##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-51002
 ZIPREALTY, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    94-3319956(State of incorporation)
    
    (IRS employer identification number)2000 POWELL STREET, SUITE 300EMERYVILLE, CA
    
    94608(Address of principal executive offices)
    
    (Zip Code)
 (510) 735-2600
 (Registrants telephone number)
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    4Unaudited Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
2007 and 2006
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURE
    
    
    47EXHIBIT INDEX
    
    
    48EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



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
 Where you can find additional information
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements:
 ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assetsCash and cash equivalents
    
    $
    7,740
    
    
    $
    8,575Short-term investments
    
    
    77,672
    
    
    
    80,233Accounts receivable, net of allowance of $32
and $30 at September 30, 2007 and December
31, 2006, respectively
    
    
    2,085
    
    
    
    1,781Prepaid expenses and other current assets
    
    
    2,964
    
    
    
    3,151Current and deferred income taxes
    
    
    24
    
    
    
    29Total current assets
    
    
    90,485
    
    
    
    93,769Restricted cash
    
    
    90
    
    
    
    90Property and equipment, net
    
    
    5,259
    
    
    
    4,114Investment in non-consolidated companies
    
    
    13
    
    
    
    17Intangible assets, net
    
    
    126
    
    
    
    149Other assets
    
    
    209
    
    
    
    218Total assets
    
    $
    96,182
    
    
    $
    98,357Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    2,810
    
    
    $
    2,184Accrued expenses and other liabilities
    
    
    10,301
    
    
    
    7,791Total current liabilities
    
    
    13,111
    
    
    
    9,975Other long-term liabilities
    
    
    501
    
    
    
    513Total liabilities
    
    
    13,612
    
    
    
    10,488Commitments and contingencies (Note 8)Stockholders equityCommon stock: $0.001 par value; 100,000
shares authorized; 23,279 and 21,627 shares
issued and outstanding at September 30, 2007
and December 31, 2006, respectively
    
    
    23
    
    
    
    22Additional paid-in capital
    
    
    141,876
    
    
    
    134,813Common stock warrants
    
    
    1,834
    
    
    
    5,519Deferred stock-based compensation
    
    
    (13
    )
    
    
    (71
    )Accumulated other comprehensive loss
    
    
    75
    
    
    
    (157
    )Accumulated deficit
    
    
    (61,225
    )
    
    
    (52,257
    )Total stockholders equity
    
    
    82,570
    
    
    
    87,869Total liabilities and stockholders equity
    
    $
    96,182
    
    
    $
    98,357
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 Three Months ended September 30,
    
    
    Nine Months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net transaction revenues
    
    $
    27,225
    
    
    $
    25,420
    
    
    $
    80,406
    
    
    $
    70,263Referral and other revenues
    
    
    804
    
    
    
    765
    
    
    
    2,286
    
    
    
    2,048Net revenues
    
    
    28,029
    
    
    
    26,185
    
    
    
    82,692
    
    
    
    72,311Operating expensesCost of revenues
    
    
    15,637
    
    
    
    14,238
    
    
    
    46,024
    
    
    
    39,568Product development
    
    
    1,835
    
    
    
    1,376
    
    
    
    5,329
    
    
    
    4,128Sales and marketing
    
    
    9,630
    
    
    
    7,719
    
    
    
    28,306
    
    
    
    22,398General and administrative
    
    
    3,357
    
    
    
    3,227
    
    
    
    11,782
    
    
    
    9,556Litigation
    
    
    3,550
    
    
    
    
    
    
    
    3,550
    
    
    
    Total operating expenses
    
    
    34,009
    
    
    
    26,560
    
    
    
    94,991
    
    
    
    75,650Income (loss) from operations
    
    
    (5,980
    )
    
    
    (375
    )
    
    
    (12,299
    )
    
    
    (3,339
    )Other income (expense), netInterest income
    
    
    1,147
    
    
    
    1,086
    
    
    
    3,329
    
    
    
    2,782Other income (expense), net
    
    
    2
    
    
    
    (8
    )
    
    
    2
    
    
    
    (8
    )Total other income, net
    
    
    1,149
    
    
    
    1,078
    
    
    
    3,331
    
    
    
    2,774Income (loss) before income taxes
    
    
    (4,831
    )
    
    
    703
    
    
    
    (8,968
    )
    
    
    (565
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    (179
    )Net income (loss)
    
    $
    (4,831
    )
    
    $
    622
    
    
    $
    (8,968
    )
    
    $
    (386
    )Net income (loss) per share:Basic
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )Weighted average common shares outstanding:Basic
    
    
    22,629
    
    
    
    20,410
    
    
    
    22,421
    
    
    
    20,356Diluted
    
    
    22,629
    
    
    
    23,478
    
    
    
    22,421
    
    
    
    20,356
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months ended September 30,2007
    
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (8,968
    )
    
    $
    (386
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activitiesDeferred income tax benefit
    
    
    
    
    
    
    (179
    )Depreciation and amortization
    
    
    2,118
    
    
    
    1,744Stock-based compensation expense
    
    
    2,862
    
    
    
    1,884Provision for doubtful accounts
    
    
    2
    
    
    
    (4
    )Amortization of short-term investment premium (discount)
    
    
    (323
    )
    
    
    (2
    )Amortization of intangible assets
    
    
    23
    
    
    
    Loss on disposal of property and equipment
    
    
    8
    
    
    
    15Equity in net loss of non-consolidated companies
    
    
    4
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (306
    )
    
    
    (308
    )Prepaid expenses and other current assets
    
    
    192
    
    
    
    421Other assets
    
    
    9
    
    
    
    (180
    )Accounts payable
    
    
    626
    
    
    
    (106
    )Accrued expenses and other liabilities
    
    
    2,510
    
    
    
    (1,614
    )Other long-term liabilities
    
    
    (12
    )
    
    
    531Net cash provided by (used in) operating activities
    
    
    (1,255
    )
    
    
    1,816Cash flows from investing activitiesPurchases of short-term investments
    
    
    (48,830
    )
    
    
    (51,102
    )Proceeds from sale and maturity of short-term investments
    
    
    51,946
    
    
    
    54,540Purchases of property and equipment
    
    
    (3,241
    )
    
    
    (3,038
    )Purchase of intangible asset
    
    
    
    
    
    
    (150
    )Investment in non-consolidated companies
    
    
    
    
    
    
    (28
    )Net cash provided by (used in) investing activities
    
    
    (125
    )
    
    
    222Cash flows from financing activitiesProceeds from stock option exercises
    
    
    95
    
    
    
    535Proceeds from common stock warrant exercises
    
    
    450
    
    
    
    Net cash provided by financing activities
    
    
    545
    
    
    
    535Net increase (decrease) in cash and cash equivalents
    
    
    (835
    )
    
    
    2,573Cash and cash equivalents at beginning of period
    
    
    8,575
    
    
    
    6,868Cash and cash equivalents at end of period
    
    $
    7,740
    
    
    $
    9,441
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
     Reclassification s
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Previously
    
    
    
    
    
    
    PreviouslyReported
    
    
    Reclassified
    
    
    Reported
    
    
    Reclassified(in thousands)Cost of revenues
    
    $
    14,238
    
    
    $
    14,238
    
    
    $
    39,568
    
    
    $
    39,568Product development
    
    
    1,284
    
    
    
    1,376
    
    
    
    3,838
    
    
    
    4,128Sales and marketing
    
    
    3,116
    
    
    
    7,719
    
    
    
    9,413
    
    
    
    22,398General and administrative
    
    
    7,922
    
    
    
    3,227
    
    
    
    22,831
    
    
    
    9,556Total operating expenses
    
    $
    26,560
    
    
    $
    26,560
    
    
    $
    75,650
    
    
    $
    75,650
 7




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Seasonality
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value Option for Financial Assets and Financial
Liabilities
 3. SHORT-TERM INVESTMENTS
  Gross
    
    
    GrossGross Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(in thousands)Money market securities
    
    $
    4,578
    
    
    $
    
    
    
    $
    
    
    
    $
    4,578Asset backed
    
    
    29,311
    
    
    
    37
    
    
    
    (40
    )
    
    
    29,308Mortgage backed
    
    
    11,763
    
    
    
    60
    
    
    
    
    
    
    
    11,823Corporate obligations
    
    
    23,763
    
    
    
    11
    
    
    
    (29
    )
    
    
    23,745US Government and agency obligations
    
    
    12,760
    
    
    
    36
    
    
    
    
    
    
    
    12,796Total short-term investments
    
    $
    82,175
    
    
    $
    144
    
    
    $
    (69
    )
    
    $
    82,250
 September 30,2007(in thousands)Recorded as:Cash equivalents
    
    $
    4,578Short-term investments
    
    
    77,672$
    82,250
   September 30,2007(in thousands)Due within one year or less
    
    $
    33,949Due after one year through two years
    
    
    16,068Due after two years through four years
    
    
    32,233$
    82,250
 8




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4. NET INCOME (LOSS) PER SHARE
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Numerator:Net income (loss)
    
    $
    (4,831
    )
    
    $
    622
    
    
    $
    (8,968
    )
    
    $
    (386
    )Denominator:Weighted average common shares outstanding:Basic
    
    
    22,629
    
    
    
    20,410
    
    
    
    22,421
    
    
    
    20,356Diluted
    
    
    22,629
    
    
    
    23,478
    
    
    
    22,421
    
    
    
    20,356Net income (loss) per share:Basic
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(in thousands)Stock options to purchase common stock
    
    
    4,203
    
    
    
    3,052
    
    
    
    4,426
    
    
    
    4,363Warrants to purchase common stock
    
    
    2,291
    
    
    
    3
    
    
    
    2,743
    
    
    
    4,603Nonvested
common shares
    
    
    42
    
    
    
    
    
    
    
    14
    
    
    
    
 5. STOCK-BASED COMPENSATION EXPENSE
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Cost of revenues
    
    $
    130
    
    
    $
    110
    
    
    $
    391
    
    
    $
    357Product development
    
    
    51
    
    
    
    48
    
    
    
    113
    
    
    
    135Sales and marketing
    
    
    218
    
    
    
    109
    
    
    
    502
    
    
    
    377General and administrative
    
    
    468
    
    
    
    448
    
    
    
    1,856
    
    
    
    1,015Total stock-based compensation expense
    
    
    867
    
    
    
    715
    
    
    
    2,862
    
    
    
    1,884Tax effect on stock-based compensation
    
    
    
    
    
    
    (286
    )
    
    
    
    
    
    
    (754
    )Net effect on net income
    
    $
    867
    
    
    $
    429
    
    
    $
    2,862
    
    
    $
    1,130Effect on earnings per share:Basic
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    0.06Diluted
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.13
    
    
    $
    0.06
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Valuation assumptions
    Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    45
    %
    
    
    51
    %
    
    
    45-51
    %
    
    
    51-52
    %Risk-free interest rate
    
    
    4.3
    %
    
    
    4.8-4.9
    %
    
    
    4.3-4.8
    %
    
    
    4.3-5.0
    %Expected life (years)
    
    
    6.1
    
    
    
    6.0-6.1
    
    
    
    5.5-6.1
    
    
    
    5.5-6.1Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted-average fair
value of options
granted during the
period
    
    $
    3.32
    
    
    $
    3.30
    
    
    $
    3.82
    
    
    $
    3.90
 Stock option and stock award activity
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber of
    
    Exercise
    
    Contractual
    
    AggregateShares
    
    Price
    
    Life (Years)
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding at January 1, 2007
    
    
    4,235
    
    
    $
    7.71
    
    
    
    8.50
    
    
    $
    5,885Options granted
    
    
    976
    
    
    
    7.37Options exercised
    
    
    (14
    )
    
    
    1.51Options forfeited or expired
    
    
    (347
    )
    
    
    9.81Outstanding at March 31, 2007
    
    
    4,850
    
    
    
    7.51
    
    
    
    8.56
    
    
    
    4,929Options granted
    
    
    425
    
    
    
    7.69Options exercised
    
    
    (37
    )
    
    
    1.36Options forfeited or expired
    
    
    (1,084
    )
    
    
    6.64Outstanding at June 30, 2007
    
    
    4,154
    
    
    
    7.81
    
    
    
    8.33
    
    
    
    4,445Options granted
    
    
    543
    
    
    
    6.68Options exercised
    
    
    (20
    )
    
    
    1.25Options forfeited or expired
    
    
    (170
    )
    
    
    8.85Outstanding at September 30, 2007
    
    
    4,507
    
    
    
    7.66
    
    
    
    8.30
    
    
    
    2,881Options exercisable at September 30, 2007
    
    
    1,909
    
    
    $
    7.38
    
    
    
    7.05
    
    
    $
    2,819
   10




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WeightedAverage Grant DateNumber of
    
    Fair ValueShares
    
    Per Share(in thousands)Nonvested at June 30, 2007
    
    
    Shares granted
    
    
    225
    
    
    $
    6.68Shares vested
    
    
    Shares forfeited
    
    
    Nonvested at September 30, 2007
    
    
    225
    
    
    $
    6.68
 Stock option plans
   Other stock options
  6. INCOME TAXES
   11




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Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement 109
 7. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Net income (loss)
    
    $
    (4,831
    )
    
    $
    622
    
    
    $
    (8,968
    )
    
    $
    (386
    )Other comprehensive income (loss):Change in accumulated
unrealized gain (loss) on
available-for-sale securities,
net of tax
    
    
    213
    
    
    
    346
    
    
    
    231
    
    
    
    322Comprehensive income (loss)
    
    $
    (4,618
    )
    
    $
    968
    
    
    $
    (8,737
    )
    
    $
    (64
    )
 8. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    Leases2007
    
    $
    5972008
    
    
    2,1722009
    
    
    1,7562010
    
    
    1,6552011
    
    
    1,656Thereafter
    
    
    615Total minimum lease payments
    
    $
    8,451
 Legal proceedings
 Lubocki, et al v. ZipRealty
 12




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##### Table of Contents



Crystal Alexander, et al. v. ZipRealty
 ZipRealty Inc., v. Squire, Sanders
& Dempsey, LLP, Michael W. Kelly Esq., et. al.
  Indemnifications
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations:
 The following discussion should be read together with our financial statements and related
notes appearing elsewhere in this report. This discussion contains forward-looking statements based
upon current expectations that involve numerous risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements for many reasons,
including but not limited to those set forth in Risk Factors in Item 1A of Part II of this report
and elsewhere in this report. Except as otherwise required by law, we do not intend to update any
information contained in these forward-looking statements.
 OVERVIEW
 General
  13




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Trends in our business
    14




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Market seasonality, cyclicality and financing influences
     16




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Income statement reclassification
  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
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Income taxes
   Stock-based compensation
 Share-Based Payment
  Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
  Recently issued accounting pronouncement
 Fair Value Option for Financial Assets and
Financial Liabilities
 18




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Statements of operations data (unaudited)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Net transaction revenues
    
    $
    27,225
    
    
    $
    25,420
    
    
    $
    80,406
    
    
    $
    70,263Referral and other revenues
    
    
    804
    
    
    
    765
    
    
    
    2,286
    
    
    
    2,048Net revenues
    
    
    28,029
    
    
    
    26,185
    
    
    
    82,692
    
    
    
    72,311Operating expenses:Cost of revenues
    
    
    15,637
    
    
    
    14,238
    
    
    
    46,024
    
    
    
    39,568Product development
    
    
    1,835
    
    
    
    1,376
    
    
    
    5,329
    
    
    
    4,128Sales and marketing
    
    
    9,630
    
    
    
    7,719
    
    
    
    28,306
    
    
    
    22,398General and administrative
    
    
    3,357
    
    
    
    3,227
    
    
    
    11,782
    
    
    
    9,556Litigation
    
    
    3,550
    
    
    
    
    
    
    
    3,550
    
    
    
    Total operating expenses
    
    
    34,009
    
    
    
    26,560
    
    
    
    94,991
    
    
    
    75,650Income (loss) from operations
    
    
    (5,980
    )
    
    
    (375
    )
    
    
    (12,299
    )
    
    
    (3,339
    )Other income (expense):Interest income
    
    
    1,147
    
    
    
    1,086
    
    
    
    3,329
    
    
    
    2,782Other expense, net
    
    
    2
    
    
    
    (8
    )
    
    
    2
    
    
    
    (8
    )Total other income, net
    
    
    1,149
    
    
    
    1,078
    
    
    
    3,331
    
    
    
    2,774Income (loss) before income taxes
    
    
    (4,831
    )
    
    
    703
    
    
    
    (8,968
    )
    
    
    (565
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    (179
    )Net income (loss)
    
    $
    (4,831
    )
    
    $
    622
    
    
    $
    (8,968
    )
    
    $
    (386
    )Net income (loss) per share:Basic
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.21
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    (0.02
    )Weighted average common shares outstanding:Basic
    
    
    22,629
    
    
    
    20,410
    
    
    
    22,421
    
    
    
    20,356Diluted
    
    
    22,629
    
    
    
    23,478
    
    
    
    22,421
    
    
    
    20,356
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Statements of operations data (unaudited)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net transaction revenues
    
    
    97.1
    %
    
    
    97.1
    %
    
    
    97.2
    %
    
    
    97.2
    %Referral and other revenues
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.8
    
    
    
    2.8Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    55.8
    
    
    
    54.4
    
    
    
    55.7
    
    
    
    54.7Product development
    
    
    6.5
    
    
    
    5.3
    
    
    
    6.4
    
    
    
    5.7Sales and marketing
    
    
    34.4
    
    
    
    29.5
    
    
    
    34.2
    
    
    
    31.0General and administrative
    
    
    12.0
    
    
    
    12.3
    
    
    
    14.2
    
    
    
    13.2Litigation
    
    
    12.7
    
    
    
    
    
    
    
    4.3
    
    
    
    Total operating expenses
    
    
    121.4
    
    
    
    101.5
    
    
    
    114.8
    
    
    
    104.6Income (loss) from operations
    
    
    (21.4
    )
    
    
    (1.5
    )
    
    
    (14.8
    )
    
    
    (4.6
    )Other income (expense):Interest income
    
    
    4.1
    
    
    
    4.1
    
    
    
    4.0
    
    
    
    3.8Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other income, net
    
    
    4.1
    
    
    
    4.1
    
    
    
    4.0
    
    
    
    3.8Income (loss) before income taxes
    
    
    (17.3
    )
    
    
    2.6
    
    
    
    (10.8
    )
    
    
    (0.8
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    (0.2
    )Net income (loss)
    
    
    (17.3
    )%
    
    
    2.3
    %
    
    
    (10.8
    )%
    
    
    (0.6
    )%
 19




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##### Table of Contents



Comparison of the three months ended September 30, 2007 and 2006
 Net transaction revenues
  Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands, except statistical data)Net transaction revenuesComparable existing markets
    
    $
    23,659
    
    
    $
    24,594
    
    
    $
    (935
    )
    
    
    (3.8
    )%New markets
    
    
    3,566
    
    
    
    826
    
    
    
    2,740
    
    
    
    331.9
    %Total
    
    $
    27,225
    
    
    $
    25,420
    
    
    $
    1,805
    
    
    
    7.1
    %Statistical dataNumber of marketsComparable existing markets
    
    
    17
    
    
    
    17
    
    
    
    New markets
    
    
    15
    
    
    
    5
    
    
    
    10Total
    
    
    32
    
    
    
    22
    
    
    
    10Number of transactions closed during the period (2)Comparable existing markets
    
    
    3,167
    
    
    
    3,304
    
    
    
    (137
    )
    
    
    (4.1
    )%New markets
    
    
    662
    
    
    
    163
    
    
    
    499
    
    
    
    306.1
    %Total
    
    
    3,829
    
    
    
    3,467
    
    
    
    362
    
    
    
    10.4
    %Average net revenue per transaction (3)Comparable existing markets
    
    $
    7,471
    
    
    $
    7,444
    
    
    $
    27
    
    
    
    0.4
    %New markets
    
    
    5,387
    
    
    
    5,066
    
    
    
    321
    
    
    
    6.3
    %All markets
    
    $
    7,110
    
    
    $
    7,332
    
    
    $
    (221
    )
    
    
    (3.0
    )%
 
 (1)
    
    Comparable existing markets consist of Atlanta GA, Baltimore MD, Boston MA, Chicago IL,
Dallas TX, Fresno/Central Valley CA, Los Angeles CA, Houston TX, Las Vegas NV, Miami FL,
Orange County CA, Phoenix AZ, Sacramento CA, San Diego CA, San Francisco Bay Area CA, Seattle
WA and Washington DC. New markets are transferred to existing markets on January 1st following
the completion of their first full calendar year. The Las Vegas, Houston and Miami markets
opened during 2005 and, therefore, completed their first full calendar year at of the end of
2006. Accordingly, these markets were moved to existing markets as of January 1, 2007 and are
included in comparable existing markets for all periods presented. New markets and the month
opened consist of: Tampa, FL
    
    February 2006Orlando, FL
    
    April 2006Minneapolis, MN
    
    May 2006Austin, TX
    
    July 2006Palm Beach, FL
    
    September 2006Greater Philadelphia Area, PA
    
    December 2006Naples, FL
    
    March 2007Tucson, AZ
    
    March 2007Denver, CO
    
    April 2007Jacksonville, FL
    
    May 2007Salt Lake City, UT
    
    July 2007Richmond, VA
    
    July 2007Virginia Beach, VA
    
    August 2007Charlotte, NC
    
    August 2007Raleigh-Durham, NC
    
    September 2007
 
 (2)
    
    The term transaction refers to each representation of a buyer or seller in a real estate
purchase or sale.(3)
    
    Average net revenue per transaction equals net transaction revenues divided by number of
transactions with respect to each period. 20




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##### Table of Contents



Referral and other revenues
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Referral and other revenues
    
    $
    804
    
    
    $
    765
    
    
    $
    39
    
    
    
    5.0
    %
   Cost of revenues
  Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Cost of revenuesComparable existing markets
    
    $
    13,712
    
    
    $
    13,818
    
    
    $
    (106
    )
    
    
    (0.8
    )%New markets
    
    
    1,925
    
    
    
    420
    
    
    
    1,505
    
    
    
    357.8
    %Total
    
    $
    15,637
    
    
    $
    14,238
    
    
    $
    1,399
    
    
    
    9.8
    %
     21




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##### Table of Contents



Product development
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Product development
    
    $
    1,835
    
    
    $
    1,376
    
    
    $
    459
    
    
    
    33.4
    %
   Sales and marketing
  Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Sales and marketingComparable existing markets
    
    $
    5,536
    
    
    $
    5,311
    
    
    $
    225
    
    
    
    4.2
    %New markets
    
    
    2,466
    
    
    
    898
    
    
    
    1,568
    
    
    
    174.7
    %Regional sales support and marketing
    
    
    1,628
    
    
    
    1,510
    
    
    
    118
    
    
    
    7.8
    %Total
    
    $
    9,630
    
    
    $
    7,719
    
    
    $
    1,911
    
    
    
    24.8
    %
      General and administrative
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)General and administrative
    
    $
    3,357
    
    
    $
    3,227
    
    
    $
    130
    
    
    
    4.0
    %
 22




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##### Table of Contents



Litigation
 Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Litigation
    

    
 $
    3,550
 

    
 $
    
 

    
 $
    3,550
 
    
    100.0
    %
  Interest income
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Interest income
    
    $
    1,147
    
    
    $
    1,086
    
    
    $
    61
    
    
    
    5.7
    %
  Other income (expense), net
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Other income (expense), net
    
    $
    2
    
    
    $
    (8
    )
    
    $
    10
    
    
    
    120.4
    %
 Provision for (benefit from) income taxes
  Three Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Provision for income taxes
    

    
 $
    
 

    
  $
    81
  
    $
    (81
    )
    
    
    100.0
    %
  23




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##### Table of Contents



Comparison of the nine months ended September 30, 2007 and 2006
 Net revenues
  Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands, except statistical data)Net transaction revenuesComparable existing markets
    
    $
    72,269
    
    
    $
    69,228
    
    
    $
    3,041
    
    
    
    4.4
    %New markets
    
    
    8,137
    
    
    
    1,035
    
    
    
    7,102
    
    
    
    686.7
    %Total
    
    $
    80,406
    
    
    $
    70,263
    
    
    $
    10,143
    
    
    
    14.4
    %Statistical dataNumber of marketsComparable existing markets
    
    
    17
    
    
    
    17
    
    
    
    New markets
    
    
    15
    
    
    
    5
    
    
    
    10Total
    
    
    32
    
    
    
    22
    
    
    
    10Number of transactions closed during the period (2)Comparable existing markets
    
    
    9,441
    
    
    
    9,456
    
    
    
    (15
    )
    
    
    (0.2
    )%New markets
    
    
    1,486
    
    
    
    201
    
    
    
    1,285
    
    
    
    639.3
    %Total
    
    
    10,927
    
    
    
    9,657
    
    
    
    1,270
    
    
    
    13.2
    %Average net revenue per transaction (3)Comparable existing markets
    
    $
    7,655
    
    
    $
    7,321
    
    
    $
    334
    
    
    
    4.6
    %New markets
    
    
    5,476
    
    
    
    5,146
    
    
    
    330
    
    
    
    6.4
    %All markets
    
    $
    7,359
    
    
    $
    7,276
    
    
    $
    83
    
    
    
    1.1
    %
 
 (1)
    
    Comparable existing markets consist of Atlanta GA, Baltimore MD, Boston MA, Chicago IL,
Dallas TX, Fresno/Central Valley CA, Los Angeles CA, Houston TX, Las Vegas NV, Miami FL,
Orange County CA, Phoenix AZ, Sacramento CA, San Diego CA, San Francisco Bay Area CA, Seattle
WA and Washington DC. New markets are transferred to existing markets on January 1st following
the completion of their first full calendar year. The Las Vegas, Houston and Miami markets
opened during 2005 and, therefore, completed their first full calendar year at of the end of
2006. Accordingly, these markets were moved to existing markets as of January 1, 2007 and are
included in comparable existing markets for all periods presented. New markets and the month
opened consist of: Tampa, FL
    
    February 2006Orlando, FL
    
    April 2006Minneapolis, MN
    
    May 2006
 24




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##### Table of Contents



Austin, TX
    
    July 2006Palm Beach, FL
    
    September 2006Greater Philadelphia Area, PA
    
    December 2006Naples, FL
    
    March 2007Tucson, AZ
    
    March 2007Denver, CO
    
    April 2007Jacksonville, FL
    
    May 2007Salt Lake City, UT
    
    July 2007Richmond, VA
    
    July 2007Virginia Beach, VA
    
    August 2007Charlotte, NC
    
    August 2007Raleigh-Durham, NC
    
    September 2007
 
 (2)
    
    The term transaction refers to each representation of a buyer or seller in a real estate
purchase or sale.(3)
    
    Average net revenue per transaction equals net transaction revenues divided by number of
transactions with respect to each period.    Referral and other revenues
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Referral and other revenues
    
    $
    2,286
    
    
    $
    2,048
    
    
    $
    238
    
    
    
    11.6
    %
  Cost of revenues
  Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Cost of revenuesComparable existing markets
    
    $
    41,641
    
    
    $
    39,045
    
    
    $
    2,596
    
    
    
    6.7
    %New markets
    
    
    4,383
    
    
    
    523
    
    
    
    3,860
    
    
    
    736.8
    %Total
    
    $
    46,024
    
    
    $
    39,568
    
    
    $
    6,456
    
    
    
    16.3
    %
    25




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##### Table of Contents



Product development
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Product development
    

    
  $
    5,329
  

    
    $
    4,128
    

    
    $
    1,201
    
    
    29.1
    %
  Sales and marketing
  Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Sales and marketingComparable existing markets
    
    $
    17,293
    
    
    $
    16,391
    
    
    $
    902
    
    
    
    5.5
    %New markets
    
    
    5,885
    
    
    
    1,693
    
    
    
    4,192
    
    
    
    247.6
    %Regional sales support and marketing
    
    
    5,128
    
    
    
    4,314
    
    
    
    814
    
    
    
    18.9
    %Total
    
    $
    28,306
    
    
    $
    22,398
    
    
    $
    5,908
    
    
    
    26.4
    %
     General and administrative
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)General and administrative
    

    
 $
    11,782
 

    
 $
    9,556
 

    
  $
    2,226
  
    
    23.3
    %
  26




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##### Table of Contents



Litigation
 Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Litigation
    

    
 $
    3,550
 

    
    $
    
    

    
    $
    3,550
    
    

    
    100.0%
  Interest income
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Interest income
    

    

  $
    3,329
  

    
    $
    2,782
    

    
    $
    547
    
    

    
    19.7%
  Other income (expense), net
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Other income (expense), net
    

    
 $
    2
 

    
 $
    (8)
    

    
  $
    10
  

    
 
    120.4%
 Provision for (benefit from) income taxes
  Nine Months EndedSeptember 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Provision benefit from income taxes
    

    
 $
    
 

    

 $
    (179)
 
 
    $
    (179)
    

    

    
 (100.0)%
  27




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LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
    Investing activities
    28




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##### Table of Contents



Financing activities
   Future needs
  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More than1 year
    
    1 to 3 years
    
    3 to 5 years
    
    5 years
    
    Total(in thousands)Minimum lease payments
    

    
  $
    2,299
  

    
    $
    3,464
    

    
    $
    2,619
    

    
 $
    69
 

    
  $
    8,451
 OFF-BALANCE SHEET ARRANGEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk:
 Interest rate sensitivity
   29




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##### Table of Contents



Exchange rate sensitivity
  
 Item 4. Controls and Procedures:
 Disclosure controls and procedures
 Changes in internal control over financial reporting
 
 PART II  OTHER INFORMATION
 Item 1. Legal Proceedings:
 Lubocki, et al v. ZipRealty
 30




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##### Table of Contents



Crystal Alexander, et al. v. ZipRealty
 ZipRealty Inc., v. Squire, Sanders
& Dempsey, LLP, Michael W. Kelly Esq., et. al.
  
 Item 1A. Risk Factors:
  RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We have experienced losses in recent 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.
  31




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##### Table of Contents



®
 ®
  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.
  Our business could be harmed by transitions in the real estate markets and economic events that
are out of our control and may be difficult to predict.
  32




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##### Table of Contents



®
 The recent tightening in the availability of credit, particularly with respect to lenders in the
mortgage market, may negatively impact the housing market.
  Foreclosures and short sales may cause significant disruption in our business.
  Our business model is new and unproven, and we cannot guarantee our future success.
  33




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##### Table of Contents



If we fail to recruit, hire and retain qualified agents, we may be unable to service our clients
and our growth could be impaired.
   We may incur additional expenses or liabilities if our current or former compensation or expense
allowance or reimbursement policies are found to violate federal or state wage and hour laws.
  Our failure to effectively manage the growth of our ZipAgents and related technology could
adversely affect our ability to service our clients.
  34




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##### Table of Contents



Our failure to effectively manage the growth of our control systems could adversely affect our
ability to maintain legal compliance.
  If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our licenses to operate.
  We may have liabilities in connection with real estate brokerage activities.
  We may have liabilities if any of our employees violates laws concerning settlement procedures.
  35




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##### Table of Contents



If any of our core services fails to comply with applicable federal and state law and regulations,
we may incur significant financial penalties or lose licenses required to provide these services.
    We may have liabilities in connection with our performance of core services.
  36




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##### Table of Contents



If our arrangements for providing core services become impaired, we may lose sources of revenue
that may be difficult to replace and we may be less likely to engage in related transactions with
our clients.
  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.
 37




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##### Table of Contents



Unless we develop, maintain and protect a strong brand identity, our business may not grow and our
financial results may suffer.
   We have numerous competitors, many of which have valuable industry relationships, innovative
business models and access to greater resources than we do.
  Trends.
 ®
 38




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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.
  We derive a significant portion of our leads through third parties, and if any of our significant
lead generation relationships are terminated, impaired or become more expensive, our ability to
attract new clients and grow our business may be adversely affected.
  Our ability to expand our business may be limited by state laws governing cash rebates to home
buyers.
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We may be subject to liability for the Internet content that we publish.
  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.
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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 of home buyers
and sellers, real estate agents and related service providers during these periods;
    
    a desire to relocate prior to the start of the school year;
    
    inclement weather, which can influence consumers desire or ability to visit properties;
    
    timing of employment compensation changes, such as raises and bonuses;
    
    the time between entry into a purchase contract for real estate and closing of the
transaction; and
    
    the levels of housing inventory available for sale.
  Our reputation and client and agent service offerings may be harmed by system failures and
computer viruses.
  Our business is geographically concentrated, which makes us more susceptible to business
interruption and financial loss due to natural disasters, inclement weather, economic or market
conditions or other regional events outside of our control.
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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;
    
    seek a license for the infringing technology; or
    
    develop alternative non-infringing technology.
  We have undergone significant management transitions recently and need to successfully integrate
new members of the management team as well as retain key personnel or our business could be
harmed.
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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.
 The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  As we implement changes in our agent compensation policies, we may incent behaviors that cause a
decrease in our profit margin with the goal of increasing our profits.
  OTHER RISKS RELATED TO OUR STOCK PRICE
 Our stock price may be volatile.
  
    
    variations in our quarterly results of operations;
    
    announcements by us or our competitors or lead source providers;
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
    
    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.
    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.
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Our charter documents and Delaware law could prevent a takeover that stockholders consider
favorable and could also reduce the market price of our stock.
  
    
    providing for a classified board of directors with staggered, three-year terms;
    
    not providing for cumulative voting in the election of directors;
    
    authorizing the board to issue, without stockholder approval, preferred stock with rights
senior to those of common stock;
    
    prohibiting stockholder action by written consent;
    
    limiting the persons who may call special meetings of stockholders; and
    
    requiring advance notification of stockholder nominations and proposals.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
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Item 5. Other Information:
  
 Item 6. Exhibits:
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SIGNATURE
  ZIPREALTY, INC.By:
    /s/ David A. RectorDavid A. RectorSenior Vice President and
Chief Financial Officer  47




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Exhibit Index
 Exhibit number
    
    Description3.1(a)(1)
    
    Amended and Restated Certificate of Incorporation3.2(a)(1)
    
    Bylaws10.1(2)*
    
    Separation Agreement and Release with Richard W. Williams dated September 14, 200710.2(2)*
    
    Restricted Stock Award Agreement with J. Patrick Lashinsky dated September 13, 200710.3(2)*
    
    Stock Option Award Agreement with J. Patrick Lashinsky dated September 13, 200731.1
    
    Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer, as required by Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350)32.2
    
    Certification of 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.(2)
    
    Incorporated by reference to the exhibit of the same number to the Registrants Current
Report on Form 8-K (File No. 000-51002) filed with the Securities and Exchange Commission on
September 19, 2007.*
    
    Identifies a management contract or compensatory plan or agreement required to be filed as an
exhibit of this report. 48