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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


| |           |   |  |                                                                                             
| | --------- | - |  | --------------------------------------------------------------------------------------------
| | (Mark one | ) |  |                                                                                             
| | þ         |   |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|
| |           |   |  | For the fiscal year ended December 31, 2004                                                 
|
| |           |   |  | OR                                                                                          
|
| | o         |   |  | 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(State of incorporation)                                                          |  | 94-3319956(IRS employer identification number)
|                                                                                         
|2000 POWELL STEET, SUITE 1555
     EMERYVILLE, CA(Address of principal executive offices) |  | 94608(Zip Code)                               

(510) 735-2600


(Registrants telephone number)


Securities registered pursuant to section 12(g) of the
Act:


Shares of Common Stock, $0.001 par value





þ o


þ


o þ














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TABLE OF CONTENTS







|                |  |                                                                                                        |  |      |    | 
|--------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                |  |                                                                                                        |  | Page |   
|                |  |                                                                                                        |  |      |   
|PART I         
|Item 1.         |  | Business                                                                                               |  |      | 2  | 
|Item 2.         |  | Properties                                                                                             |  |      | 16 | 
|Item 3.         |  | Legal Proceedings                                                                                      |  |      | 16 | 
|Item 4.         |  | Submission of Matters to a Vote of Security
    Holders                                                |  |      | 16 | 
|PART II        
|Item 5.         |  | Market for Our Common Stock, Related
    Stockholder Matters and Issuer Purchases of Equity Securities |  |      | 16 | 
|Item 6.         |  | Selected Financial Data                                                                                |  |      | 18 | 
|Item 7.         |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations              |  |      | 19 | 
|Item 7A.        |  | Quantitative and Qualitative Disclosures
    About Market Risk                                         |  |      | 48 | 
|Item 8.         |  | Financial Statements and Supplementary
    Data                                                        |  |      | 49 | 
|Item 9.         |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure               |  |      | 76 | 
|Item 9A.        |  | Controls and Procedures                                                                                |  |      | 76 | 
|Item 9B.        |  | Other Information                                                                                      |  |      | 76 | 
|PART III       
|Item 10.        |  | Directors and Executive Officers                                                                       |  |      | 76 | 
|Item 11         |  | Executive Compensation                                                                                 |  |      | 77 | 
|Item 12.        |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters     |  |      | 77 | 
|Item 13.        |  | Certain Relationships and Related
    Transactions                                                     |  |      | 77 | 
|Item 14.        |  | Principal Accountant Fees and Services                                                                 |  |      | 77 | 
|PART IV        
|Item 15.        |  | Exhibits and Financial Statement
    Schedules                                                         |  |      | 78 | 
|EXHIBIT 10.3(A)
|EXHIBIT 10.11  
|EXHIBIT 10.12  
|EXHIBIT 23.1   
|EXHIBIT 31.1   
|EXHIBIT 31.2   
|EXHIBIT 32.1   
|EXHIBIT 32.2   



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DOCUMENTS INCORPORATED BY REFERENCE




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.


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PART I







|        |          
|------- | ---------
|Item 1. | Business:

OVERVIEW










INDUSTRY BACKGROUND




| |                                        
| | ---------------------------------------
| | The U.S. residential real estate market

Trends Trends Trends


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Trends


Trends.




| |                                            
| | -------------------------------------------
| | Traditional real estate transaction process









| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Increasing use of the Internet in the residential real
    estate transaction process

Business Week


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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.


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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.



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OUR STRATEGY






| |                                                    
| | ---------------------------------------------------
| | Broaden and deepen our presence in existing markets





| |                            
| | ---------------------------
| | Enhance the ZipRealty brand





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Continue to invest in technology and our people to
    increase operational efficiency





| |                                              
| | ---------------------------------------------
| | Expand operations into new geographic markets



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| |                                          
| | -----------------------------------------
| | Continue to improve the client experience



OUR CONSUMER WEBSITE AND SERVICES






| |                                                
| | -----------------------------------------------
| | Comprehensive MLS access for home listings data





| |          
| | ---------
| | ZipNotify





| |                                          
| | -----------------------------------------
| | Neighborhood data and related information



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| |                                
| | -------------------------------
| | Online images and virtual tours





| |                
| | ---------------
| | Schedule visits





| |            
| | -----------
| | Home offers





| |                       
| | ----------------------
| | Financing pre-approval



ZIPAGENT PLATFORM






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ZIPAGENTS






| |                       
| | ----------------------
| | 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. Industry
    commission splits vary widely, but frequently range from 70% to
    80% to the agent and the balance to the brokerage firm. Our
    commission splits to ZipAgents vary from as low as 40% to as
    high as 80% of our net revenues, after deducting certain other
    items.                                                                                                                                      
|
| |  | Expense allowance. All ZipAgents receive an expense
    allowance of $750 to $1,500 per month, depending on their
    level of productivity. This allowance is designed to allow
    ZipAgents to cover many expenses typically related to their
    business, such as automobile, cell phone and Internet
    connectivity.                                                                                                                                                                                                                                                                                  
|
| |  | Company-paid expenses. In the traditional independent
    contractor model, agents are typically responsible for covering
    all of their own expenses, including the cost of lead
    generation, advertising and marketing costs associated with
    selling homes, production of collateral materials and
    transaction coordination costs if those services are desired. In
    our model, we cover these costs for all of our ZipAgents who
    meet certain levels of productivity. For those ZipAgents who do
    not meet this threshold, we charge a client acquisition fee of
    $750 per month.
|
| |  | 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 annual performance reviews and in
    some cases based upon transaction volume.                                                                                                                                                              



| |                        
| | -----------------------
| | Recruiting and training



CLIENT ACQUISITION




| |                
| | ---------------
| | Lead generation



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| |                  
| | -----------------
| | Offline marketing



PRODUCT DEVELOPMENT AND ENGINEERING








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REGULATORY MATTERS






| |                      
| | ---------------------
| | Government regulation



State regulation.


Federal regulation.


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Local regulation.


Federal and state labor regulation.








| |                       
| | ----------------------
| | Third-party regulation





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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;                                                          

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| |   |                               
| | - | ------------------------------
| |  | ease of product usability; and
|
| |  | overall client service.       



INTELLECTUAL PROPERTY






EMPLOYEES




EXECUTIVE OFFICERS




|                         |  |     |    |  |          |                                                                
|------------------------ |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name                     |  | Age |    |  | Position
|                         |  |     |    |  |         
|Eric A. Danziger         |  |     | 50 |  |          | President, Chief Executive Officer and Director                
|Gary M. Beasley          |  |     | 39 |  |          | Executive Vice President and Chief Financial Officer           
|William Scott Kucirek    |  |     | 38 |  |          | Executive Vice President of New Market Development and Director
|William C. Sinclair      |  |     | 56 |  |          | Senior Vice President of Sales and Operations                  
|Alain J. Ané             |  |     | 47 |  |          | Vice President of Human Resources                              
|Joseph Patrick Lashinsky |  |     | 38 |  |          | Vice President of Marketing and Business Development           
|David A. Rector          |  |     | 59 |  |          | Vice President, Controller and Chief Accounting Officer        
|Karen B. Seto            |  |     | 40 |  |          | Vice President, General Counsel and Secretary                  
|Joseph P. Trifoglio      |  |     | 51 |  |          | Vice President of Technology                                   

Eric A. Danziger


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Gary M. Beasley


William Scott Kucirek,


William C. Sinclair


Alain J. Ané


Joseph Patrick Lashinsky


David A. Rector


Karen B. Seto cum
laude


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Joseph P. Trifoglio







|        |            
|------- | -----------
|Item 2. | Properties:








|        |                   
|------- | ------------------
|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 |   |       | Low | 
|                   |                                                   |      |   |       |     | 
|2004 Calendar year |                                                   |      |   |       |     |  |   |      
|                   | Fourth Quarter (November 10 to December 31, 2004) |      | $ | 19.20 |     |  | $ | 14.75 | 



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Equity compensation plan information




|                                                   |  |                   |           |  |                      |   |                        |                        |  |  |         | 
|-------------------------------------------------- |  | ----------------- | --------- |  | -------------------- | - | ---------------------- | ---------------------- |  |  | ------- | 
|                                                   |  | Number of         |           |  |                      |   | Number of Securities   |                       
|                                                   |  | Securities to be  |           |  |                      |   | Available for Issuance |                       
|                                                   |  | Issued upon       |           |  |                      |   | under Equity           |                       
|                                                   |  | Exercise of       |           |  | Weighted-Average     |   |                        | Compensation Plans     | 
|                                                   |  | Outstanding       |           |  | Exercise Price of    |   |                        | (Excluding Securities  | 
|                                                   |  | Options, Warrants |           |  | Outstanding Options, |   |                        | Reflected in the First | 
|Plan Name and Type                                 |  | and Rights        |           |  | Warrants and Rights  |   |                        | Column)                | 
|                                                   |  |                   |           |  |                      |   |                        |                        | 
|Equity compensation plans approved by stockholders |  |                   |           |  |                      |   |                        |                        |  |  |         | 
|1999 Stock Option Plan                             |  |                   | 2,865,376 |  |                      | $ | 3.48                   |                        |  |  |        | 
|2004 Equity Incentive Plan                         |  |                   | 555,351   |  |                      | $ | 16.50                  |                        |  |  | 685,713 | 
|Total                                              |  |                   | 3,420,727 |  |                      | $ | 5.59                   |                        |  |  | 685,713 | 

Dividend policy




Use of proceeds










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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data:



|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |        |        |        |   |        |        |        | 
|-------------------------------------------------- | ------------------------------------------- | ------------------------------------ | ------- | ------ | ------ | - | ------- | ----- | ------ | - | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                   |                                             | Year Ended December 31,              |        
|                                                   |                                             |                                      |        
|Statements of Operations Data                      |                                             | 2000                                 |         |        | 2001   |   |         | 2002  |        |   | 2003    |        |        | 2004 |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|                                                   |                                             | (In thousands except per share data) |        
|Net transaction revenues                           |                                             | $                                    | 1,386   |        |        | $ | 3,907   |       |        | $ | 16,795  |        |        | $    | 32,679 |        |        | $ | 60,749 |       
|Referral and other revenues                        |                                             |                                      |        |        |        |   | 56      |       |        |   | 368     |        |        |      | 1,128  |        |        |   | 1,539  |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|                                                   | Net revenues                                |                                      |         | 1,386  |        |   |         | 3,963 |        |   |         | 17,163 |        |      |        | 33,807 |        |   |        | 62,288 |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Operating expenses:                                |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |        |        |        |   |        |       
|                                                   | Cost of revenues                            |                                      |         | 3,798  |        |   |         | 6,969 |        |   |         | 13,450 |        |      |        | 19,929 |        |   |        | 33,858 |       
|                                                   | Product development                         |                                      |         | 2,623  |        |   |         | 1,899 |        |   |         | 1,559  |        |      |        | 1,717  |        |   |        | 2,245  |       
|                                                   | Marketing and business development          |                                      |         | 10,497 |        |   |         | 3,225 |        |   |         | 4,451  |        |      |        | 5,003  |        |   |        | 8,821  |       
|                                                   | General and administrative                  |                                      |         | 4,613  |        |   |         | 5,447 |        |   |         | 10,378 |        |      |        | 9,464  |        |   |        | 14,342 |       
|                                                   | Stock-based compensation                    |                                      |         | 124    |        |   |         | 185   |        |   |         | 84     |        |      |        | 85     |        |   |        | 159    |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|                                                   |                                             | Total operating expenses             |         |        | 21,655 |   |         |       | 17,725 |   |         |        | 29,922 |      |        |        | 36,198 |   |        |        | 59,425 | 
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Income (loss) from operations                      |                                             |                                      | (20,269 | )      |        |   | (13,762 | )     |        |   | (12,759 | )      |        |      | (2,391 | )      |        |   | 2,863  |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Other income (expense):                            |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |        |        |        |   |        |       
|                                                   | Interest expense                            |                                      |         |       |        |   |         | (226  | )      |   |         | (2,118 | )      |      |        | (2,273 | )      |   |        |       |       
|                                                   | Interest income                             |                                      |         | 304    |        |   |         | 193   |        |   |         | 126    |        |      |        | 60     |        |   |        | 411    |       
|                                                   | Other income (expense), net                 |                                      |         |       |        |   |         | 3     |        |   |         | (14    | )      |      |        | 21     |        |   |        | (1     | )     
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|                                                   |                                             | Total other income (expense), net    |         |        | 304    |   |         |       | (30    | ) |         |        | (2,006 | )    |        |        | (2,192 | ) |        |        | 410    | 
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Income (loss) before income taxes                  |                                             |                                      | (19,965 | )      |        |   | (13,792 | )     |        |   | (14,765 | )      |        |      | (4,583 | )      |        |   | 3,273  |       
|Provision for income taxes                         |                                             |                                      |        |        |        |   |        |       |        |   |        |        |        |      |       |        |        |   | 89     |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Net income (loss)                                  |                                             | $                                    | (19,965 | )      |        | $ | (13,792 | )     |        | $ | (14,765 | )      |        | $    | (4,583 | )      |        | $ | 3,184  |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Cumulative preferred stock dividends               |                                             |                                      |        |        |        |   | 385     |       |        |   | 631     |        |        |      | 631    |        |        |   | 552    |       
|Amount allocated to participating preferred shares |                                             |                                      |        |        |        |   |        |       |        |   |        |        |        |      |       |        |        |   | 2,632  |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Net income (loss) available to common stockholders |                                             | $                                    | (19,965 | )      |        | $ | (14,177 | )     |        | $ | (15,396 | )      |        | $    | (5,214 | )      |        | $ |       |       
|                                                   |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |       
|Net income (loss) per share:                       |                                             |                                      |         |        |        |   |         |       |        |   |         |        |        |      |        |        |        |   |        |       
|                                                   | Basic                                       |                                      |         |        |        |   | $       | (9.96 | )      |   | $       | (10.63 | )      |      | $      | (3.57  | )      |   | $      |       |       
|                                                   | Diluted                                     |                                      |         |        |        |   | $       | (9.96 | )      |   | $       | (10.63 | )      |      | $      | (3.57  | )      |   | $      |       |       
|                                                   | Weighted average common shares outstanding: |                                      |         |        |        |   |         |       |        |   |         |        |        |      |        |        |        |   |        |        |       
|                                                   | Basic                                       |                                      |         |        |        |   |         | 1,424 |        |   |         | 1,448  |        |      |        | 1,459  |        |   |        | 3,798  |       
|                                                   | Diluted                                     |                                      |         |        |        |   |         | 1,424 |        |   |         | 1,448  |        |      |        | 1,459  |        |   |        | 3,798  |       



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|                                                    |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        | 
|--------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | 
|                                                    |  | December 31,   |        
|                                                    |  |                |        
|Balance Sheet Data                                  |  | 2000           |         |   | 2001 |   |         | 2002 |  |   | 2003    |   |  | 2004 |        
|                                                    |  |                |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                    |  | (In thousands) |        
|Cash, cash equivalents and short-term investments   |  | $              | 5,999   |   |      | $ | 931     |      |  | $ | 8,961   |   |  | $    | 10,357  |   |  | $ | 83,497 | 
|Working capital                                     |  |                | 5,085   |   |      |   | (171    | )    |  |   | 7,817   |   |  |      | 8,183   |   |  |   | 80,924 | 
|Total assets                                        |  |                | 10,063  |   |      |   | 4,018   |      |  |   | 12,047  |   |  |      | 12,430  |   |  |   | 88,126 | 
|Total long-term liabilities                         |  |                | 873     |   |      |   | 316     |      |  |   | 17,082  |   |  |      | 157     |   |  |   | 90     | 
|Total liabilities                                   |  |                | 2,356   |   |      |   | 1,962   |      |  |   | 19,827  |   |  |      | 3,535   |   |  |   | 5,855  | 
|Redeemable convertible preferred stock and warrants |  |                | 29,726  |   |      |   | 37,554  |      |  |   | 42,392  |   |  |      | 63,556  |   |  |   |       | 
|Total stockholders equity (deficit)                |  |                | (22,019 | ) |      |   | (35,497 | )    |  |   | (50,172 | ) |  |      | (54,660 | ) |  |   | 82,271 | 






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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 under
Risk factors and elsewhere in this report. We
undertake no obligation to update any information contained in
these forward-looking statements.


OVERVIEW




| |        
| | -------
| | General









| |                       
| | ----------------------
| | Trends in our business



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Trends Trends




| |                                                                 
| | ----------------------------------------------------------------
| | Market seasonality, cyclicality and interest rate
    influences







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CRITICAL ACCOUNTING POLICIES AND ESTIMATES








| |                    
| | -------------------
| | Revenue recognition





| |                                                    
| | ---------------------------------------------------
| | Internal-use software and website development costs

Accounting for the Cost of Computer Software Developed
or Obtained for Internal Use Accounting for Website Development Costs.


Deferred stock-based compensation


Accounting for Stock Issued to Employees, Accounting for Certain
Transactions Involving Stock Compensation  an
Interpretation of APB No. 25 Accounting for Stock-Based
Compensation,


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Accounting for Stock-Based Compensation 
Transaction and Disclosure. Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services. Share-Based Payment








| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | 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



23



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24



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RESULTS OF OPERATIONS




|                                                   |                                    |                                   |         |        |        |   |        |        |        |   |        |        |        | 
|-------------------------------------------------- | ---------------------------------- | --------------------------------- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                   |                                    | Year Ended December 31,           |        
|                                                   |                                    |                                   |        
|Statements of Operations Data                      |                                    | 2002                              |         |        | 2003   |   |        | 2004   |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|                                                   |                                    | (In thousands except per          |        
|                                                   |                                    | share data)                       |        
|Net transaction revenues                           |                                    | $                                 | 16,795  |        |        | $ | 32,679 |        |        | $ | 60,749 |       
|Referral and other revenues                        |                                    |                                   | 368     |        |        |   | 1,128  |        |        |   | 1,539  |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|                                                   | Net revenues                       |                                   |         | 17,163 |        |   |        | 33,807 |        |   |        | 62,288 |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Operating expenses:                                |                                    |                                   |         |        |        |   |        |        |        |   |        |       
|                                                   | Cost of revenues                   |                                   |         | 13,450 |        |   |        | 19,929 |        |   |        | 33,858 |       
|                                                   | Product development                |                                   |         | 1,559  |        |   |        | 1,717  |        |   |        | 2,245  |       
|                                                   | Marketing and business development |                                   |         | 4,451  |        |   |        | 5,003  |        |   |        | 8,821  |       
|                                                   | General and administrative         |                                   |         | 10,378 |        |   |        | 9,464  |        |   |        | 14,342 |       
|                                                   | Stock-based compensation           |                                   |         | 84     |        |   |        | 85     |        |   |        | 159    |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|                                                   |                                    | Total operating expenses          |         |        | 29,922 |   |        |        | 36,198 |   |        |        | 59,425 | 
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Income (loss) from operations                      |                                    |                                   | (12,759 | )      |        |   | (2,391 | )      |        |   | 2,863  |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Other income (expense):                            |                                    |                                   |         |        |        |   |        |        |        |   |        |       
|                                                   | Interest expense                   |                                   |         | (2,118 | )      |   |        | (2,273 | )      |   |        |       |       
|                                                   | Interest income                    |                                   |         | 126    |        |   |        | 60     |        |   |        | 411    |       
|                                                   | Other income (expense), net        |                                   |         | (14    | )      |   |        | 21     |        |   |        | (1     | )     
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|                                                   |                                    | Total other income (expense), net |         |        | (2,006 | ) |        |        | (2,192 | ) |        |        | 410    | 
|Income (loss) before income taxes                  |                                    |                                   | (14,765 | )      |        |   | (4,583 | )      |        |   | 3,273  |       
|Provision for income taxes                         |                                    |                                   |        |        |        |   |       |        |        |   | 89     |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Net income (loss)                                  |                                    | $                                 | (14,765 | )      |        | $ | (4,583 | )      |        | $ | 3,184  |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Cumulative preferred stock dividends               |                                    |                                   | 631     |        |        |   | 631    |        |        |   | 552    |       
|Amount allocated to participating preferred shares |                                    |                                   |        |        |        |   |       |        |        |   | 2,632  |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Net income (loss) available to common stockholders |                                    | $                                 | (15,396 | )      |        | $ | (5,214 | )      |        | $ |       |       
|                                                   |                                    |                                   |         |        |        |   |        |        |       
|Net income (loss) per share:                       |                                    |                                   |         |        |        |   |        |        |        |   |        |       
|Basic                                              |                                    | $                                 | (10.63  | )      |        | $ | (3.57  | )      |        | $ |       |       
|Diluted                                            |                                    | $                                 | (10.63  | )      |        | $ | (3.57  | )      |        | $ |       |       
|Weighted average common shares outstanding:        |                                    |                                   |         |        |        |   |        |        |        |   |        |       
|Basic                                              |                                    |                                   | 1,448   |        |        |   | 1,459  |        |        |   | 3,798  |       
|Diluted                                            |                                    |                                   | 1,448   |        |        |   | 1,459  |        |        |   | 3,798  |       





| |                                 
| | --------------------------------
| | Other financial data (unaudited)



| |                                      
| | -------------------------------------
| | Pro forma net income (loss) per share



25



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|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |     |       |   |        |       |        | 
|-------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------- | ----------------------------------------------- | ------- | ---- | ----- | - | ------ | --- | ----- | - | ------ | ----- | ------ | 
|                                       |                                                                    | Year Ended December 31,                            |                                                
|                                       |                                                                    |                                                    |                                                
|                                       |                                                                    | 2002                                               |                                                 |         | 2003 |       |   | 2004   |    
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|                                       |                                                                    | (In thousands except per share data)               |                                                
|Numerator (for basic and diluted)      |                                                                    |                                                    |                                                 |         |      |       |   |        |     |       |   |       
|                                       | Net income (loss) available to common stockholders                 |                                                    | $                                               | (15,396 | )    |       | $ | (5,214 | )   |       | $ |       |      
|                                       | Add:                                                               |                                                    |                                                 |         |      |       |   |        |     |       |   |        |      
|                                       |                                                                    | Cumulative preferred stock dividends               |                                                 |         | 631  |       |   |        | 631 |       |   |        | 552   |       
|                                       |                                                                    | Amount allocated to participating preferred shares |                                                 |         |     |       |   |        |    |       |   |        | 2,632 |       
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|                                       | Numerator (for basic and diluted)  proforma net
    income (loss) |                                                    |                                                 | (14,765 | )    |       |   | (4,583 | )   |       |   | 3,184  |      
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|Denominator                            |                                                                    |                                                    |                                                 |         |      |       |   |        |     |       |   |       
|                                       | Weighted average common shares outstanding                         |                                                    |                                                 | 1,448   |      |       |   | 1,459  |     |       |   | 3,798  |      
|                                       | Add:                                                               |                                                    |                                                 |         |      |       |   |        |     |       |   |        |      
|                                       |                                                                    |                                                    | Weighted average of convertible preferred stock |         |      | 4,918 |   |        |     | 7,934 |   |        |       | 10,324 | 
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|                                       | Proforma denominator for basic calculation:                        |                                                    |                                                 | 6,366   |      |       |   | 9,393  |     |       |   | 14,122 |      
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|                                       | Effect of dilutive securities                                      |                                                    |                                                 |         |      |       |   |        |     |       |   |        |      
|                                       | Add:                                                               |                                                    |                                                 |         |      |       |   |        |     |       |   |        |      
|                                       |                                                                    |                                                    | Weighted average of warrants outstanding        |         |      |      |   |        |     |      |   |        |       | 3,272  | 
|                                       |                                                                    |                                                    | Weighted average of stock options outstanding   |         |      |      |   |        |     |      |   |        |       | 1,968  | 
|                                       |                                                                    |                                                    |                                                 |         |      |       |   |        |    
|                                       | Proforma denominator for diluted calculation:                      |                                                    |                                                 | 6,366   |      |       |   | 9,393  |     |       |   | 19,362 |      
|Pro forma net income (loss) per share: |                                                                    |                                                    |                                                 |         |      |       |   |        |     |       |   |       
|                                       | Basic                                                              |                                                    | $                                               | (2.32   | )    |       | $ | (0.49  | )   |       | $ | 0.23   |      
|                                       | Diluted                                                            |                                                    | $                                               | (2.32   | )    |       | $ | (0.49  | )   |       | $ | 0.16   |      



|                                  |                                    |                                   |       |       |       |   |       |      |       |   |       |      |      | 
|--------------------------------- | ---------------------------------- | --------------------------------- | ----- | ----- | ----- | - | ----- | ---- | ----- | - | ----- | ---- | ---- | 
|                                  |                                    | Year Ended December 31,           |      
|                                  |                                    |                                   |      
|Statements of Operations Data     |                                    | 2002                              |       |       | 2003  |   |       | 2004 |      
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Net transaction revenues          |                                    |                                   | 97.9  | %     |       |   | 96.7  | %    |       |   | 97.5  | %   
|Referral and other revenues       |                                    |                                   | 2.1   |       |       |   | 3.3   |      |       |   | 2.5   |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Net revenues                      |                                    |                                   | 100.0 |       |       |   | 100.0 |      |       |   | 100.0 |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Operating expenses:               |                                    |                                   |       |       |       |   |       |      |       |   |       |     
|                                  | Cost of revenues                   |                                   |       | 78.4  |       |   |       | 58.9 |       |   |       | 54.4 |     
|                                  | Product development                |                                   |       | 9.1   |       |   |       | 5.1  |       |   |       | 3.6  |     
|                                  | Marketing and business development |                                   |       | 25.9  |       |   |       | 14.8 |       |   |       | 14.2 |     
|                                  | General and administrative         |                                   |       | 60.5  |       |   |       | 28.0 |       |   |       | 23.0 |     
|                                  | Stock-based compensation           |                                   |       | 0.5   |       |   |       | 0.3  |       |   |       | 0.3  |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|                                  |                                    | Total operating expenses          |       |       | 174.4 |   |       |      | 107.1 |   |       |      | 95.5 | 
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Income (loss) from operations     |                                    |                                   | (74.4 | )     |       |   | (7.1  | )    |       |   | 4.5   |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Other income (expense):           |                                    |                                   |       |       |       |   |       |      |       |   |       |     
|                                  | Interest expense                   |                                   |       | (12.3 | )     |   |       | (6.7 | )     |   |       |     |     
|                                  | Interest income                    |                                   |       | 0.7   |       |   |       | 0.2  |       |   |       | 0.7  |     
|                                  | Other income (expense)             |                                   |       | (0.1  | )     |   |       | 0.1  |       |   |       |     |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|                                  |                                    | Total other income (expense), net |       |       | (11.7 | ) |       |      | (6.4  | ) |       |      | 0.7  | 
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Income (loss) before income taxes |                                    |                                   | (86.1 | )     |       |   | (13.5 | )    |       |   | 5.2   |     
|Provision for income taxes        |                                    |                                   |      |       |       |   |      |      |       |   | 0.1   |     
|                                  |                                    |                                   |       |       |       |   |       |      |      
|Net income (loss)                 |                                    |                                   | (86.1 | )%    |       |   | (13.5 | )%   |       |   | 5.1   | %   
|                                  |                                    |                                   |       |       |       |   |       |      |      

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|                                                                               |  |                         |       |  |      |   |       |      |  |   |       | 
|------------------------------------------------------------------------------ |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                                               |  | Year Ended December 31, |      
|                                                                               |  |                         |      
|Other Operating Data                                                           |  | 2002                    |       |  | 2003 |   |       | 2004 | 
|                                                                               |  |                         |       |  |      |   |       |      | 
|Number of ZipAgents at end of period                                           |  |                         | 279   |  |      |   | 440   |      |  |   | 914   | 
|Total value of real estate transactions closed during period
    (in billions) |  | $                       | 0.9   |  |      | $ | 1.6   |      |  | $ | 3.0   | 
|Number of transactions closed during period(1)                                 |  |                         | 3,379 |  |      |   | 5,394 |      |  |   | 8,500 | 
|Average net revenue per transaction during period(2)                           |  | $                       | 4,970 |  |      | $ | 6,058 |      |  | $ | 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, 2004 and
    December 31, 2003



| |             
| | ------------
| | Net revenues

|             |  |                |        |  |          |   |        |            |  |   |        |  |  |  |      |  
|------------ |  | -------------- | ------ |  | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | ---- | -
|             |  | Year Ended     |        |  |          |   |       
|             |  | December 31,   |        |  |          |   |       
|             |  |                |        |  | Increase |   |        | Percent    | 
|             |  | 2003           |        |  | 2004     |   |        | (Decrease) |  |   | Change | 
|             |  |                |        |  |          |   |        |            |  |   |        | 
|             |  | (In thousands) |        |  |         
|Net revenues |  | $              | 33,807 |  |          | $ | 62,288 |            |  | $ | 28,481 |  |  |  | 84.2 | %







| |                 
| | ----------------
| | Cost of revenues

|                 |  |                |        |  |          |   |        |            |  |   |        |  |  |  |      |  
|---------------- |  | -------------- | ------ |  | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | ---- | -
|                 |  | Year Ended     |        |  |          |   |       
|                 |  | December 31,   |        |  |          |   |       
|                 |  |                |        |  | Increase |   |        | Percent    | 
|                 |  | 2003           |        |  | 2004     |   |        | (Decrease) |  |   | Change | 
|                 |  |                |        |  |          |   |        |            |  |   |        | 
|                 |  | (In thousands) |        |  |         
|Cost of revenues |  | $              | 19,929 |  |          | $ | 33,858 |            |  | $ | 13,929 |  |  |  | 69.9 | %





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| |                    
| | -------------------
| | Product development

|                    |  |                |       |  |          |   |       |            |  |   |        |  |  |  |      |  
|------------------- |  | -------------- | ----- |  | -------- | - | ----- | ---------- |  | - | ------ |  |  |  | ---- | -
|                    |  | Year Ended     |       |  |          |   |      
|                    |  | December 31,   |       |  |          |   |      
|                    |  |                |       |  | Increase |   |       | Percent    | 
|                    |  | 2003           |       |  | 2004     |   |       | (Decrease) |  |   | Change | 
|                    |  |                |       |  |          |   |       |            |  |   |        | 
|                    |  | (In thousands) |       |  |         
|Product development |  | $              | 1,717 |  |          | $ | 2,245 |            |  | $ | 528    |  |  |  | 30.8 | %









| |                                   
| | ----------------------------------
| | Marketing and business development

|                                   |  |                |       |  |          |   |       |            |  |   |        |  |  |  |      |  
|---------------------------------- |  | -------------- | ----- |  | -------- | - | ----- | ---------- |  | - | ------ |  |  |  | ---- | -
|                                   |  | Year Ended     |       |  |          |   |      
|                                   |  | December 31,   |       |  |          |   |      
|                                   |  |                |       |  | Increase |   |       | Percent    | 
|                                   |  | 2003           |       |  | 2004     |   |       | (Decrease) |  |   | Change | 
|                                   |  |                |       |  |          |   |       |            |  |   |        | 
|                                   |  | (In thousands) |       |  |         
|Marketing and business development |  | $              | 5,003 |  |          | $ | 8,821 |            |  | $ | 3,818  |  |  |  | 76.3 | %









| |                           
| | --------------------------
| | General and administrative

|                           |  |                |       |  |          |   |        |            |  |   |        |  |  |  |      |  
|-------------------------- |  | -------------- | ----- |  | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | ---- | -
|                           |  | Year Ended     |       |  |          |   |       
|                           |  | December 31,   |       |  |          |   |       
|                           |  |                |       |  | Increase |   |        | Percent    | 
|                           |  | 2003           |       |  | 2004     |   |        | (Decrease) |  |   | Change | 
|                           |  |                |       |  |          |   |        |            |  |   |        | 
|                           |  | (In thousands) |       |  |         
|General and administrative |  | $              | 9,464 |  |          | $ | 14,342 |            |  | $ | 4,878  |  |  |  | 51.5 | %

28



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| |                         
| | ------------------------
| | Stock-based compensation

|                         |  |                |    |  |          |   |     |            |  |   |        |  |  |  |      |  
|------------------------ |  | -------------- | -- |  | -------- | - | --- | ---------- |  | - | ------ |  |  |  | ---- | -
|                         |  | Year Ended     |    |  |          |   |    
|                         |  | December 31,   |    |  |          |   |    
|                         |  |                |    |  | Increase |   |     | Percent    | 
|                         |  | 2003           |    |  | 2004     |   |     | (Decrease) |  |   | Change | 
|                         |  |                |    |  |          |   |     |            |  |   |        | 
|                         |  | (In thousands) |    |  |         
|Stock-based compensation |  | $              | 85 |  |          | $ | 159 |            |  | $ | 74     |  |  |  | 86.0 | %



Share-Based Payment




| |                 
| | ----------------
| | Interest expense

|                 |  |                |        |          |      |   |            |  |  |        |        |   |  |  |        |   
|---------------- |  | -------------- | ------ | -------- | ---- | - | ---------- |  |  | ------ | ------ | - |  |  | ------ | --
|                 |  | Year Ended     |        |          |      |  
|                 |  | December 31,   |        |          |      |  
|                 |  |                |        | Increase |      |   | Percent    | 
|                 |  | 2003           |        |          | 2004 |   | (Decrease) |  |  | Change |       
|                 |  |                |        |          |      |   |            |  |  |        |       
|                 |  | (In thousands) |        |          |     
|Interest expense |  | $              | (2,273 | )        |      | $ |           |  |  | $      | (2,273 | ) |  |  | (100.0 | )%



29



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| |                
| | ---------------
| | Interest income

|                |  |                |    |  |          |   |     |            |  |   |        |  |  |  |       |  
|--------------- |  | -------------- | -- |  | -------- | - | --- | ---------- |  | - | ------ |  |  |  | ----- | -
|                |  | Year Ended     |    |  |          |   |    
|                |  | December 31,   |    |  |          |   |    
|                |  |                |    |  | Increase |   |     | Percent    | 
|                |  | 2003           |    |  | 2004     |   |     | (Decrease) |  |   | Change | 
|                |  |                |    |  |          |   |     |            |  |   |        | 
|                |  | (In thousands) |    |  |         
|Interest income |  | $              | 60 |  |          | $ | 411 |            |  | $ | 351    |  |  |  | 583.6 | %





| |                            
| | ---------------------------
| | Other income (expense), net

|                            |  |                |    |  |          |   |    |            |  |   |        |   |  |  |        |   
|--------------------------- |  | -------------- | -- |  | -------- | - | -- | ---------- |  | - | ------ | - |  |  | ------ | --
|                            |  | Year Ended     |    |  |          |   |   
|                            |  | December 31,   |    |  |          |   |   
|                            |  |                |    |  | Increase |   |    | Percent    | 
|                            |  | 2003           |    |  | 2004     |   |    | (Decrease) |  |   | Change |  
|                            |  |                |    |  |          |   |    |            |  |   |        |  
|                            |  | (In thousands) |    |  |         
|Other income (expense), net |  | $              | 21 |  |          | $ | (1 | )          |  | $ | (22    | ) |  |  | (102.7 | )%





| |                           
| | --------------------------
| | Provision for income taxes

|                           |  |                |   |      |          |   |            |         |  |        |    |  |  |  |       |  
|-------------------------- |  | -------------- | - | ---- | -------- | - | ---------- | ------- |  | ------ | -- |  |  |  | ----- | -
|                           |  | Year Ended     |   |      |          |   |           
|                           |  | December 31,   |   |      |          |   |           
|                           |  |                |   |      | Increase |   |            | Percent | 
|                           |  | 2003           |   | 2004 |          |   | (Decrease) |         |  | Change |   
|                           |  |                |   |      |          |   |            |         |  |        |   
|                           |  | (In thousands) |   |      |         
|Provision for income taxes |  | $              |  |      |          | $ | 89         |         |  | $      | 89 |  |  |  | 100.0 | %





| |                                                                          
| | -------------------------------------------------------------------------
| | Comparison of the years ended December 31, 2003 and
    December 31, 2002



| |             
| | ------------
| | Net revenues

|             |  |                |        |  |          |   |        |            |  |   |        |  |  |  |      |  
|------------ |  | -------------- | ------ |  | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | ---- | -
|             |  | Year Ended     |        |  |          |   |       
|             |  | December 31,   |        |  |          |   |       
|             |  |                |        |  | Increase |   |        | Percent    | 
|             |  | 2002           |        |  | 2003     |   |        | (Decrease) |  |   | Change | 
|             |  |                |        |  |          |   |        |            |  |   |        | 
|             |  | (In thousands) |        |  |         
|Net revenues |  | $              | 17,163 |  |          | $ | 33,807 |            |  | $ | 16,644 |  |  |  | 97.0 | %



30



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| |                 
| | ----------------
| | Cost of revenues

|                 |  |                |        |  |          |   |        |            |  |   |        |  |  |  |      |  
|---------------- |  | -------------- | ------ |  | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | ---- | -
|                 |  | Year Ended     |        |  |          |   |       
|                 |  | December 31,   |        |  |          |   |       
|                 |  |                |        |  | Increase |   |        | Percent    | 
|                 |  | 2002           |        |  | 2003     |   |        | (Decrease) |  |   | Change | 
|                 |  |                |        |  |          |   |        |            |  |   |        | 
|                 |  | (In thousands) |        |  |         
|Cost of revenues |  | $              | 13,450 |  |          | $ | 19,929 |            |  | $ | 6,479  |  |  |  | 48.2 | %





| |                    
| | -------------------
| | Product development

|                    |  |                |       |  |          |   |       |            |  |   |        |  |  |  |      |  
|------------------- |  | -------------- | ----- |  | -------- | - | ----- | ---------- |  | - | ------ |  |  |  | ---- | -
|                    |  | Year Ended     |       |  |          |   |      
|                    |  | December 31,   |       |  |          |   |      
|                    |  |                |       |  | Increase |   |       | Percent    | 
|                    |  | 2002           |       |  | 2003     |   |       | (Decrease) |  |   | Change | 
|                    |  |                |       |  |          |   |       |            |  |   |        | 
|                    |  | (In thousands) |       |  |         
|Product development |  | $              | 1,559 |  |          | $ | 1,717 |            |  | $ | 158    |  |  |  | 10.1 | %





| |                                   
| | ----------------------------------
| | Marketing and business development

|                                   |  |                |       |  |          |   |       |            |  |   |        |  |  |  |      |  
|---------------------------------- |  | -------------- | ----- |  | -------- | - | ----- | ---------- |  | - | ------ |  |  |  | ---- | -
|                                   |  | Year Ended     |       |  |          |   |      
|                                   |  | December 31,   |       |  |          |   |      
|                                   |  |                |       |  | Increase |   |       | Percent    | 
|                                   |  | 2002           |       |  | 2003     |   |       | (Decrease) |  |   | Change | 
|                                   |  |                |       |  |          |   |       |            |  |   |        | 
|                                   |  | (In thousands) |       |  |         
|Marketing and business development |  | $              | 4,451 |  |          | $ | 5,003 |            |  | $ | 552    |  |  |  | 12.4 | %





| |                           
| | --------------------------
| | General and administrative

|                           |  |                |        |  |          |   |       |            |  |   |        |   |  |  |      |   
|-------------------------- |  | -------------- | ------ |  | -------- | - | ----- | ---------- |  | - | ------ | - |  |  | ---- | --
|                           |  | Year Ended     |        |  |          |   |      
|                           |  | December 31,   |        |  |          |   |      
|                           |  |                |        |  | Increase |   |       | Percent    | 
|                           |  | 2002           |        |  | 2003     |   |       | (Decrease) |  |   | Change |  
|                           |  |                |        |  |          |   |       |            |  |   |        |  
|                           |  | (In thousands) |        |  |         
|General and administrative |  | $              | 10,378 |  |          | $ | 9,464 |            |  | $ | (914   | ) |  |  | (8.8 | )%



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| |                         
| | ------------------------
| | Stock-based compensation

|                         |  |                |    |  |          |   |    |            |  |   |        |  |  |  |     |  
|------------------------ |  | -------------- | -- |  | -------- | - | -- | ---------- |  | - | ------ |  |  |  | --- | -
|                         |  | Year Ended     |    |  |          |   |   
|                         |  | December 31,   |    |  |          |   |   
|                         |  |                |    |  | Increase |   |    | Percent    | 
|                         |  | 2002           |    |  | 2003     |   |    | (Decrease) |  |   | Change | 
|                         |  |                |    |  |          |   |    |            |  |   |        | 
|                         |  | (In thousands) |    |  |         
|Stock-based compensation |  | $              | 84 |  |          | $ | 85 |            |  | $ | 1      |  |  |  | 1.9 | %





| |                 
| | ----------------
| | Interest expense

|                 |  |                |        |   |          |   |        |            |  |   |        |  |  |  |     |  
|---------------- |  | -------------- | ------ | - | -------- | - | ------ | ---------- |  | - | ------ |  |  |  | --- | -
|                 |  | Year Ended     |        |   |          |   |       
|                 |  | December 31,   |        |   |          |   |       
|                 |  |                |        |   | Increase |   |        | Percent    | 
|                 |  | 2002           |        |   | 2003     |   |        | (Decrease) |  |   | Change | 
|                 |  |                |        |   |          |   |        |            |  |   |        | 
|                 |  | (In thousands) |        |   |         
|Interest expense |  | $              | (2,118 | ) |          | $ | (2,273 | )          |  | $ | 155    |  |  |  | 7.3 | %





| |                
| | ---------------
| | Interest income

|                |  |                |     |  |          |   |    |            |  |   |        |   |  |  |       |   
|--------------- |  | -------------- | --- |  | -------- | - | -- | ---------- |  | - | ------ | - |  |  | ----- | --
|                |  | Year Ended     |     |  |          |   |   
|                |  | December 31,   |     |  |          |   |   
|                |  |                |     |  | Increase |   |    | Percent    | 
|                |  | 2002           |     |  | 2003     |   |    | (Decrease) |  |   | Change |  
|                |  |                |     |  |          |   |    |            |  |   |        |  
|                |  | (In thousands) |     |  |         
|Interest income |  | $              | 126 |  |          | $ | 60 |            |  | $ | (66    | ) |  |  | (52.4 | )%





| |                            
| | ---------------------------
| | Other income (expense), net

|                            |  |                |     |   |          |   |    |            |  |   |        |   |  |  |        |   
|--------------------------- |  | -------------- | --- | - | -------- | - | -- | ---------- |  | - | ------ | - |  |  | ------ | --
|                            |  | Year Ended     |     |   |          |   |   
|                            |  | December 31,   |     |   |          |   |   
|                            |  |                |     |   | Increase |   |    | Percent    | 
|                            |  | 2002           |     |   | 2003     |   |    | (Decrease) |  |   | Change |  
|                            |  |                |     |   |          |   |    |            |  |   |        |  
|                            |  | (In thousands) |     |   |         
|Other income (expense), net |  | $              | (14 | ) |          | $ | 21 |            |  | $ | (35    | ) |  |  | (242.7 | )%



LIQUIDITY AND CAPITAL RESOURCES








| |                     
| | --------------------
| | Operating activities



32



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| |                     
| | --------------------
| | Investing activities









| |                     
| | --------------------
| | Financing activities







| |             
| | ------------
| | Future needs



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CONTRACTUAL OBLIGATIONS AND COMMITMENTS




|                            |  |                        |     |  |              |   |           |              |  |         |   |  |       |   |   |  |  |   |       | 
|--------------------------- |  | ---------------------- | --- |  | ------------ | - | --------- | ------------ |  | ------- | - |  | ----- | - | - |  |  | - | ----- | 
|                            |  | Payments Due by Period |     |  |             
|                            |  |                        |     |  |             
|                            |  | Less than              |     |  |              |   | More than |              |  |        
|                            |  | 1 Year                 |     |  | 1 to 3 Years |   |           | 3 to 5 Years |  | 5 Years |   |  | Total |  
|                            |  |                        |     |  |              |   |           |              |  |         |   |  |       |  
|                            |  | (In thousands)         |    
|Operating lease commitments |  | $                      | 568 |  |              | $ | 634       |              |  | $       |  |  |       | $ |  |  |  | $ | 1,202 | 

OFF-BALANCE SHEET ARRANGEMENTS




EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS


Share-Based Payment




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Participating Securities and the Two-Class Method under
FASB Statement No. 128


The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments


RISK FACTORS


RISKS RELATED TO OUR BUSINESS AND INDUSTRY




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Our business model is new and unproven, and we cannot
    guarantee our future success.



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| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have been profitable in only five quarters and may
    incur losses in the future, and our limited operating history
    makes our future financial performance difficult to
    assess.









| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







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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.









| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to effectively manage the growth of our
    ZipAgents and our information and control systems could
    adversely affect our ability to service our clients.



37



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| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results are subject to seasonality and vary
    significantly among quarters during each calendar year, making
    meaningful comparisons of successive quarters difficult.







| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | timing of widely observed holidays and vacation periods and
    availability 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.                                                                                                                             





| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest rates have been at historic lows for the past
    several years, and increases in interest rates have the
    potential to negatively impact the housing market.



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| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Our success depends in part on our ability to successfully
    expand into additional real estate markets.





| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Unless we develop, maintain and protect a strong brand
    identity, our business may not grow and our financial results
    may suffer.



39



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| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We have numerous competitors, many of which have valuable
    industry relationships and access to greater resources than we
    do.



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.



40



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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 or become more expensive, our
    ability to attract new clients and grow our business may be
    adversely affected.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our business could be harmed by economic events that are
    out of our control and may be difficult to predict.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Our ability to expand our business may be limited by state
    laws governing cash rebates to home buyers.



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| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with real estate brokerage laws and
    regulations, we may incur significant financial penalties or
    lose our license to operate.





| |                                                                                 
| | --------------------------------------------------------------------------------
| | We may have liabilities in connection with real estate
    brokerage activities.





| |                                                                             
| | ----------------------------------------------------------------------------
| | We may be subject to liability for the Internet content
    that we publish.



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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 reputation and client and agent service offerings may
    be harmed by system failures and computer viruses.



43



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| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is geographically concentrated, which makes
    us more susceptible to business interruption and financial loss
    due to natural disasters, inclement weather 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.





| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;

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| |   |                                                 
| | - | ------------------------------------------------
| |  | 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.





| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | 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.



45



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| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | The value of our services could be diminished if anti-spam
    software filters out an increasing portion of the emails we
    send.



OTHER RISKS RELATED TO OUR STOCK PRICE




| |                                 
| | --------------------------------
| | Our stock price may be volatile.





| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly results of operations;                                                                
|
| |  | 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, 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.





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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.                                                  





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|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk:

Interest rate sensitivity






Exchange rate sensitivity




48



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|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data:

Financial Statements Table of Contents


|                                                                     |  |        |    | 
|-------------------------------------------------------------------- |  | ------ | -- | 
|                                                                     |  | Page   |   
|                                                                     |  | Number |   
|                                                                     |  |        |   
|Report of Independent Registered Public
    Accounting Firm          |  |        | 50 | 
|Balance Sheets                                                       |  |        | 51 | 
|Statements of Operations                                             |  |        | 52 | 
|Statements of Stockholders Equity                                   |  |        | 53 | 
|Statements of Cash Flows                                             |  |        | 55 | 
|Notes to Financial Statements                                        |  |        | 56 | 
|Financial Statement Schedule 
    Valuation and Qualifying Accounts |  |        | 78 | 

49



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














50



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BALANCE SHEETS


|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |             |            | 
|------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ---------- | ----------- | ----------- | - | --------- | ----------- | ---------- | 
|                                                                                           |                                                                                                                                                                                                                                                                 | December 31,                                                                                     |           
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |           
|                                                                                           |                                                                                                                                                                                                                                                                 | 2003                                                                                             |            |             | 2004        |  
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|ASSETS                                                                                    
|Current assets                                                                             |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |            
|                                                                                           | Cash and cash equivalents                                                                                                                                                                                                                                       |                                                                                                  | $          | 10,357,379  |             |   | $         | 11,525,221  |           
|                                                                                           | Short-term investments                                                                                                                                                                                                                                          |                                                                                                  |            |            |             |   |           | 71,972,173  |           
|                                                                                           | Accounts receivable, net of allowance of $19,405 and $28,681 at
    December 31, 2003 and 2004, respectively                                                                                                                                                    |                                                                                                  |            | 507,311     |             |   |           | 1,089,463   |           
|                                                                                           | Prepaid expenses and other current assets                                                                                                                                                                                                                       |                                                                                                  |            | 696,372     |             |   |           | 2,102,109   |           
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total current assets                                                                             |            |             | 11,561,062  |   |           |             | 86,688,966 | 
|Restricted cash                                                                            |                                                                                                                                                                                                                                                                 |                                                                                                  | 189,654    |             |             |   | 189,654   |            
|Property and equipment, net                                                                |                                                                                                                                                                                                                                                                 |                                                                                                  | 668,118    |             |             |   | 1,236,151 |            
|Other assets                                                                               |                                                                                                                                                                                                                                                                 |                                                                                                  | 11,625     |             |             |   | 11,625    |            
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total assets                                                                                     |            | $           | 12,430,459  |   |           | $           | 88,126,396 | 
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                          
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
    STOCKHOLDERS EQUITY (DEFICIT)
|Current liabilities                                                                        |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |            
|                                                                                           | Accounts payable                                                                                                                                                                                                                                                |                                                                                                  | $          | 975,797     |             |   | $         | 1,477,768   |           
|                                                                                           | Accrued expenses                                                                                                                                                                                                                                                |                                                                                                  |            | 2,402,347   |             |   |           | 4,287,188   |           
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total current liabilities                                                                        |            |             | 3,378,144   |   |           |             | 5,764,956  | 
|Other long-term liabilities                                                                |                                                                                                                                                                                                                                                                 |                                                                                                  | 156,725    |             |             |   | 90,283    |            
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total liabilities                                                                                |            |             | 3,534,869   |   |           |             | 5,855,239  | 
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|Commitments and contingencies (Note 6)                                                     |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |            
|Redeemable convertible preferred stock:                                                    |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |            
|                                                                                           | $0.001 par value; 59,342,640 shares authorized;
    10,805,336 and 0 shares issued and outstanding at
    December 31, 2003 and 2004, respectively (aggregate
    liquidation preference of $93,593,288 and $0 at
    December 31, 2003 and 2004, respectively) |                                                                                                  |            | 56,170,054  |             |   |           |            |           
|Redeemable convertible preferred stock warrants                                            |                                                                                                                                                                                                                                                                 |                                                                                                  | 7,385,541  |             |             |   |          |            
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  | 63,555,595 |             |             |   |          |            
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|Stockholders equity (deficit)                                                             |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |   |           |            
|                                                                                           | Preferred Stock: $0.001 par value; 0 and 5,000,000 shares
    authorized at December 31, 2003 and 2004, respectively;
    0 shares issued and outstanding                                                                                                       |                                                                                                  |            |            |             |   |           |            |           
|                                                                                           | Common stock: $0.001 par value; 80,000,000 and
    100,000,000 shares authorized at December 31 2003 and
    2004, respectively; 1,468,686 and 19,880,122 shares issued
    and outstanding at December 31, 2003 and 2004, respectively                         |                                                                                                  |            | 1,469       |             |   |           | 19,880      |           
|                                                                                           | Additional paid-in capital                                                                                                                                                                                                                                      |                                                                                                  |            | 928,024     |             |   |           | 128,554,789 |           
|                                                                                           | Common stock warrants                                                                                                                                                                                                                                           |                                                                                                  |            |            |             |   |           | 6,369,154   |           
|                                                                                           | Deferred stock-based compensation                                                                                                                                                                                                                               |                                                                                                  |            | (274,874    | )           |   |           | (437,349    | )         
|                                                                                           | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                   |                                                                                                  |            |            |             |   |           | (104,980    | )         
|                                                                                           | Accumulated deficit                                                                                                                                                                                                                                             |                                                                                                  |            | (55,314,624 | )           |   |           | (52,130,337 | )         
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total stockholders equity (deficit)                                                             |            |             | (54,660,005 | ) |           |             | 82,271,157 | 
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  
|                                                                                           |                                                                                                                                                                                                                                                                 | Total liabilities, redeemable convertible preferred stock and
    stockholders equity (deficit) |            | $           | 12,430,459  |   |           | $           | 88,126,396 | 
|                                                                                           |                                                                                                                                                                                                                                                                 |                                                                                                  |            |             |             |  



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STATEMENTS OF OPERATIONS


|                                                            |         |                         |             |           |      |   |            |           |   |   |            |           | 
|----------------------------------------------------------- | ------- | ----------------------- | ----------- | --------- | ---- | - | ---------- | --------- | - | - | ---------- | --------- | 
|                                                            |         | Year Ended December 31, |            
|                                                            |         |                         |            
|                                                            |         | 2002                    |             |           | 2003 |   |            | 2004      |  
|                                                            |         |                         |             |           |      |   |            |           |  
|Net transaction revenues                                    |         | $                       | 16,795,289  |           |      | $ | 32,678,894 |           |   | $ | 60,748,995 |          
|Referral and other revenues                                 |         |                         | 368,192     |           |      |   | 1,128,044  |           |   |   | 1,539,068  |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Net revenues                                                |         |                         | 17,163,481  |           |      |   | 33,806,938 |           |   |   | 62,288,063 |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Operating expenses                                          |         |                         |             |           |      |   |            |           |   |   |            |          
|Cost of revenues                                            |         |                         | 13,450,170  |           |      |   | 19,928,922 |           |   |   | 33,857,825 |          
|Product development                                         |         |                         | 1,558,655   |           |      |   | 1,716,573  |           |   |   | 2,245,329  |          
|Marketing and business development                          |         |                         | 4,451,541   |           |      |   | 5,002,973  |           |   |   | 8,821,112  |          
|General and administrative                                  |         |                         | 10,378,141  |           |      |   | 9,464,011  |           |   |   | 14,341,861 |          
|Stock-based compensation                                    |         |                         | 83,868      |           |      |   | 85,458     |           |   |   | 158,935    |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Total operating expenses                                    |         |                         | 29,922,375  |           |      |   | 36,197,937 |           |   |   | 59,425,062 |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Income (loss) from operations                               |         |                         | (12,758,894 | )         |      |   | (2,390,999 | )         |   |   | 2,863,001  |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Other income (expense)                                      |         |                         |             |           |      |   |            |           |   |   |            |          
|Interest expense                                            |         |                         | (2,118,451  | )         |      |   | (2,272,799 | )         |   |   |           |          
|Interest income                                             |         |                         | 126,295     |           |      |   | 60,125     |           |   |   | 411,040    |          
|Other income (expense), net                                 |         |                         | (14,372     | )         |      |   | 20,505     |           |   |   | (554       | )        
|                                                            |         |                         |             |           |      |   |            |           |  
|Total other income (expense), net                           |         |                         | (2,006,528  | )         |      |   | (2,192,169 | )         |   |   | 410,486    |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Income (loss) before income taxes                           |         |                         | (14,765,422 | )         |      |   | (4,583,168 | )         |   |   | 3,273,487  |          
|Provision for income taxes                                  |         |                         |            |           |      |   |           |           |   |   | 89,200     |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Net income (loss)                                           |         | $                       | (14,765,422 | )         |      | $ | (4,583,168 | )         |   | $ | 3,184,287  |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Cumulative preferred stock dividends                        |         | $                       | 630,800     |           |      | $ | 630,800    |           |   | $ | 551,949    |          
|Amount allocated to participating preferred stockholders    |         |                         |            |           |      |   |           |           |   |   | 2,632,338  |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Net income (loss) available to common stockholders          |         | $                       | (15,396,222 | )         |      | $ | (5,213,968 | )         |   | $ |           |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Net income (loss) per share:                                |         |                         |             |           |      |   |            |           |   |   |            |          
|                                                            | Basic   |                         | $           | (10.63    | )    |   | $          | (3.57     | ) |   | $          |          | 
|                                                            | Diluted |                         | $           | (10.63    | )    |   | $          | (3.57     | ) |   | $          |          | 
|Weighted average common shares outstanding:                 |         |                         |             |           |      |   |            |           |   |   |            |          
|                                                            | Basic   |                         |             | 1,447,867 |      |   |            | 1,459,058 |   |   |            | 3,798,097 | 
|                                                            | Diluted |                         |             | 1,447,867 |      |   |            | 1,459,058 |   |   |            | 3,798,097 | 
|Stock-based compensation can be allocated to the following: |         |                         |             |           |      |   |            |           |   |   |            |          
|Cost of revenues                                            |         | $                       | 1,280       |           |      | $ | 8,370      |           |   | $ | 45,297     |          
|Product development                                         |         |                         | 25,340      |           |      |   | 22,817     |           |   |   | 11,589     |          
|Marketing and business development                          |         |                         | 18,486      |           |      |   | 18,486     |           |   |   | 5,631      |          
|General and administrative                                  |         |                         | 38,762      |           |      |   | 35,785     |           |   |   | 96,418     |          
|                                                            |         |                         |             |           |      |   |            |           |  
|Total stock-based compensation                              |         | $                       | 83,868      |           |      | $ | 85,458     |           |   | $ | 158,935    |          
|                                                            |         |                         |             |           |      |   |            |           |  



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##### Table of Contents






STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)


|                                                                                                 |  |                        |            |            |             |   |            |          |              |   |           |            |  |  |        |           |             |             |   |       |               |       |   |              |   |               |               |   |               |         |   |          |           |  |  |        |  |  |   |             |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------ |  | ---------------------- | ---------- | ---------- | ----------- | - | ---------- | -------- | ------------ | - | --------- | ---------- |  |  | ------ | --------- | ----------- | ----------- | - | ----- | ------------- | ----- | - | ------------ | - | ------------- | ------------- | - | ------------- | ------- | - | -------- | --------- |  |  | ------ |  |  | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                 |  |                        |            | Redeemable |             |   |            |          |              |   |           |            |  |  |        |           |             |             |   |       |               |       |   |             
|                                                                                                 |  | Redeemable Convertible |            |            | Convertible |   |            |          |              |   |           |            |  |  |        |           | Accumulated |             |   |       |               | Total |   |              |  
|                                                                                                 |  | Preferred Stock        |            |            | Preferred   |   |            |          | Common Stock |   |           | Additional |  |  | Common |           |             | Deferred    |   |       | Other         |       |   |              |   | Stockholders |               |   | Comprehensive |        
|                                                                                                 |  |                        |            |            | Stock       |   |            |          |              |   |           | Paid-in    |  |  | Stock  |           |             | Stock-Based |   |       | Comprehensive |       |   | Accumulated  |   |               | Equity        |   |               | Income  |  
|                                                                                                 |  | Shares                 |            |            | Amount      |   |            | Warrants |              |   |           | Shares     |  |  | Amount |           |             | Capital     |   |       | Warrants      |       |   | Compensation |   |               | Income (Loss) |   |               | Deficit |   |          | (Deficit) |  |  | (Loss) | 
|                                                                                                 |  |                        |            |            |             |   |            |          |              |   |           |            |  |  |        |           |             |             |   |       |               |       |   |              |   |               |               |   |               |         |   |          |           |  |  |        | 
|Balance at December 31, 2001                                                                     |  |                        | 4,918,078  |            |             | $ | 35,865,833 |          |              | $ | 1,687,767 |            |  |  |        | 1,444,625 |             |             | $ | 1,445 |               |       | $ | 722,489      |   |               |               |  |               |         | $ | (255,107 | )         |  |  |       |  |  | $ | (35,966,034 | ) |  | $ | (35,497,207 | ) |  |   |             |  
|Issuance of common stock upon exercise of stock options                                          |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        | 9,697     |             |             |   | 9     |               |       |   | 6,830        |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   | 6,839       |   |  |   |             |  
|Amortization of deferred stock-based compensation                                                |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   | 83,868   |           |  |  |       |  |  |   |            |   |  |   | 83,868      |   |  |   |             |  
|Recapture of deferred stock-based compensation upon employee
    terminations                    |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   | (64,935      | ) |               |               |  |               |         |   | 64,935   |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Issuance of Series E-1 preferred stock warrants in
    conjunction with notes payable            |  |                        |           |            |             |   |           |          |              |   | 1,987,705 |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Issuance of Series F preferred stock warrants in
    conjunction with notes payable              |  |                        |           |            |             |   |           |          |              |   | 2,850,528 |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Net loss                                                                                         |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   | (14,765,422 | ) |  |   | (14,765,422 | ) |  | $ | (14,765,422 | )
|                                                                                                 |  |                        |            |            |             |   |            |          |              |   |           |            |  |  |        |           |             |             |   |       |               |       |   |              |   |               |               |   |               |         |   |          |           |  |  |        | 
|Balance at December 31, 2002                                                                     |  |                        | 4,918,078  |            |             |   | 35,865,833 |          |              |   | 6,526,000 |            |  |  |        | 1,454,322 |             |             |   | 1,454 |               |       |   | 664,384      |   |               |               |  |               |         |   | (106,304 | )         |  |  |       |  |  |   | (50,731,456 | ) |  |   | (50,171,922 | ) |  |   |             |  
|Issuance of common stock upon exercise of stock options                                          |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        | 14,364    |             |             |   | 15    |               |       |   | 9,612        |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   | 9,627       |   |  |   |             |  
|Deferred stock- based compensation                                                               |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   | 259,516      |   |               |               |  |               |         |   | (259,516 | )         |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Amortization of deferred stock-based compensation                                                |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   | 85,458   |           |  |  |       |  |  |   |            |   |  |   | 85,458      |   |  |   |             |  
|Recapture of deferred stock-based compensation upon employee
    terminations                    |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   | (5,488       | ) |               |               |  |               |         |   | 5,488    |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Issuance of Series F preferred stock warrants in
    conjunction with notes payable              |  |                        |           |            |             |   |           |          |              |   | 408,782   |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Conversion of notes payable and accrued interest into
    Series E and Series F preferred stock  |  |                        | 5,887,258  |            |             |   | 20,304,221 |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Issuance of Series E-1 preferred stock warrants in
    conjunction with notes payable conversion |  |                        |           |            |             |   |           |          |              |   | 93,572    |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Issuance of Series F preferred stock warrants in
    conjunction with notes payable conversion   |  |                        |           |            |             |   |           |          |              |   | 357,187   |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   |            |   |  |   |            |   |  |   |             |  
|Net loss                                                                                         |  |                        |           |            |             |   |           |          |              |   |          |            |  |  |        |          |             |             |   |      |               |       |   |             |   |               |               |  |               |         |   |         |           |  |  |       |  |  |   | (4,583,168  | ) |  |   | (4,583,168  | ) |  |   | (4,583,168  | )
|                                                                                                 |  |                        |            |            |             |   |            |          |              |   |           |            |  |  |        |           |             |             |   |       |               |       |   |              |   |               |               |   |               |         |   |          |           |  |  |        | 
|Balance at December 31, 2003                                                                     |  |                        | 10,805,336 |            |             |   | 56,170,054 |          |              |   | 7,385,541 |            |  |  |        | 1,468,686 |             |             |   | 1,469 |               |       |   | 928,024      |   |               |               |  |               |         |   | (274,874 | )         |  |  |       |  |  |   | (55,314,624 | ) |  |   | (54,660,005 | ) |  |   |             |  

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|                                                                                     |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |   |          |   |             |           |   |   |             |           |          |   |           |           |          |  
|------------------------------------------------------------------------------------ | ---------------------------------- | ------------------------------------------------------------ | ----------- | ---------- | ----------- | - | ----------- | ------------ | - | - | ---------- | - | - | ------ | ---------- | ----------- | ----------- | - | ------ | ------------- | ----- | - | ------------ | - | ------------- | ------------- | --------- | ------------- | ------- | - | -------- | --------- | - | - | -------- | - | -------- | - | ----------- | --------- | - | - | ----------- | --------- | -------- | - | --------- | --------- | -------- | -
|                                                                                     |                                    |                                                              |             | Redeemable |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |             
|                                                                                     |                                    | Redeemable Convertible                                       |             |            | Convertible |   |             |              |   |   |            |   |   |        |            | Accumulated |             |   |        |               | Total |   |              |  
|                                                                                     |                                    | Preferred Stock                                              |             |            | Preferred   |   |             | Common Stock |   |   | Additional |   |   | Common |            |             | Deferred    |   |        | Other         |       |   |              |   | Stockholders |               |           | Comprehensive |        
|                                                                                     |                                    |                                                              |             |            | Stock       |   |             |              |   |   | Paid-in    |   |   | Stock  |            |             | Stock-Based |   |        | Comprehensive |       |   | Accumulated  |   |               | Equity        |           |               | Income  |  
|                                                                                     |                                    | Shares                                                       |             |            | Amount      |   |             | Warrants     |   |   | Shares     |   |   | Amount |            |             | Capital     |   |        | Warrants      |       |   | Compensation |   |               | Income (Loss) |           |               | Deficit |   |          | (Deficit) |   |   | (Loss)   |  
|                                                                                     |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |  
|Balance at December 31, 2003                                                         |                                    |                                                              | 10,805,336  |            |             |   | 56,170,054  |              |   |   | 7,385,541  |   |   |        | 1,468,686  |             |             |   | 1,469  |               |       |   | 928,024      |   |               |               |          |               |         |   | (274,874 | )         |   |   |         |   |          |   | (55,314,624 | )         |   |   | (54,660,005 | )         |          |   |           |          
|Issuance of common stock upon exercise of stock options                              |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        | 151,857    |             |             |   | 152    |               |       |   | 177,006      |   |               |               |          |               |         |   |         |           |   |   |         |   |          |   |            |           |   |   | 177,158     |           |          |   |           |          
|Issuance of common stock upon exercise of common stock warrants                      |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        | 1,459      |             |             |   | 1      |               |       |   | 1,532        |   |               |               | (1,460    | )             |         |   |         |           |   |   |         |   |          |   |            |           |   |   | 73          |           |          |   |           |          
|Issuance of preferred stock upon exercise of Series E-1
    preferred stock warrants |                                    |                                                              | 2,220,284   |            |             |   | 9,572,749   |              |   |   | (1,014,927 | ) |   |        |           |             |             |   |       |               |       |   |             |   |               |               |          |               |         |   |         |           |   |   |         |   |          |   |            |           |   |   |            |           |          |   |           |          
|Conversion of preferred stock to common stock                                        |                                    |                                                              | (13,025,620 | )          |             |   | (65,742,803 | )            |   |   | (6,370,614 | ) |   |        | 13,025,620 |             |             |   | 13,026 |               |       |   | 65,729,777   |   |               |               | 6,370,614 |               |         |   |         |           |   |   |         |   |          |   |            |           |   |   | 72,113,417  |           |          |   |           |          
|Issuance of common stock-Initial Public Offering                                     |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        | 5,232,500  |             |             |   | 5,232  |               |       |   | 61,397,040   |   |               |               |          |               |         |   |         |           |   |   |         |   |          |   |            |           |   |   | 61,402,272  |           |          |   |           |          
|Deferred stock- based compensation                                                   |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        |           |             |             |   |       |               |       |   | 430,397      |   |               |               |          |               |         |   | (430,397 | )         |   |   |         |   |          |   |            |           |   |   |             |           |          |   |           |          
|Amortization of deferred stock-based compensation                                    |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        |           |             |             |   |       |               |       |   |             |   |               |               |          |               |         |   | 158,935  |           |   |   |         |   |          |   |            |           |   |   | 158,935     |           |          |   |           |          
|Recapture of deferred stock-based compensation upon employee
    terminations        |                                    |                                                              |            |            |             |   |            |              |   |   |           |   |   |        |           |             |             |   |       |               |       |   | (108,987     | ) |               |               |          |               |         |   | 108,987  |           |   |   |         |   |          |   |            |           |   |   |            |           |          |   |           |          
|Comprehensive income:                                                                |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |   |          |   |             |           |   |   |             |           |          |   |           |          
|                                                                                     | Net income                         |                                                              |             |           |             |   |             |             |   |   |            |  |   |        |            |            |             |   |        |              |       |   |              |  |               |               |           |              |         |   |          |          |   |   |          |  |          |   |             | 3,184,287 |   |   |             | 3,184,287 |          |   | $         | 3,184,287 |         
|                                                                                     | Other comprehensive income (loss): |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |   |          |   |             |           |   |   |             |           |          |   |           |           |         
|                                                                                     |                                    | Unrealized loss on available-for-sale securities, net of tax |             |            |            |   |             |              |  |   |            |   |  |        |            |             |            |   |        |               |      |   |              |   |              |               |           |               |        |   |          |           |  |   |          |   | (104,980 | ) |             |           |  |   |             |           | (104,980 | ) |           |           | (104,980 | )
|                                                                                     |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |  
|Total comprehensive income                                                           |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |   |          |   |             |           |   |   |             |           |          | $ | 3,079,307 |          
|                                                                                     |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |  
|Balance at December 31, 2004                                                         |                                    |                                                              |            |            |             | $ |            |              |   | $ |           |   |   |        | 19,880,122 |             |             | $ | 19,880 |               |       | $ | 128,554,789  |   |               |               | 6,369,154 |               |         | $ | (437,349 | )         |   | $ | (104,980 | ) |          | $ | (52,130,337 | )         |   | $ | 82,271,157  |           |          |   |           |          
|                                                                                     |                                    |                                                              |             |            |             |   |             |              |   |   |            |   |   |        |            |             |             |   |        |               |       |   |              |   |               |               |           |               |         |   |          |           |   |   |          |  



54



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STATEMENTS OF CASH FLOWS


|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |         |            |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | --------- | --------- | ----------- | ---------- | ------- | ------- | --------- | ----------- | ------- | ---------- | ----------- | -
|                                                                                                                                                       |                                                                            | Year Ended December 31,                   |                                                    
|                                                                                                                                                       |                                                                            |                                           |                                                    
|                                                                                                                                                       |                                                                            | 2002                                      |                                                     |           | 2003      |             |            | 2004    |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Cash flows from operating activities                                                                                                                   |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|Net income (loss)                                                                                                                                      |                                                                            | $                                         | (14,765,422                                         | )         |           | $           | (4,583,168 | )       |         | $         | 3,184,287   |        
|Adjustments to reconcile net income (loss) to net cash (used in)
    provided by operating activities                                                  |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|                                                                                                                                                       | Depreciation and amortization                                              |                                           |                                                     | 1,434,220 |           |             |            | 856,552 |         |           |             | 847,419 |           
|                                                                                                                                                       | Amortization of convertible notes payable discount to interest
    expense |                                           |                                                     | 1,413,183 |           |             |            | 934,952 |         |           |             |        |           
|                                                                                                                                                       | Amortization of deferred stock-based compensation                          |                                           |                                                     | 83,868    |           |             |            | 85,458  |         |           |             | 158,935 |           
|                                                                                                                                                       | Amortization of short-term investment premium                              |                                           |                                                     |          |           |             |            |        |         |           |             | 70,740  |           
|                                                                                                                                                       | Non-cash interest expense                                                  |                                           |                                                     | 33,428    |           |             |            | 852,996 |         |           |             |        |           
|                                                                                                                                                       | Loss on sale and impairment of assets                                      |                                           |                                                     | 240,857   |           |             |            |        |         |           |             |        |           
|                                                                                                                                                       | Warrants and preferred stock issued for rent                               |                                           |                                                     | 11,343    |           |             |            |        |         |           |             |        |           
|                                                                                                                                                       | Amortization of warrants issued in connection with equipment
    lease     |                                           |                                                     | 17,100    |           |             |            | 9,573   |         |           |             |        |           
|                                                                                                                                                       | Non-cash expense in connection with note payable conversion                |                                           |                                                     |          |           |             |            | 450,759 |         |           |             |        |           
|                                                                                                                                                       | Changes in operating assets and liabilities                                |                                           |                                                     |           |           |             |            |         |         |           |             |         |           
|                                                                                                                                                       |                                                                            | Accounts receivable, net                  |                                                     |           | (434,185  | )           |            |         | 61,625  |           |             |         | (582,152   | )          
|                                                                                                                                                       |                                                                            | Prepaid expenses and other current assets |                                                     |           | (651,128  | )           |            |         | 177,888 |           |             |         | (1,405,737 | )          
|                                                                                                                                                       |                                                                            | Other assets                              |                                                     |           | 16,958    |             |            |         | 77,923  |           |             |         |           |            
|                                                                                                                                                       |                                                                            | Accounts payable                          |                                                     |           | 209,390   |             |            |         | 202,520 |           |             |         | 501,971    |            
|                                                                                                                                                       |                                                                            | Accrued expenses                          |                                                     |           | 1,207,287 |             |            |         | 670,307 |           |             |         | 1,884,841  |            
|                                                                                                                                                       |                                                                            | Accrued interest                          |                                                     |           | 593,888   |             |            |         |        |           |             |         |           |            
|                                                                                                                                                       |                                                                            | Other long-term liabilities               |                                                     |           | 171,871   |             |            |         | (15,446 | )         |             |         | (66,442    | )          
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|                                                                                                                                                       |                                                                            |                                           | Net cash (used in) provided by operating activities |           |           | (10,417,342 | )          |         |         | (218,061  | )           |         |            | 4,593,862   |  
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Cash flows from investing activities                                                                                                                   |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|Restricted cash                                                                                                                                        |                                                                            |                                           | (261,254                                            | )         |           |             | 251,600    |         |         |           |            |        
|Purchases of short-term investments                                                                                                                    |                                                                            |                                           |                                                    |           |           |             |           |         |         |           | (72,147,893 | )      
|Purchases of property and equipment                                                                                                                    |                                                                            |                                           | (832,993                                            | )         |           |             | (570,176   | )       |         |           | (1,415,452  | )      
|Proceeds from sale of property and equipment                                                                                                           |                                                                            |                                           | 460,000                                             |           |           |             |           |         |         |           |            |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|                                                                                                                                                       |                                                                            |                                           | Net cash used in investing activities               |           |           | (634,247    | )          |         |         | (318,576  | )           |         |            | (73,563,345 | )
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Cash flows from financing activities                                                                                                                   |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|Proceeds from stock option exercises                                                                                                                   |                                                                            |                                           | 6,839                                               |           |           |             | 9,627      |         |         |           | 176,665     |        
|Issuance costs in connection with note payable conversion                                                                                              |                                                                            |                                           |                                                    |           |           |             | (15,758    | )       |         |           |            |        
|Proceeds from issuance of warrants in conjunction with
    convertible notes payable                                                                   |                                                                            |                                           | 195,464                                             |           |           |             | 21,565     |         |         |           |            |        
|Proceeds from issuance of convertible notes payable                                                                                                    |                                                                            |                                           | 19,512,978                                          |           |           |             | 2,156,516  |         |         |           |            |        
|Repayment of capital lease obligations                                                                                                                 |                                                                            |                                           | (633,511                                            | )         |           |             | (239,087   | )       |         |           |            |        
|Proceeds from Series E-1 preferred stock warrant exercises                                                                                             |                                                                            |                                           |                                                    |           |           |             |           |         |         |           | 8,557,903   |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Proceeds from issuance of common stock-Initial Public Offering,
    net of issuance costs                                                              |                                                                            |                                           |                                                    |           |           |             |           |         |         |           | 61,402,757  |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|                                                                                                                                                       |                                                                            |                                           | Net cash provided by financing activities           |           |           | 19,081,770  |            |         |         | 1,932,863 |             |         |            | 70,137,325  |  
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|                                                                                                                                                       |                                                                            |                                           | Net increase in cash and cash equivalents           |           |           | 8,030,181   |            |         |         | 1,396,226 |             |         |            | 1,167,842   |  
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Cash and cash equivalents at beginning of period                                                                                                       |                                                                            |                                           | 930,972                                             |           |           |             | 8,961,153  |         |         |           | 10,357,379  |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Cash and cash equivalents at end of period                                                                                                             |                                                                            | $                                         | 8,961,153                                           |           |           | $           | 10,357,379 |         |         | $         | 11,525,221  |        
|                                                                                                                                                       |                                                                            |                                           |                                                     |           |           |             |            |         |        
|Supplemental cash flow information                                                                                                                     |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|Cash paid for interest                                                                                                                                 |                                                                            | $                                         | 64,730                                              |           |           | $           | 34,092     |         |         | $         |            |        
|Non-cash investing and financing activities                                                                                                            |                                                                            |                                           |                                                     |           |           |             |            |         |         |           |             |        
|Series E-1 preferred stock warrants issued in connection
    with convertible notes payable                                                            |                                                                            | $                                         | 1,987,705                                           |           |           | $           |           |         |         | $         |            |        
|Series F preferred stock warrants issued in connection with
    convertible notes payable                                                              |                                                                            | $                                         | 2,850,528                                           |           |           | $           | 408,782    |         |         | $         |            |        
|Recapture of deferred stock-based compensation upon employee
    terminations                                                                          |                                                                            | $                                         | 64,935                                              |           |           | $           | 5,488      |         |         | $         | 108,987     |        
|Conversion of convertible notes payable into preferred stock                                                                                           |                                                                            | $                                         |                                                    |           |           | $           | 21,702,922 |         |         | $         |            |        
|Conversion of preferred stock into common stock                                                                                                        |                                                                            | $                                         |                                                    |           |           | $           |           |         |         | $         | (65,742,803 | )      
|Conversion of preferred stock warrants into common stock warrants                                                                                      |                                                                            | $                                         |                                                    |           |           | $           |           |         |         | $         | (6,370,614  | )      
|Debt issuance costs converted to preferred stock                                                                                                       |                                                                            | $                                         |                                                    |           |           | $           | 147,975    |         |         | $         |            |        
|Recognition of preferred stock additional paid-in capital from
    preferred stock warrants due to exercise of Series E-1
    preferred stock warrants |                                                                            | $                                         |                                                    |           |           | $           |           |         |         | $         | 1,014,927   |        
|Recognition of common stock additional paid-in capital from
    common stock warrants due to exercise of common stock warrants                         |                                                                            | $                                         |                                                    |           |           | $           |           |         |         | $         | 1,532       |        
|Write-off of fully depreciated property, plant, and equipment                                                                                          |                                                                            | $                                         | 348,922                                             |           |           | $           | 3,228,262  |         |         | $         | 2,459       |        
|Deferred stock-based compensation                                                                                                                      |                                                                            | $                                         |                                                    |           |           | $           | 259,516    |         |         | $         | 430,397     |        
|Unrealized loss on available-for-sale securities                                                                                                       |                                                                            | $                                         |                                                    |           |           | $           |           |         |         | $         | (104,980    | )      



55



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NOTES TO FINANCIAL STATEMENTS




|   |                                                           
|-- | ----------------------------------------------------------
|1. | THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                     
| | --------------------
| | Nature of operations





| |            
| | -----------
| | Stock split





| |                        
| | -----------------------
| | Initial public offering









56



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##### Table of Contents



NOTES TO 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







| |                    
| | -------------------
| | Expense recognition



57



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                 
| | ----------------
| | Cost of revenues





| |                          
| | -------------------------
| | Cash and cash equivalents





| |                       
| | ----------------------
| | Short-term investments





| |                
| | ---------------
| | Restricted cash





| |                                    
| | -----------------------------------
| | Fair value of financial instruments





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Concentration of credit risk, significant customers and
    significant suppliers







58



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)








| |                       
| | ----------------------
| | Property and equipment



|                                  |  |                                                      |           | 
|--------------------------------- |  | ---------------------------------------------------- | --------- | 
|Computer hardware and software    |  |                                                      | 1-3 years | 
|Furniture, fixtures and equipment |  |                                                      | 4-5 years | 
|Leasehold improvements            |  | Shorter of the lease period or estimated useful life





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

Accounting for the Impairment or Disposal of
Long-Lived Assets




| |                         
| | ------------------------
| | Stock-Based Compensation

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


59



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NOTES TO FINANCIAL STATEMENTS  (Continued)




Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services




|                                                                                                                        |                                           |                         |             |   |        |   |            |      |       |   |           |   |   | 
|----------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------- | ----------- | - | ------ | - | ---------- | ---- | ----- | - | --------- | - | - | 
|                                                                                                                        |                                           | Year Ended December 31, |            
|                                                                                                                        |                                           |                         |            
|                                                                                                                        |                                           | 2002                    |             |   | 2003   |   |            | 2004 |      
|                                                                                                                        |                                           |                         |             |   |        |   |            |      |      
|Net income (loss) as reported                                                                                           |                                           | $                       | (14,765,422 | ) |        | $ | (4,583,168 | )    |       | $ | 3,184,287 |  
|Add: Stock-based compensation expense included in reported net
    income (loss)                                        |                                           |                         | 83,868      |   |        |   | 85,458     |      |       |   | 158,935   |  
|Deduct: Total stock-based employee compensation expense
    determined under the fair value based method for all awards |                                           |                         | (352,160    | ) |        |   | (378,498   | )    |       |   | (538,657  | )
|                                                                                                                        |                                           |                         |             |   |        |   |            |      |      
|Pro forma net income (loss)                                                                                             |                                           | $                       | (15,033,714 | ) |        | $ | (4,876,208 | )    |       | $ | 2,804,565 |  
|                                                                                                                        |                                           |                         |             |   |        |   |            |      |      
|                                                                                                                        | Net income (loss) per share, as reported: |                         |             |   |        |   |            |      |       |   |           |   |  
|                                                                                                                        |                                           | Basic                   |             | $ | (10.63 | ) |            | $    | (3.57 | ) |           | $ |  | 
|                                                                                                                        |                                           | Diluted                 |             | $ | (10.63 | ) |            | $    | (3.57 | ) |           | $ |  | 
|                                                                                                                        | Pro forma income (loss) per share:        |                         |             |   |        |   |            |      |       |   |           |   |  
|                                                                                                                        |                                           | Basic                   |             | $ | (10.82 | ) |            | $    | (3.77 | ) |           | $ |  | 
|                                                                                                                        |                                           | Diluted                 |             | $ | (10.82 | ) |            | $    | (3.77 | ) |           | $ |  | 



|                        |  |                         |           |      |      |  |           |      |  |  |           |     
|----------------------- |  | ----------------------- | --------- | ---- | ---- |  | --------- | ---- |  |  | --------- | ----
|                        |  | Year Ended December 31, |          
|                        |  |                         |          
|                        |  | 2002                    |           |      | 2003 |  |           | 2004 | 
|                        |  |                         |           |      |      |  |           |      | 
|Expected volatility     |  |                         | 0         | %(1) |      |  | 0         | %(1) |  |  | 21-50     | %(2)
|Risk-free interest rate |  |                         | 2.41-4.47 | %    |      |  | 1.86-3.01 | %    |  |  | 2.51-3.70 | %   
|Expected life           |  |                         | 4 years   |      |      |  | 4 years   |      |  |  | 4 years   |     
|Expected dividend yield |  |                         | 0         | %    |      |  | 0         | %    |  |  | 0         | %   






|    |                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In fiscal years 2002 and 2003, the Company was a private Company
    and, therefore, used the minimum value method under which
    volatility is not considered.                                                                                                                                                       
|   
|(2) | The Company used the minimum value method until the initial
    Form S-1 was filed on May 20, 2004. The Company used a
    50% volatility from May 20, 2004 until the effective date
    of the initial public offering on November 9, 2004. After
    this date the Company used a weighted-average volatility of 21%.







60



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NOTES TO FINANCIAL STATEMENTS  (Continued)






| |                                       
| | --------------------------------------
| | Software and Website Development Costs

Accounting for Website
Development Costs. Accounting
for the Cost of Computer Software Developed or Obtained for
Internal Use,






| |                  
| | -----------------
| | Advertising Costs





| |             
| | ------------
| | Income Taxes





| |                            
| | ---------------------------
| | Comprehensive Income (Loss)



61



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                  
| | -----------------
| | Segment Reporting

Disclosures about Segments of an Enterprise and Related
Information,




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Share-Based Payment








62



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




Participating Securities and the Two-Class Method under
FASB Statement No. 128


The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments




|   |                         
|-- | ------------------------
|2. | BALANCE SHEET COMPONENTS



| |                       
| | ----------------------
| | Short-term investments



|                                     |  |                 |            |       |            |   |       |            |  |   |            |   |  |   |            | 
|------------------------------------ |  | --------------- | ---------- | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ---------- | 
|                                     |  |                 |            | Gross |            |   | Gross |            |  |  
|                                     |  | Gross Amortized |            |       | Unrealized |   |       | Unrealized |  |   | Estimated  |  
|                                     |  | Cost            |            |       | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                     |  |                 |            |       |            |   |       |            |  |   |            |  
|Money market securities              |  | $               | 2,068,833  |       |            | $ |      |            |  | $ |           |   |  | $ | 2,068,833  | 
|Repurchase agreements                |  |                 | 5,396,000  |       |            |   |      |            |  |   |           |   |  |   | 5,396,000  | 
|Asset backed                         |  |                 | 9,158,795  |       |            |   |      |            |  |   | (9,522     | ) |  |   | 9,149,273  | 
|Corporate obligations                |  |                 | 29,512,526 |       |            |   | 17    |            |  |   | (61,398    | ) |  |   | 29,451,145 | 
|US Government and agency obligations |  |                 | 36,705,832 |       |            |   | 2,226 |            |  |   | (36,303    | ) |  |   | 36,671,755 | 
|                                     |  |                 |            |       |            |   |       |            |  |   |            |  
|Total short-term investments         |  | $               | 82,841,986 |       |            | $ | 2,243 |            |  | $ | (107,223   | ) |  | $ | 82,737,006 | 
|                                     |  |                 |            |       |            |   |       |            |  |   |            |  

|                       |  |              |            | 
|---------------------- |  | ------------ | ---------- | 
|                       |  | December 31, |           
|                       |  | 2004         |           
|                       |  |              |           
|Recorded as:           |  |              |            | 
|Cash equivalents       |  | $            | 10,764,833 | 
|Short-term investments |  |              | 71,972,173 | 
|                       |  |              |           
|                       |  | $            | 82,737,006 | 
|                       |  |              |           



63



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NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                         |  |              |            | 
|---------------------------------------- |  | ------------ | ---------- | 
|                                         |  | December 31, |           
|                                         |  | 2004         |           
|                                         |  |              |           
|Due within one year or less              |  | $            | 32,812,640 | 
|Due after one year through two years     |  |              | 43,922,831 | 
|Due after two years through three years  |  |              | 3,990,736  | 
|                                         |  |              |           
|Due after three years through four years |  |              | 2,010,799  | 
|                                         |  |              |           
|                                         |  | $            | 82,737,006 | 
|                                         |  |              |           



| |                                          
| | -----------------------------------------
| | Prepaid expenses and other current assets



|                        |                                           |              |         |         |      |   |           |           | 
|----------------------- | ----------------------------------------- | ------------ | ------- | ------- | ---- | - | --------- | --------- | 
|                        |                                           | December 31, |        
|                        |                                           |              |        
|                        |                                           | 2003         |         |         | 2004 |  
|                        |                                           |              |         |         |      |  
|Prepaid expenses        |                                           | $            | 572,228 |         |      | $ | 1,210,934 |          
|Interest receivable     |                                           |              |        |         |      |   | 735,362   |          
|Other assets            |                                           |              | 135,769 |         |      |   | 167,438   |          
|                        |                                           |              |         |         |      |  
|                        |                                           |              | 707,997 |         |      |   | 2,113,734 |          
|Less: long-term portion |                                           |              | 11,625  |         |      |   | 11,625    |          
|                        |                                           |              |         |         |      |  
|                        | Prepaid expenses and other current assets |              | $       | 696,372 |      |   | $         | 2,102,109 | 
|                        |                                           |              |         |         |      |  



| |                            
| | ---------------------------
| | Property and equipment, net



|                                                |                             |              |            |         |      |   |            |           | 
|----------------------------------------------- | --------------------------- | ------------ | ---------- | ------- | ---- | - | ---------- | --------- | 
|                                                |                             | December 31, |           
|                                                |                             |              |           
|                                                |                             | 2003         |            |         | 2004 |  
|                                                |                             |              |            |         |      |  
|Computer hardware and software                  |                             | $            | 2,251,166  |         |      | $ | 3,574,149  |          
|Furniture, fixtures and equipment               |                             |              | 303,791    |         |      |   | 390,674    |          
|Leasehold improvements                          |                             |              | 31,042     |         |      |   | 34,169     |          
|                                                |                             |              |            |         |      |  
|                                                |                             |              | 2,585,999  |         |      |   | 3,998,992  |          
|Less: accumulated depreciation and amortization |                             |              | (1,917,881 | )       |      |   | (2,762,841 | )        
|                                                |                             |              |            |         |      |  
|                                                | Property and equipment, net |              | $          | 668,118 |      |   | $          | 1,236,151 | 
|                                                |                             |              |            |         |      |  





64



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                 
| | ----------------
| | Accrued expenses



|                           |                  |              |         |           |      |   |           |           | 
|-------------------------- | ---------------- | ------------ | ------- | --------- | ---- | - | --------- | --------- | 
|                           |                  | December 31, |        
|                           |                  |              |        
|                           |                  | 2003         |         |           | 2004 |  
|                           |                  |              |         |           |      |  
|Accrued vacation           |                  | $            | 446,967 |           |      | $ | 538,956   |          
|Accrued agent commissions  |                  |              | 902,192 |           |      |   | 1,646,626 |          
|Accrued bonuses            |                  |              | 263,452 |           |      |   | 975,598   |          
|Accrued marketing expenses |                  |              | 346,079 |           |      |   | 431,702   |          
|Other accrued expenses     |                  |              | 443,657 |           |      |   | 694,306   |          
|                           |                  |              |         |           |      |  
|                           | Accrued expenses |              | $       | 2,402,347 |      |   | $         | 4,287,188 | 
|                           |                  |              |         |           |      |  



| |                                              
| | ---------------------------------------------
| | Accumulated other comprehensive income (loss)



|                                                             |                                         |              |   |      |  |   |          |          |  
|------------------------------------------------------------ | --------------------------------------- | ------------ | - | ---- |  | - | -------- | -------- | -
|                                                             |                                         | December 31, |  
|                                                             |                                         |              |  
|                                                             |                                         | 2003         |   | 2004 | 
|                                                             |                                         |              |   |      | 
|Other comprehensive income (loss):                           |                                         |              |   |      |  |   |          |         
|Unrealized loss on available-for-sale securities, net of tax |                                         | $            |  |      |  | $ | (104,980 | )       
|                                                             |                                         |              |   |      |  |  
|                                                             | Total other comprehensive income (loss) |              | $ |     |  |   | $        | (104,980 | )
|                                                             |                                         |              |   |      |  |  



|   |                            
|-- | ---------------------------
|3. | NET INCOME (LOSS) PER SHARE



|                                                                                                 |         |                         |             |        |      |   |            |       |   |   |           |   | 
|------------------------------------------------------------------------------------------------ | ------- | ----------------------- | ----------- | ------ | ---- | - | ---------- | ----- | - | - | --------- | - | 
|                                                                                                 |         | Year Ended December 31, |            
|                                                                                                 |         |                         |            
|                                                                                                 |         | 2002                    |             |        | 2003 |   |            | 2004  |  
|                                                                                                 |         |                         |             |        |      |   |            |       |  
|Numerator:                                                                                       |         |                         |             |        |      |   |            |       |   |   |           |  
|Net income (loss)                                                                                |         | $                       | (14,765,422 | )      |      | $ | (4,583,168 | )     |   | $ | 3,184,287 |  
|Cumulative preferred stock dividends                                                             |         |                         | 630,800     |        |      |   | 630,800    |       |   |   | 551,949   |  
|Amount allocated to participating preferred stockholders                                         |         |                         |            |        |      |   |           |       |   |   | 2,632,338 |  
|                                                                                                 |         |                         |             |        |      |   |            |       |  
|Net income (loss) available to common stockholders (for basic
    and dilutive EPS computations) |         | $                       | (15,396,222 | )      |      | $ | (5,213,968 | )     |   | $ |          |  
|                                                                                                 |         |                         |             |        |      |   |            |       |  
|Denominator:                                                                                     |         |                         |             |        |      |   |            |       |   |   |           |  
|Shares used to compute basic and diluted EPS                                                     |         |                         | 1,447,867   |        |      |   | 1,459,058  |       |   |   | 3,798,097 |  
|Net income (loss) per share:                                                                     |         |                         |             |        |      |   |            |       |   |   |           |  
|                                                                                                 | Basic   |                         | $           | (10.63 | )    |   | $          | (3.57 | ) |   | $         |  | 
|                                                                                                 | Diluted |                         | $           | (10.63 | )    |   | $          | (3.57 | ) |   | $         |  | 



|                                                |  |                         |           |  |      |  |            |      |  |  |           | 
|----------------------------------------------- |  | ----------------------- | --------- |  | ---- |  | ---------- | ---- |  |  | --------- | 
|                                                |  | Year Ended December 31, |          
|                                                |  |                         |          
|                                                |  | 2002                    |           |  | 2003 |  |            | 2004 | 
|                                                |  |                         |           |  |      |  |            |      | 
|Stock options to purchase common stock          |  |                         | 2,148,128 |  |      |  | 2,262,942  |      |  |  | 3,420,727 | 
|Participating convertible preferred stock       |  |                         | 4,918,078 |  |      |  | 10,805,336 |      |  |  |          | 
|Warrants to purchase preferred and common stock |  |                         | 6,444,990 |  |      |  | 7,057,729  |      |  |  | 4,811,067 | 

65



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |             
|-- | ------------
|4. | INCOME TAXES





|                          |                                  |                                 |             |            |            |  |             |            |            | 
|------------------------- | -------------------------------- | ------------------------------- | ----------- | ---------- | ---------- |  | ----------- | ---------- | ---------- | 
|                          |                                  | December 31,                    |            
|                          |                                  |                                 |            
|                          |                                  | 2003                            |             |            | 2004       | 
|                          |                                  |                                 |             |            |            | 
|Deferred tax assets       |                                  |                                 |             |            |            |  |             |           
|                          | Net operating loss carryforwards |                                 | $           | 19,423,157 |            |  | $           | 17,733,579 |           
|                          | Allowances and accruals          |                                 |             | 458,472    |            |  |             | 397,437    |           
|                          | Credits                          |                                 |             |           |            |  |             | 78,981     |           
|                          |                                  |                                 |             |            |            | 
|                          |                                  |                                 | 19,881,629  |            |            |  | 18,209,997  |           
|Deferred tax liabilities  |                                  |                                 |             |            |            |  |             |           
|                          | Other                            |                                 |             |           |            |  |             |           |           
|                          |                                  |                                 |             |            |            | 
|                          |                                  |                                 |            |            |            |  |            |           
|                          |                                  |                                 |             |            |            | 
|                          |                                  | Total gross deferred tax assets |             |            | 19,881,629 |  |             |            | 18,209,997 | 
|Less: valuation allowance |                                  |                                 | (19,881,629 | )          |            |  | (18,209,997 | )         
|                          |                                  |                                 |             |            |            | 
|                          |                                  | Net deferred tax assets         |             | $          |           |  |             | $          |           | 
|                          |                                  |                                 |             |            |            | 









|                                                |  |                         |        |    |      |  |        |      |  |  |        |   
|----------------------------------------------- |  | ----------------------- | ------ | -- | ---- |  | ------ | ---- |  |  | ------ | --
|                                                |  | Year Ended December 31, |       
|                                                |  |                         |       
|                                                |  | 2002                    |        |    | 2003 |  |        | 2004 | 
|                                                |  |                         |        |    |      |  |        |      | 
|Statutory federal tax rate                      |  |                         | (34.00 | )% |      |  | (34.00 | )%   |  |  | 34.00  | % 
|State tax rate, net of federal benefit          |  |                         | (3.43  | )% |      |  | (3.64  | )%   |  |  | 5.67   | % 
|Change in valuation allowance                   |  |                         | 35.65  | %  |      |  | 35.97  | %    |  |  | (44.13 | )%
|Other, net                                      |  |                         | 1.78   | %  |      |  | 1.67   | %    |  |  | 7.18   | % 
|                                                |  |                         |        |    |      |  |        |      | 
|Total provision for (benefit from) income taxes |  |                         | 0.00   | %  |      |  | 0.00   | %    |  |  | 2.72   | % 
|                                                |  |                         |        |    |      |  |        |      | 

66



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                          
|-- | -------------------------
|5. | CONVERTIBLE NOTES PAYABLE













|   |                              
|-- | -----------------------------
|6. | COMMITMENTS AND CONTINGENCIES



| |       
| | ------
| | Leases



67



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|                         |                              |           |         |           | 
|------------------------ | ---------------------------- | --------- | ------- | --------- | 
|                         |                              | Operating |        
|Year Ending December 31, |                              | Leases    |        
|                         |                              |           |        
|2005                     |                              |           | 568,434 |          
|2006                     |                              |           | 584,892 |          
|2007                     |                              |           | 49,216  |          
|                         |                              |           |        
|                         | Total minimum lease payments |           | $       | 1,202,542 | 
|                         |                              |           |        







| |                                                  
| | -------------------------------------------------
| | Related Party Advertising and Promotion Agreement





| |                  
| | -----------------
| | Legal Proceedings





| |                 
| | ----------------
| | Indemnifications





68



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                                       
|-- | --------------------------------------
|7. | REDEEMABLE CONVERTIBLE PREFERRED STOCK



|           |                              |            |            |            |             |  |             |            |  |   |            |            | 
|---------- | ---------------------------- | ---------- | ---------- | ---------- | ----------- |  | ----------- | ---------- |  | - | ---------- | ---------- | 
|           |                              |            |            | Shares     |             |  | Aggregate   |           
|           |                              |            |            | Issued and |             |  | Liquidation |           
|           |                              | Authorized |            |            | Outstanding |  |             | Preference | 
|           |                              |            |            |            |             |  |             |            | 
|Series A   |                              |            | 1,911,112  |            |             |  | 629,626     |            |  | $ | 1,700,000  |           
|Series B   |                              |            | 5,246,171  |            |             |  | 1,734,752   |            |  |   | 16,393,438 |           
|Series C   |                              |            | 2,178,486  |            |             |  | 547,343     |            |  |   | 10,000,005 |           
|Series D   |                              |            | 6,106,871  |            |             |  | 2,006,357   |            |  |   | 9,531,544  |           
|Series E   |                              |            | 9,000,000  |            |             |  | 2,466,724   |            |  |   | 29,082,849 |           
|Series E-1 |                              |            | 15,300,000 |            |             |  |            |            |  |   |           |           
|Series F   |                              |            | 19,600,000 |            |             |  | 3,420,534   |            |  |   | 26,885,452 |           
|           |                              |            |            |            |             |  |             |            | 
|           | Balance at December 31, 2003 |            |            | 59,342,640 |             |  |             | 10,805,336 |  |   | $          | 93,593,288 | 
|           |                              |            |            |            |             |  |             |            | 







| |       
| | ------
| | Voting









| |          
| | ---------
| | Dividends





69



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




| |            
| | -----------
| | Liquidation







| |           
| | ----------
| | Conversion

2 3






| |                     
| | --------------------
| | Warrant for services





| |                          
| | -------------------------
| | Warrant with office lease



70



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                                   
| | ----------------------------------
| | Warrants with equipment lease line





| |                               
| | ------------------------------
| | Warrants for convertible notes









71



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)










|   |                           
|-- | --------------------------
|8. | PREFERRED AND COMMON STOCK





| |                      
| | ---------------------
| | Common stock warrants





|   |                   
|-- | ------------------
|9. | STOCK OPTION PLANS







72



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)










|                              |  |               |            |   |             |          |           |          |  |   |       | 
|----------------------------- |  | ------------- | ---------- | - | ----------- | -------- | --------- | -------- |  | - | ----- | 
|                              |  |               |            |   |             | Weighted |          
|                              |  | Options       |            |   | Number of   |          |           | Average  | 
|                              |  | Available for |            |   | Options     |          |           | Exercise | 
|                              |  | Grant         |            |   | Outstanding |          |           | Price    | 
|                              |  |               |            |   |             |          |           |          | 
|Balance at December 31, 2001  |  |               | 557,036    |   |             |          | 906,990   |          |  | $ | 1.20  | 
|Increase in authorized shares |  |               | 866,666    |   |             |          |           |          |  |   |       | 
|Options granted               |  |               | (1,397,682 | ) |             |          | 1,397,682 |          |  | $ | 0.99  | 
|Options canceled              |  |               | 146,847    |   |             |          | (146,847  | )        |  | $ | 1.53  | 
|Options exercised             |  |               |            |   |             |          | (9,697    | )        |  | $ | 0.69  | 
|                              |  |               |            |   |             |          |           |          | 
|Balance at December 31, 2002  |  |               | 172,867    |   |             |          | 2,148,128 |          |  | $ | 1.05  | 
|Increase in authorized shares |  |               | 200,000    |   |             |          |           |          |  |   |       | 
|Options granted               |  |               | (313,737   | ) |             |          | 313,737   |          |  | $ | 1.92  | 
|Options canceled              |  |               | 184,559    |   |             |          | (184,559  | )        |  | $ | 1.26  | 
|Options exercised             |  |               |            |   |             |          | (14,364   | )        |  | $ | 0.66  | 
|                              |  |               |            |   |             |          |           |          | 
|Balance at December 31, 2003  |  |               | 243,689    |   |             |          | 2,262,942 |          |  | $ | 1.14  | 
|Increase in authorized shares |  |               | 1,750,000  |   |             |          |           |          |  |   |       | 
|Options granted               |  |               | (1,527,936 | ) |             |          | 1,527,936 |          |  | $ | 11.28 | 
|Options canceled              |  |               | 219,960    |   |             |          | (219,960  | )        |  | $ | 2.39  | 
|Options exercised             |  |               |            |   |             |          | (150,191  | )        |  | $ | 1.18  | 
|                              |  |               |            |   |             |          |           |          | 
|Balance at December 31, 2004  |  |               | 685,713    |   |             |          | 3,420,727 |          |  | $ | 5.59  | 
|                              |  |               |            |   |             |          |           |          | 

73



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)




|                         |  |                        |           |                    |                   |  |          |          |  |   |             |         |  |          |           |  |  |   |       | 
|------------------------ |  | ---------------------- | --------- | ------------------ | ----------------- |  | -------- | -------- |  | - | ----------- | ------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  |                        |           | Options Vested and |                  
|                         |  | Options Outstanding at |           |                    | Exercisable at    | 
|                         |  | December 31, 2004      |           |                    | December 31, 2004 | 
|                         |  |                        |           |                    |                   | 
|                         |  |                        |           | Weighted           |                   |  |          |          |  |   | Weighted    |        
|                         |  |                        |           | Average            |                   |  | Weighted |          |  |   |             | Average | 
|                         |  |                        |           | Remaining          |                   |  | Average  |          |  |   |             | Option  | 
|                         |  | Number                 |           |                    | Contractual       |  |          | Exercise |  |   | Number      |         |  | Exercise |          
|Range of Exercise Prices |  | Outstanding            |           |                    | Life (Years)      |  |          | Price    |  |   | Outstanding |         |  | Price    |          
|                         |  |                        |           |                    |                   |  |          |          |  |   |             |         |  |          |          
|$0.30                    |  |                        | 4,125     |                    |                   |  | 4.6      |          |  | $ | 0.30        |         |  |          | 4,125     |  |  | $ | 0.30  | 
|$0.99                    |  |                        | 1,708,648 |                    |                   |  | 6.9      |          |  | $ | 0.99        |         |  |          | 1,303,532 |  |  | $ | 0.99  | 
|$1.20                    |  |                        |          |                    |                   |  |         |          |  | $ | 1.20        |         |  |          |          |  |  | $ | 1.20  | 
|$1.50                    |  |                        | 79,322    |                    |                   |  | 8.3      |          |  | $ | 1.50        |         |  |          | 35,506    |  |  | $ | 1.50  | 
|$2.25                    |  |                        | 102,690   |                    |                   |  | 8.8      |          |  | $ | 2.25        |         |  |          | 35,549    |  |  | $ | 2.25  | 
|$2.40                    |  |                        | 16,415    |                    |                   |  | 5.0      |          |  | $ | 2.40        |         |  |          | 16,415    |  |  | $ | 2.40  | 
|$3.60                    |  |                        | 1,832     |                    |                   |  | 5.1      |          |  | $ | 3.60        |         |  |          | 1,832     |  |  | $ | 3.60  | 
|$5.25                    |  |                        | 1,666     |                    |                   |  | 5.4      |          |  | $ | 5.25        |         |  |          | 1,666     |  |  | $ | 5.25  | 
|$6.00                    |  |                        | 113,395   |                    |                   |  | 8.7      |          |  | $ | 6.00        |         |  |          | 16,535    |  |  | $ | 6.00  | 
|$7.50                    |  |                        | 511,664   |                    |                   |  | 9.2      |          |  | $ | 7.50        |         |  |          | 91,767    |  |  | $ | 7.50  | 
|$9.00                    |  |                        | 106,633   |                    |                   |  | 9.3      |          |  | $ | 9.00        |         |  |          | 1,909     |  |  | $ | 9.00  | 
|$10.50                   |  |                        | 94,769    |                    |                   |  | 9.5      |          |  | $ | 10.50       |         |  |          | 1,268     |  |  | $ | 10.50 | 
|$11.25                   |  |                        | 124,217   |                    |                   |  | 9.7      |          |  | $ | 11.25       |         |  |          | 754       |  |  | $ | 11.25 | 
|$16.50                   |  |                        | 555,351   |                    |                   |  | 10.0     |          |  | $ | 16.50       |         |  |          | 375       |  |  | $ | 16.50 | 
|                         |  |                        |           |                    |                   |  |          |          |  |   |             |         |  |          |          
|                         |  |                        | 3,420,727 |                    |                   |  | 8.2      |          |  | $ | 5.59        |         |  |          | 1,511,233 |  |  | $ | 1.53  | 
|                         |  |                        |           |                    |                   |  |          |          |  |   |             |         |  |          |          



|                                 |  |            |     |  |           |   |       |            |  |   |           |  |  |   |      | 
|-------------------------------- |  | ---------- | --- |  | --------- | - | ----- | ---------- |  | - | --------- |  |  | - | ---- | 
|                                 |  |            |     |  |           |   |       | Weighted-  | 
|                                 |  | Number     |     |  | Weighted- |   |       | Weighted-  |  |   | Average   | 
|                                 |  | of Options |     |  | Average   |   |       | Average    |  |   | Intrinsic | 
|                                 |  | Granted    |     |  | Exercise  |   |       | Fair Value |  |   | Value per | 
|Grants Made During Quarter Ended |  | (000s)     |     |  | Price     |   |       | per Share  |  |   | Share     | 
|                                 |  |            |     |  |           |   |       |            |  |   |           | 
|March 31, 2004                   |  |            | 507 |  |           | $ | 7.17  |            |  | $ | 7.89      |  |  | $ | 0.72 | 
|June 30, 2004                    |  |            | 340 |  |           | $ | 8.85  |            |  | $ | 9.06      |  |  | $ | 0.21 | 
|September 30, 2004               |  |            | 86  |  |           | $ | 11.25 |            |  | $ | 11.25     |  |  | $ |     | 
|December 31, 2004                |  |            | 595 |  |           | $ | 16.15 |            |  | $ | 16.15     |  |  | $ |     | 





| |                              
| | -----------------------------
| | Stock option exchange program



74



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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |                      
|--- | ---------------------
|10. | EMPLOYEE BENEFIT PLAN





|    |                                   
|--- | ----------------------------------
|11. | UNAUDITED QUARTERLY FINANCIAL DATA



|                                                   |         |         |            |           |         |   |            |           |   |   |           |           |  |       |           |           |  |   |            |           |  
|-------------------------------------------------- | ------- | ------- | ---------- | --------- | ------- | - | ---------- | --------- | - | - | --------- | --------- |  | ----- | --------- | --------- |  | - | ---------- | --------- | -
|                                                   |         | First   |            |           | Second  |   |            | Third     |   |   | Fourth    |           |  |      
|Year Ended December 31, 2003                       |         | Quarter |            |           | Quarter |   |            | Quarter   |   |   | Quarter   |           |  | Total |          
|                                                   |         |         |            |           |         |   |            |           |   |   |           |           |  |       |          
|Net transaction revenues                           |         | $       | 5,319,584  |           |         | $ | 8,325,188  |           |   | $ | 9,969,350 |           |  | $     | 9,064,772 |           |  | $ | 32,678,894 |          
|Income (loss) from operations                      |         |         | (2,099,180 | )         |         |   | (868,019   | )         |   |   | 441,376   |           |  |       | 134,824   |           |  |   | (2,390,999 | )        
|Net income (loss)                                  |         |         | (2,976,977 | )         |         |   | (2,225,560 | )         |   |   | 445,898   |           |  |       | 173,471   |           |  |   | (4,583,168 | )        
|Net income (loss) available to common shareholders |         |         | (3,134,678 | )         |         |   | (2,383,265 | )         |   |   |          |           |  |       |          |           |  |   | (5,213,968 | )        
|Net income (loss) per share:                       |         |         |            |           |         |   |            |           |   |   |           |           |  |       |           |           |  |   |            |          
|                                                   | Basic   |         | $          | (2.15     | )       |   | $          | (1.64     | ) |   | $         |          |  |       | $         |          |  |   | $          | (3.57     | )
|                                                   | Diluted |         | $          | (2.15     | )       |   | $          | (1.64     | ) |   | $         |          |  |       | $         |          |  |   | $          | (3.57     | )
|Weighted average common shares outstanding:        |         |         |            |           |         |   |            |           |   |   |           |           |  |       |           |           |  |   |            |          
|                                                   | Basic   |         |            | 1,454,687 |         |   |            | 1,455,248 |   |   |           | 1,457,835 |  |       |           | 1,468,322 |  |   |            | 1,459,058 |  
|                                                   | Diluted |         |            | 1,454,687 |         |   |            | 1,455,248 |   |   |           | 1,457,835 |  |       |           | 1,468,322 |  |   |            | 1,459,058 |  

|                                                   |         |         |            |           |         |   |            |           |  |   |            |           |  |       |            |            |  |   |            |           | 
|-------------------------------------------------- | ------- | ------- | ---------- | --------- | ------- | - | ---------- | --------- |  | - | ---------- | --------- |  | ----- | ---------- | ---------- |  | - | ---------- | --------- | 
|                                                   |         | First   |            |           | Second  |   |            | Third     |  |   | Fourth     |           |  |      
|Year Ended December 31, 2004                       |         | Quarter |            |           | Quarter |   |            | Quarter   |  |   | Quarter    |           |  | Total |           
|                                                   |         |         |            |           |         |   |            |           |  |   |            |           |  |       |           
|Net transaction revenues                           |         | $       | 10,659,743 |           |         | $ | 15,902,490 |           |  | $ | 17,107,793 |           |  | $     | 17,078,969 |            |  | $ | 60,748,995 |          
|Income (loss) from operations                      |         |         | (126,753   | )         |         |   | 1,167,863  |           |  |   | 1,207,083  |           |  |       | 614,808    |            |  |   | 2,863,001  |          
|Net income (loss)                                  |         |         | (114,741   | )         |         |   | 1,157,124  |           |  |   | 1,254,077  |           |  |       | 887,827    |            |  |   | 3,184,287  |          
|Net income (loss) available to common shareholders |         |         | (272,008   | )         |         |   |           |           |  |   |           |           |  |       | 128,567    |            |  |   |           |          
|Net income (loss) per share:                       |         |         |            |           |         |   |            |           |  |   |            |           |  |       |            |            |  |   |            |          
|                                                   | Basic   |         | $          | (0.19     | )       |   | $          |          |  |   | $          |          |  |       | $          | 0.01       |  |   | $          |          | 
|                                                   | Diluted |         | $          | (0.19     | )       |   | $          |          |  |   | $          |          |  |       | $          | 0.01       |  |   | $          |          | 
|Weighted average common shares outstanding:        |         |         |            |           |         |   |            |           |  |   |            |           |  |       |            |            |  |   |            |          
|                                                   | Basic   |         |            | 1,469,304 |         |   |            | 1,498,596 |  |   |            | 1,562,552 |  |       |            | 10,705,953 |  |   |            | 3,798,097 | 
|                                                   | Diluted |         |            | 1,469,304 |         |   |            | 1,498,596 |  |   |            | 1,562,552 |  |       |            | 16,440,403 |  |   |            | 3,798,097 | 

75



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure:








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures:

Disclosure controls and procedures.




Changes in internal control over financial
reporting.







|         |                   
|-------- | ------------------
|Item 9B. | Other Information:






PART III







|         |                                  
|-------- | ---------------------------------
|Item 10. | Directors and Executive Officers:

Executive officers




Directors




76



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##### Table of Contents



Section 16(a) beneficial ownership reporting
compliance




Code of ethics


www.ziprealty.com







|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation:








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters:










|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions:








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services:



77



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##### Table of Contents






PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules:

(a) Documents filed with this report:


1. Financial Statements.






| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Report of independent registered public accounting firm                                    
|
| |  | Balance Sheets at December 31, 2004 and 2003                                               
|
| |  | Statements of Operations for the years ended December 31,
    2004, 2003 and 2002          
|
| |  | Statements of Stockholders Equity for the years ended
    December 31, 2004, 2003 and 2002
|
| |  | Statements of Cash Flows for the years ended December 31,
    2004, 2003 and 2002          
|
| |  | Notes Financial Statements.                                                                

2. Financial Statement Schedule









Schedule II  Valuation and Qualifying
Accounts


Deferred Tax Asset Valuation Allowance


|                                    |  |              |            |         |               |   |           |            |  |            |           |  |  |   |            | 
|----------------------------------- |  | ------------ | ---------- | ------- | ------------- | - | --------- | ---------- |  | ---------- | --------- |  |  | - | ---------- | 
|                                    |  |              |            | Charged |               |   |           |            | 
|                                    |  | Balance at   |            |         | (Credited) to |   |           |            |  | Balance at |          
|                                    |  | Beginning of |            |         | Costs and     |   |           |            |  | End of     |          
|                                    |  | Year         |            |         | Expenses      |   |           | Deductions |  |            | Year      | 
|                                    |  |              |            |         |               |   |           |            |  |            |           | 
|Fiscal year ended December 31, 2002 |  | $            | 12,977,451 |         |               | $ | 5,263,412 |            |  | $          |          |  |  | $ | 18,240,863 | 
|Fiscal year ended December 31, 2003 |  |              | 18,240,863 |         |               |   | 1,640,766 |            |  |            |          |  |  |   | 19,881,629 | 
|Fiscal year ended December 31, 2004 |  |              | 19,881,629 |         |               |   |          |            |  |            | 1,671,632 |  |  |   | 18,209,997 | 



3. Exhibits.




78



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##### Table of Contents






SIGNATURES






| |                
| | ---------------
| | ZIPREALTY, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ Gary M. Beasley

| |                             
| | ----------------------------
| |                             
| | Gary M. Beasley             
| | Executive Vice President and
| | Chief Financial Officer     







|                                          |  |                                                                                            |  |                |  | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------- |  | 
|Name                                      |  | Title                                                                                      |  | Date          
|                                          |  |                                                                                            |  |               
|                                         
|/s/ Eric A. Danziger
    Eric A. Danziger |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)          |  | March 28, 2005
|                                         
|/s/ Gary M. Beasley
    Gary M. Beasley   |  | Executive Vice President and Chief Financial Officer (Principal
    Financial Officer)     |  | March 28, 2005
|                                         
|/s/ David A. Rector
    David A. Rector   |  | Vice President, Controller and Chief Accounting Officer
    (Principal Accounting Officer) |  | March 28, 2005
|                                         
|/s/ W. Scott Kucirek
    W. Scott Kucirek |  | Director                                                                                   |  | March 28, 2005
|                                         
|/s/ Ronald C. Brown
    Ronald C. Brown   |  | Director                                                                                   |  | March 28, 2005
|                                         
|/s/ Marc L. Cellier
    Marc L. Cellier   |  | Director                                                                                   |  | March 28, 2005
|                                         
|/s/ Matthew E. Crisp
    Matthew E. Crisp |  | Director                                                                                   |  | March 28, 2005

79



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|                                                      |  |          |  |                |  | 
|----------------------------------------------------- |  | -------- |  | -------------- |  | 
|Name                                                  |  | Title    |  | Date          
|                                                      |  |          |  |               
|                                                     
|/s/ Robert C. Kagle
    Robert C. Kagle               |  | Director |  | March 28, 2005
|                                                     
|/s/ Stanley M. Koonce, Jr.
    Stanley M. Koonce, Jr. |  | Director |  | March 28, 2005
|                                                     
|/s/ Juan F. Mini
    Juan F. Mini                     |  | Director |  | March 28, 2005
|                                                     
|/s/ Donald F. Wood
    Donald F. Wood                 |  | Director |  | March 28, 2005

80



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##### Table of Contents






Exhibit Index


|        |    |             |  |                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 1  | .1(1)       |  | Form of Underwriting Agreement                                                                                                                             
|       
|        | 3  | .1(a)(1)    |  | Amended and Restated Certificate of Incorporation                                                                                                          
|       
|        | 3  | .2(a)(1)    |  | Bylaws                                                                                                                                                     
|       
|        | 4  | .1(1)       |  | Form of Common Stock Certificate                                                                                                                           
|       
|        | 10 | .1(1)*      |  | Form of Director and Executive Officer Indemnification Agreement                                                                                           
|       
|        | 10 | .2(1)*      |  | 1999 Stock Option Plan                                                                                                                                     
|       
|        | 10 | .3(1)*      |  | 2004 Equity Incentive Plan                                                                                                                                 
|       
|        | 10 | .3(a)*      |  | Form of Stock Option Award Agreement under 2004 Equity Incentive
    Plan                                                                                  
|       
|        | 10 | .4(1)*      |  | Form of Change of Control Agreement                                                                                                                        
|       
|        | 10 | .5(1)       |  | Fifth Amended and Restated Investors Rights Agreement
    dated December 17, 2002                                                                         
|       
|        | 10 | .6(1)       |  | Office Lease Agreement between the Registrant and EOP-Emeryville
    Properties, L.L.C. dated November 28, 2001                                            
|       
|        | 10 | .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, 2001
|       
|        | 10 | .7(1)*      |  | Employment offer letter between the Registrant and Eric A.
    Danziger dated April 27, 2001                                                               
|       
|        | 10 | .8(1)       |  | Form of Primary Warrant to purchase shares of Series E-1
    Preferred Stock                                                                               
|       
|        | 10 | .9(1)       |  | Form of Secondary Warrant to purchase shares of Series E-1
    Preferred Stock                                                                             
|       
|        | 10 | .10(1)      |  | Form of Warrant to purchase shares of Series F Preferred
    Stock                                                                                         
|       
|        | 10 | .11*        |  | Director Compensation Policy                                                                                                                               
|       
|        | 10 | .12*        |  | Summary of Compensation for Named Executive Officers                                                                                                       
|       
|        | 23 | .1          |  | Consent of independent registered public accounting firm                                                                                                   
|       
|        | 24 | .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 1934                   
|       
|        | 31 | .2          |  | Certification of Chief Financial Officer, as required by
    Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
    Act of 1934                   
|       
|        | 32 | .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 Chief Financial Officer, as required by
    Section 1350 of Chapter 63 of Title 18 of the
    United States Code (18 U.S.C. 1350)         






|    |                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| | * | Identifies a management contract or compensatory plan of
    arrangement required to be filed as an exhibit to this report.

81