-based awards granted subsequent, to
    January 1, 2006, based on the grant date fair value
    estimated in accordance with the provisions of
    SFAS 123(R); and
    compensation cost for options granted prior to our filing of the
    registration statement for an initial public offering in May
    2004, based on the intrinsic value method.    No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services (EITF 96-18).
   65




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      
    comparable values of similar companies and the pricing of recent
    rounds of financing;
    revenue growth and profitability milestones achieved and as
    measured to budget;
    continued growth in experience of our management team;
    marketplace activity and competition;
    barriers to entry; and
    status of capital markets.  Software
    and Website Development Costs
  No. 00-02, Accounting for Website Development Costs No. 00-02). No. 00-02 98-1, Accounting for the Cost of Computer Software Developed or
    Obtained for Internal Use (SOP 98-1) , SOP 98-1,
    Advertising
    Costs
   66




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Income
    Taxes
    Comprehensive
    Income (Loss)
  available-for-sale
  Segment
    Reporting
  Disclosures about Segments of an Enterprise and Related
    Information
  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income
    Taxes Accounting for Income Taxes
  Fair Value
    Measurements
  Considering the Effects of
    Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements
 67




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.
    BALANCE
    SHEET COMPONENTS  Short-term
    investments
  available-for-sale
  December 31, 2006


December 31, 2005Gross


Gross


Gross


Estimated


Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


Fair


Amortized


Unrealized


FairCost


Gains


Losses


Value


Cost


Losses


Value(In thousands)


(In thousands)Money market securities

$
5,604


$



$



$
5,604


$
2,462


$



$
2,462Repurchase agreements


150











150



300







300Asset backed


24,314



13



(41
)


24,286



9,056



(25
)


9,031Corporate obligations


35,575



14



(77
)


34,512



38,187



(214
)


37,973US Government and agency
    obligations


21,501



3



(69
)


21,435



35,288



(251
)


35,037Total short-term investments

$
86,144


$
30


$
(187
)

$
85,987


$
85,293


$
(490
)

$
84,803   December 31,


December 31,2006


2005(In thousands)


(In thousands)Recorded as:Cash equivalents

$
5,754


$
2,762Short-term investments


80,233



82,041$
85,987


$
84,803       December 31,2006(In thousands)Due within one year or less

$
32,238Due after one year through two
    years


31,529Due after two years through four
    years


22,220$
85,987  68




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Prepaid
    expenses and other current assets
    December 31,2006


2005(In thousands)Prepaid expenses

$
1,906


$
2,101Interest receivable


809



858Other assets


559



2703,274



3,229Less: long-term portion


123



91Prepaid expenses and other current
    assets

$
3,151


$
3,138   Property
    and equipment, net
    December 31,2006


2005(In thousands)Computer hardware and software

$
6,085


$
4,812Furniture, fixtures and equipment


1,587



901Leasehold improvements


1,464



4289,136



6,141Less: accumulated depreciation and
    amortization


(5,022
)


(3,603
)Property and equipment, net

$
4,114


$
2,538       Accrued
    expenses
    December 31,2006


2005(In thousands)Accrued vacation

$
909


$
727Accrued agent commissions


1,926



1,905Accrued bonuses


1,523



565Accrued marketing expenses


876



774Litigation settlement






3,164Other accrued expenses


2,557



1,368Accrued expenses

$
7,791


$
8,503  69




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accumulated
    other comprehensive income (loss)
    December 31,2006


2005(In thousands)Other comprehensive income (loss):Unrealized loss on
    available-for-sale
    securities, net of tax

$
(157
)

$
(490
)Total other comprehensive income
    (loss)

$
(157
)

$
(490
)   3.
    NET
    INCOME (LOSS) PER SHARE    Year Ended December 31,2006


2005


2004(In thousands, except pershare amounts)Numerator:Net income (loss)

$
(20,594
)

$
20,467


$
3,184Cumulative preferred stock
    dividends










552Amount allocated to participating
    preferred stockholders










2,632Net income (loss) available to
    common stockholders (for basic and dilutive EPS computations)

$
(20,594
)

$
20,467


$
Denominator:Shares used to compute EPS:Basic


20,542



20,089



3,798Add: Dilutive common stock options
    and warrants






4,991



Diluted


20,542



25,080



3,798Net income (loss) per share:Basic

$
(1.00
)

$
1.02


$
Diluted

$
(1.00
)

$
0.82


$
     Year Ended December 31,2006


2005


2004(In thousands)Stock options to purchase common
    stock


4,500



808



3,421Participating convertible
    preferred stock










Warrants to purchase preferred and
    common stock


4,169



3



4,811  70




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    INCOME
    TAXES    December 31,2006


2005


2004(In thousands)Current:Federal

$
64


$
636


$
65State






146



2464



782



89Deferred:Federal


15,853



(15,853
)


State


1,643



(1,643
)


17,496



(17,496
)


Total provision for income taxes

$
17,560


$
(16,714
)

$
89     December 31,2006


2005(In thousands)Deferred tax assetsNet operating loss carryforwards

$
16,339


$
16,762Allowances and accruals


1,846



780Credits


194



146Total gross deferred tax assets


18,379



17,688Less: valuation allowance


(18,379
)


(192
)Net deferred tax assets

$



$
17,496      71




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Year Ended December 31,2006


2005


2004Statutory federal tax rate


34.00
%


34.00
%


34.00
%State tax rate, net of federal
    benefit


0.00
%


5.27
%


5.67
%Change in valuation allowance


576.63
%


(479.15
)%


(44.13
)%Other, net


(31.91
)%


(0.24
)%


7.18
%Total provision for (benefit from)
    income taxes


578.72
%


(440.12
)%


2.72
%     December 31,2006


2005(In thousands)Prepaid income taxes

$
29


$
57Deferred income taxes, current






443$
29


$
500   5.
    COMMITMENTS
    AND CONTINGENCIES  Leases
      OperatingLeasesYear ending
    December 31,2007

$
1,6992008


1,4302009


9852010


8622011


840Thereafter


68Total minimum lease payments

$
5,884  72




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Legal
    Proceedings
    Indemnifications
      6.
    REDEEMABLE
    CONVERTIBLE PREFERRED STOCK    Shares


AggregateIssued and


LiquidationAuthorized


Outstanding


PreferenceSeries A


1,911,112



629,626


$
1,700,000Series B


5,246,171



1,734,752



16,393,438Series C


2,178,486



547,343



10,000,005Series D


6,106,871



2,006,357



9,531,544Series E


9,000,000



2,466,724



29,082,849Series E-1


15,300,000







Series F


19,600,000



3,420,534



26,885,452Balance at December 31, 2003


59,342,640



10,805,336


$
93,593,288    73




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Warrant
    for services
    Warrant
    with office lease
    Warrants
    with equipment lease line
    Warrants
    for convertible notes
     74




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Series E-1 E-1 E-1
  Series E-1 Series E-1
  7.
    PREFERRED
    AND COMMON STOCK    Common
    stock warrants
     75




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    8.
    STOCK-BASED
    COMPENSATION  Share-Based
    Payment
  No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services (EITF 96-18).
  Prior
    to the adoption of SFAS 123(R)
  Accounting for Stock Issued to Employees Accounting for Certain
    Transactions Involving Stock Compensation  an
    Interpretation of APB No. 25 Accounting for
    Stock-Based Compensation Accounting for Stock-Based
    Compensation  Transaction and Disclosure
 76




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended


Year EndedDecember 31,


December 31,2005


2004Net income as reported

$
20,467


$
3,814Deduct: Total stock-based employee
    compensation expense determined under the fair value based
    method for all awards, net of tax


(1,127
)


(538
)Pro forma net income

$
19,340


$
3,276Net income per share, as reported:Basic

$
1.02


$
Diluted

$
0.82


$
Pro forma net income per share:Basic

$
0.96


$
Diluted

$
0.77


$
     Impact
    of the Adoption of SFAS 123(R)
    
    compensation cost for all unvested stock-based awards as of
    January 1, 2006 that were granted subsequent to the
    Companys filing of the registration statement for an
    initial public offering in May 2004, and prior to
    January 1, 2006, that vested during the period based on the
    grant date fair value estimated in accordance with the original
    provisions of SFAS 123;
    compensation cost for stock-based awards granted subsequent to
    January 1, 2006, that vested during the period based on the
    grant date fair value estimated in accordance with the
    provisions of SFAS 123(R); and
    compensation cost for options granted prior to the
    Companys filing of the registration statement for an
    initial public offering in May 2004, that vested during the
    period based on the intrinsic value method. 77




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year EndedDecember 31,2006(In thousands)Cost of revenues

$
500Product development


183Marketing and customer acquisition


67General and administrative


2,035Total stock-based compensation


2,785Tax effect on stock-based
    compensation


(1,114
)Net effect on net income

$
1,671Effect on earnings per share:Basic

$
0.08Diluted

$
0.08     Valuation
    Assumptions
     78




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##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended December 31,2006


2005


2004Expected volatility


51-52
%


33-61
%


21-50
%Risk-free interest rate


4.3-5.0
%


3.8-4.4
%


2.5-3.7
%Expected life (years)


5.5-6.1



4



4Expected dividend yield


0
%


0
%


0
%Weighted-average fair value of
    options granted during the period

$
3.90


$
5.06


$
2.68   Stock
    Option Activity
    WeightedWeighted


AverageAverage


RemainingNumber of


Exercise


Contractual


AggregateShares


Price


Life (Years)


Intrinsic Value(In thousands)








(In thousands)Outstanding at
    December 31, 2003


2,263


$
1.14Options granted


1,528


$
11.28Options exercised


(150
)

$
1.18Options forfeited or expired


(220
)

$
2.39Outstanding at
    December 31, 2004


3,421


$
5.59



8.15



41,983Options granted


704


$
13.60Options exercised


(240
)

$
2.38Options forfeited or expired


(233
)

$
10.95Outstanding at
    December 31, 2005


3,652


$
7.01



7.56



13,011Options granted


2,664


$
7.16Options exercised


(1,151
)

$
1.36Options forfeited or expired


(930
)

$
11.25Outstanding at
    December 31, 2006


4,235


$
7.71



8.50



5,885Options exercisable at
    December 31, 2006


1,327


$
6.98



6.88



3,694   in-the-money in-the-money
    Stock
    Option Plans
   79




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Form S-8.
    Other
    Stock Option
    9.
    EMPLOYEE
    BENEFIT PLAN   80




---



##### Table of Contents



ZIPREALTY,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10.
    UNAUDITED
    QUARTERLY FINANCIAL DATA    Fourth


Third


Second


FirstYear Ended December 31, 2006

Quarter


Quarter


Quarter


Quarter(In thousands)Net transaction revenues

$
22,396


$
25,420


$
26,195


$
18,648Cost of revenues


12,598



14,238



14,590



10,740Income (loss) from operations


(3,586
)


(375
)


342



(3,306
)Net income (loss)(a)


(20,208
)


622



(220
)


(788
)Net income (loss) per share:Basic

$
(0.96
)

$
0.03


$
(0.01
)

$
(0.04
)Diluted

$
(0.96
)

$
0.03


$
(0.01
)

$
(0.04
)Weighted average common shares
    outstanding:Basic


21,092



20,410



20,336



20,291Diluted


21,092



23,478



20,336



20,291   Fourth


Third


Second


FirstYear Ended December 31, 2005

Quarter


Quarter


Quarter


Quarter(In thousands)Net transaction revenues

$
20,960


$
27,576


$
25,228


$
17,318Cost of revenues


11,655



15,565



13,829



10,073Income (loss) from operations(b)


340



2,219



(1,616
)


82Net income (loss)(c)


17,901



2,850



(946
)


662Net income (loss) per share:Basic

$
0.88


$
0.14


$
(0.05
)

$
0.03Diluted

$
0.73


$
0.11


$
(0.05
)

$
0.03Weighted average common shares
    outstanding:Basic


20,260



20,198



20,005



19,885Diluted


24,546



25,328



20,005



25,711     (a)
    
    Includes an income tax expense of $17.7 million recorded in
    the fourth quarter of 2006 related to a recording of a valuation
    allowance primarily attributable to the deferred tax assets
    related to net operating loss carryforwards.(b)
    
    Includes a one-time charge of $4.2 million recorded in the
    second quarter of 2005 related to the settlement of threatened
    litigation.(c)
    
    Includes an income tax benefit of $16.8 million recorded in
    the fourth quarter of 2005 related to a reversal of the
    Companys valuation allowance primarily attributable to the
    deferred tax assets related to net operating loss carryforwards. 81




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure:    Item 9A.
    Controls
    and Procedures:  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(e) 15d-15(e) Form 10-K.
  Managements
    Report on Internal Control Over Financial
    Reporting
  Rule 13a-15(f) Internal
    Control  Integrated Framework.
  Internal Control  Integrated Framework
    Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information:   82




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##### Table of Contents



PART III  Item 10.
    Directors
    and Executive Officers:  Executive
    officers
    Directors
    Section 16(a)
    beneficial ownership reporting compliance
    Code
    of ethics
    Corporate
    governance
    Item 11.
    Executive
    Compensation:    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters:    Equity
    compensation plan information
   83




---



##### Table of Contents



Number of SecuritiesNumber of





Available forSecurities to be





Issuance UnderIssued Upon


Weighted-Average


Equity CompensationExercise of


Exercise Price of


Plans (ExcludingOutstanding Options,


Outstanding Options,


Securities ReflectedPlan Name and Type

Warrants and Rights


Warrants and Rights


in the First Column)(In thousands)





(In thousands)Equity compensation plans
    approved by stockholders1999 Stock Option Plan


1,064


$
4.60



2004 Equity Incentive Plan


1,921


$
10.51



541Equity compensation not
    approved by stockholdersNew CEO Inducement Grant


1,250


$
6.06



Total


4,235


$
7.71



541   Item 13.
    Certain
    Relationships and Related Transactions:    Item 14.
    Principal
    Accountant Fees and Services:   84




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedule:  Documents filed with this report:
  Financial Statements.
    
    Report of independent registered public accounting firm
    Consolidated Balance Sheets at December 31, 2006 and 2005
    Consolidated Statements of Operations for the years ended
    December 31, 2006, 2005 and 2004
    Consolidated Statements of Stockholders Equity for the
    years ended December 31, 2006, 2005 and 2004
    Consolidated Statements of Cash Flows for the years ended
    December 31, 2006, 2005 and 2004
    Notes Consolidated Financial Statements.  Financial Statement Schedule
  Schedule II-Valuation
   Schedule II 
    Valuation and Qualifying Accounts  Balance at


Charged to





Balance atBeginning of


Costs and





End ofDescription

Year


Expenses


Deductions


Year(In thousands)Fiscal year ended
    December 31, 2004Provision for Doubtful Accounts


20



9







29Deferred Tax Asset Valuation


19,882







1,672



18,210Fiscal year ended
    December 31, 2005Provision for Doubtful Accounts


29



19



6



42Deferred Tax Asset Valuation


18,210







18,018



192Fiscal year ended
    December 31, 2006Provision for Doubtful Accounts


42



33



45



30Deferred Tax Asset Valuation


192



18,187







18,379     Exhibits.
   85




---



##### Table of Contents



SIGNATURES    ZIPREALTY, INC.
  By:
    /s/  David
    A. Rector        attorneys-in-fact, Form 10-K attorneys-in-fact
    Name

Title

Date/s/  Richard
    F. SommerRichard
    F. Sommer

Chief Executive Officer and
    Director (Principal Executive Officer)

March 16, 2007/s/  David
    A. RectorDavid
    A. Rector

Senior Vice President, Interim
    Chief Financial Officer, Controller and Chief Accounting Officer
    (Principal Financial and Accounting Officer)

March 16, 2007/s/  Donald
    F. WoodDonald
    F. Wood

Chairman of the Board of Directors

March 16, 2007/s/  Ronald
    C. BrownRonald
    C. Brown

Director

March 16, 2007/s/  Marc
    L. CellierMarc
    L. Cellier

Director

March 16, 2007/s/  Elisabeth
    H. DeMarseElisabeth
    H. DeMarse

Director

March 16, 2007/s/  Robert
    C. KagleRobert
    C. Kagle

Director

March 16, 2007/s/  Stanley
    M. Koonce, Jr.Stanley
    M. Koonce, Jr.

Director

March 16, 2007  86




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##### Table of Contents



Exhibit Index
  ExhibitNumber

Description1
.1(1)

Form of Underwriting Agreement3
.1(a)(1)

Amended and Restated Certificate
    of Incorporation3
.2(a)(1)

Bylaws4
.1(1)

Form of Common Stock Certificate10
.1(1)*

Form of Director and Executive
    Officer Indemnification Agreement10
.2(1)*

1999 Stock Option Plan10
.3(1)*

2004 Equity Incentive Plan10
.3(a)(2)*

Form of Stock Option Award
    Agreement under 2004 Equity Incentive Plan10
.4(1)*

Form of Change of Control Agreement10
.5(1)

Fifth Amended and Restated
    Investors Rights Agreement dated December 17, 200210
.6(1)

Office Lease Agreement between the
    Registrant and EOP-Emeryville Properties, L.L.C. dated
    November 28, 200110
.6(a)(1)

First Amendment dated
    March 22, 2002 to Office Lease Agreement between the
    Registrant and EOP-Emeryville Properties, L.L.C. dated
    November 28, 200110
.6(b)(3)

Third Amendment dated
    November 30, 2005 to Office Lease Agreement between
    ZipRealty, Inc. and CA-Emeryville Properties Limited Partnership
    (as successor in interest to EOP-Emeryville Properties, L.L.C.)
    dated November 28, 200110
.7(1)*

Employment offer letter between
    the Registrant and Eric A. Danziger dated April 27, 200110
.8(1)

Form of Primary Warrant to
    purchase shares of Series E-1 Preferred Stock10
.9(1)

Form of Secondary Warrant to
    purchase shares of Series E-1 Preferred Stock10
.10(1)

Form of Warrant to purchase shares
    of Series F Preferred Stock10
.11(4)

Director Compensation Policy10
.13(5)*

Management Incentive
    Plan  Fiscal Year 200610
.13(a)(6)*

Amended and Restated Management
    Incentive Plan  Fiscal Year 200610
.14(7)*

Termination Agreement and Release
    with Eric A. Danzinger executed May 15, 200610
.15(7)*

Gary M. Beasley Employment
    Agreement executed May 15, 200610
.16(8)*

Offer Letter to Richard F. Sommer
    dated August 24, 200610
.17(9)*

Form of Stock Option Award
    Agreement between the Company and Richard F. Sommer dated
    September 6, 200610
.18(10)*

J. Patrick Lashinsky Employment
    Agreement dated January 30, 200710
.19(11)*

Gary M. Beasley Separation
    Agreement and Release dated February 1, 200710
.20*

Consulting and Separation
    Agreement with Jeffrey G. Wagoner dated February 9, 200723
.1

Consent of independent registered
    public accounting firm24
.1

Power of Attorney (see signature
    page)31
.1

Certification of Chief Executive
    Officer, as required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Securities Exchange Act of 193431
.2

Certification of Interim Chief
    Financial Officer, as required by
    Rule 13a-14(a)
    or
    Rule 15d-14(a)
    of the Securities Exchange Act of 193432
.1

Certification of Chief Executive
    Officer, as required by Section 1350 of Chapter 63 of
    Title 18 of the United States Code (18 U.S.C. 1350)32
.2

Certification of Interim Chief
    Financial Officer, as required by Section 1350 of
    Chapter 63 of Title 18 of the United States Code
    (18 U.S.C. 1350)  87




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##### Table of Contents



(1)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Registration Statement on
    Form S-1(File
    No. 333-115657)
    filed with the Securities and Exchange Commission on
    May 20, 2004, as amended.(2)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Annual Report on
    Form 10-K
    (File
    No. 000-51002)
    for its fiscal year ended December 31, 2004, filed with the
    Securities and Exchange Commission on March 28, 2005.(3)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Current Report on
    Form 8-K
    (File
    No. 000-51002)
    filed with the Securities and Exchange Commission on
    December 6, 2005.(4)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Quarterly Report on
    Form 10-Q
    (File
    No. 000-51002)
    for the quarterly period ended June 30, 2005, filed with
    the Securities and Exchange Commission on August 12, 2005.(5)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Annual Report on
    Form 10-K
    (File
    No. 000-51002)
    for its fiscal year ended December 31, 2005, filed with the
    Securities and Exchange Commission on March 16, 2006.(6)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Current Report on
    Form 8-K
    (File
    No. 111-51002)
    filed with the Securities and Exchange Commission on
    October 27, 2006.(7)
    
    Incorporated by reference to the exhibit of the same number to
    the Registrants Current Report on
    Form 8-K
    (File
    No. 111-51002)
    filed with the Securities and Exchange Commission on
    May 16, 2006.(8)
    
    Incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    (File
    No. 000-51002)
    filed with the Securities and Exchange Commission on
    August 30, 2006.(9)
    
    Incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    (File
    No. 000-51002)
    filed with the Securities and Exchange Commission on
    August 30, 2006.  (10)
    
    Incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    (File
    No. 000-51002)
    filed with the Securities and Exchange Commission on
    February 8, 2007.(11)
    
    Incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    (File
    No. 000-51002)
    filed with the Securities and Exchange Commission on
    February 8, 2007.  *
    
    Identifies a management contract or compensatory plan of
    arrangement required to be filed as an exhibit to this report. 88