##### 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 June 30, 2006
 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(State of incorporation)
    
    94-3319956(IRS employer identification number)2000 POWELL STEET, 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 June 30, 2006 and December 31, 2005
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,
2006 and 2005
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    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
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBITS
INDEX
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Statement regarding forward-looking statements
  
    
    our future financial results;
    
    our future growth and expansion into new markets;
    
    our future advertising and marketing activities; and
    
    our future investment in technology.
   Trademarks
  Internet Site
 www.ziprealty.com
 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
 June 30,
    
    
    December 31,2006
    
    
    2005(in thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    13,728
    
    
    $
    6,868Short-term investments
    
    
    72,675
    
    
    
    82,041Accounts receivable, net of allowance of $65
and $42 at June 30, 2006 and December 31,
2005, respectively
    
    
    2,506
    
    
    
    1,634Prepaid expenses and other current assets
    
    
    2,790
    
    
    
    3,138Current and deferred income taxes
    
    
    761
    
    
    
    500Total current assets
    
    
    92,460
    
    
    
    94,181Restricted cash
    
    
    90
    
    
    
    90Property and equipment, net
    
    
    4,074
    
    
    
    2,538Investment in non-consolidated companies
    
    
    37
    
    
    
    Deferred tax assets, net
    
    
    17,053
    
    
    
    17,053Other assets
    
    
    132
    
    
    
    91Total assets
    
    $
    113,846
    
    
    $
    113,953Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    1,329
    
    
    $
    1,631Accrued expenses
    
    
    7,628
    
    
    
    8,503Total current liabilities
    
    
    8,957
    
    
    
    10,134Other long-term liabilities
    
    
    590
    
    
    
    38Total liabilities
    
    
    9,547
    
    
    
    10,172Commitments and contingencies (Note 7)Stockholders equityCommon stock: $0.001 par value; 100,000
shares authorized; 20,395 and 20,273 shares
issued and outstanding at June 30, 2006 and
December 31, 2005, respectively
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    131,542
    
    
    
    130,077Common stock warrants
    
    
    6,094
    
    
    
    6,094Deferred stock-based compensation
    
    
    (172
    )
    
    
    (257
    )Accumulated other comprehensive loss
    
    
    (514
    )
    
    
    (490
    )Accumulated deficit
    
    
    (32,671
    )
    
    
    (31,663
    )Total stockholders equity
    
    
    104,299
    
    
    
    103,781Total liabilities and stockholders equity
    
    $
    113,846
    
    
    $
    113,953
  4




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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share amounts)Net transaction revenues
    
    $
    26,195
    
    
    $
    25,228
    
    
    $
    44,843
    
    
    $
    42,546Referral and other revenues
    
    
    714
    
    
    
    529
    
    
    
    1,283
    
    
    
    1,029Net revenues
    
    
    26,909
    
    
    
    25,757
    
    
    
    46,126
    
    
    
    43,575Operating expensesCost of revenues
    
    
    14,590
    
    
    
    13,829
    
    
    
    25,330
    
    
    
    23,902Product development
    
    
    1,275
    
    
    
    611
    
    
    
    2,554
    
    
    
    1,205Marketing and business development
    
    
    3,224
    
    
    
    3,286
    
    
    
    6,297
    
    
    
    6,092General and administrative
    
    
    7,478
    
    
    
    5,483
    
    
    
    14,909
    
    
    
    9,745Litigation
    
    
    
    
    
    
    4,164
    
    
    
    
    
    
    
    4,164Total operating expenses
    
    
    26,567
    
    
    
    27,373
    
    
    
    49,090
    
    
    
    45,108Income (loss) from operations
    
    
    342
    
    
    
    (1,616
    )
    
    
    (2,964
    )
    
    
    (1,533
    )Other income (expense), netInterest income
    
    
    896
    
    
    
    652
    
    
    
    1,696
    
    
    
    1,252Other expense, net
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Total other income (expense), net
    
    
    896
    
    
    
    651
    
    
    
    1,696
    
    
    
    1,249Income (loss) before income taxes
    
    
    1,238
    
    
    
    (965
    )
    
    
    (1,268
    )
    
    
    (284
    )Provision for (benefit from) income taxes
    
    
    1,458
    
    
    
    (19
    )
    
    
    (260
    )
    
    
    Net loss
    
    $
    (220
    )
    
    $
    (946
    )
    
    $
    (1,008
    )
    
    $
    (284
    )Net loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )Weighted average common shares outstanding:Basic
    
    
    20,366
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001Diluted
    
    
    20,366
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six months ended June 30,2006
    
    
    2005(in thousands)Cash flows from operating activitiesNet loss
    
    $
    (1,008
    )
    
    $
    (284
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activitiesDeferred income tax benefit
    
    
    (261
    )
    
    
    Depreciation and amortization
    
    
    1,124
    
    
    
    643Stock-based compensation expense
    
    
    1,169
    
    
    
    71Provision for doubtful accounts
    
    
    23
    
    
    
    26Amortization of short-term investment premium
    
    
    72
    
    
    
    376Changes in operating assets and liabilitiesAccounts receivable
    
    
    (895
    )
    
    
    (1,198
    )Prepaid expenses and other current assets
    
    
    348
    
    
    
    (229
    )Other assets
    
    
    (41
    )
    
    
    Accounts payable
    
    
    (302
    )
    
    
    (307
    )Accrued expenses
    
    
    (875
    )
    
    
    5,868Other long-term liabilities
    
    
    552
    
    
    
    (29
    )Net cash provided by (used in) operating activities
    
    
    (94
    )
    
    
    4,937Cash flows from investing activitiesPurchases of short-term investments
    
    
    (31,553
    )
    
    
    (17,094
    )Proceeds from sale and maturity of short-term investments
    
    
    40,823
    
    
    
    6,959Purchases of property and equipment
    
    
    (2,660
    )
    
    
    (1,383
    )Investment in non-consolidated companies
    
    
    (37
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    6,573
    
    
    
    (11,518
    )Cash flows from financing activitiesProceeds from stock option exercises
    
    
    381
    
    
    
    314Proceeds from common stock warrant exercises
    
    
    
    
    
    
    11Net cash provided by financing activities
    
    
    381
    
    
    
    325Net increase (decrease) in cash and cash equivalents
    
    
    6,860
    
    
    
    (6,256
    )Cash and cash equivalents at beginning of period
    
    
    6,868
    
    
    
    11,525Cash and cash equivalents at end of period
    
    $
    13,728
    
    
    $
    5,269
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
     Reclassifications
  Stock split
  Initial public offering
     Seasonality
  7




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2. SHORT-TERM INVESTMENTS
  Gross
    
    
    GrossGross Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(in thousands)Money market securities
    
    $
    3,987
    
    
    $
    
    
    
    $
    
    
    
    $
    3,987Repurchase agreements
    
    
    5,318
    
    
    
    
    
    
    
    
    
    
    
    5,318Asset backed
    
    
    25,443
    
    
    
    
    
    
    
    (92
    )
    
    
    25,351Corporate obligations
    
    
    27,669
    
    
    
    
    
    
    
    (219
    )
    
    
    27,450US Government and agency obligations
    
    
    20,077
    
    
    
    
    
    
    
    (203
    )
    
    
    19,874Total short-term investments
    
    $
    82,494
    
    
    $
    
    
    
    $
    (514
    )
    
    $
    81,980
 June 30,2006(in thousands)Recorded as:Cash equivalents
    
    $
    9,305Short-term investments
    
    
    72,675$
    81,980
   June 30,2006(in thousands)Due within one year or less
    
    $
    34,956Due after one year through two years
    
    
    24,481Due after two years through four years
    
    
    22,543$
    81,980
 3. NET INCOME (LOSS) PER SHARE
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Numerator:Net loss
    
    $
    (220
    )
    
    $
    (946
    )
    
    $
    (1,008
    )
    
    $
    (284
    )Denominator:Weighted average common shares outstanding:Basic
    
    
    20,366
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001Diluted
    
    
    20,366
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001Net loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )
  8




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Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005(in thousands)Stock options to purchase common stock
    
    
    4,305
    
    
    
    3,491
    
    
    
    4,206
    
    
    
    3,451Warrants to purchase common stock
    
    
    4,603
    
    
    
    4,807
    
    
    
    4,603
    
    
    
    4,808
 4. 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
 Prior to the adoption of SFAS 123(R)
 Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving Stock Compensation  an
Interpretation of APB No. 25 Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation  Transaction and Disclosure
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302005
    
    
    2005Net loss as reported
    
    $
    (946
    )
    
    $
    (284
    )Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards, net
of tax
    
    
    (272
    )
    
    
    (501
    )Pro forma net loss
    
    $
    (1,218
    )
    
    $
    (785
    )Net loss per share, as reported:Basic
    
    $
    (0.05
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )Pro forma loss per share:Basic
    
    $
    (0.06
    )
    
    $
    (0.04
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.04
    )
  9




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##### Table of Contents



Impact of the Adoption of SFAS 123(R)
  
    
    compensation cost for all unvested stock-based awards as of January 1, 2006 that were
granted subsequent to the Companys filing of the registration statement for an initial
public offering in May 2004, and prior to January 1, 2006, that vested during the period
based on the grant date fair value estimated in accordance with the original provisions of
SFAS 123;
    
    compensation cost for stock-based awards granted subsequent to January 1, 2006, that
vested during the period based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R); and
    
    compensation cost for options granted prior to the Companys filing of the registration
statement for an initial public offering in May 2004, that vested during the period based on
the intrinsic value method.
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006(in thousands)
    
    
    (in thousands)Cost of revenues
    
    $
    127
    
    
    $
    247Product development
    
    
    45
    
    
    
    87Marketing and business development
    
    
    25
    
    
    
    52General and administrative
    
    
    416
    
    
    
    783Total stock-based compensation
    
    
    613
    
    
    
    1,169Tax effect
on stock-based compensation
    
    
    (245
    )
    
    
    (468
    )Net effect on net income
    
    $
    368
    
    
    $
    701Effect on earnings per share:Basic
    
    $
    0.02
    
    
    $
    0.03Diluted
    
    $
    0.02
    
    
    $
    0.03
  Valuation Assumptions
    10




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Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    52%
    
    
    
    36%
    
    
    
    52%
    
    
    
    33-36%Risk-free interest rate
    
    
    5.0%
    
    
    
    3.8%
    
    
    
    4.3-5.0%
    
    
    
    3.8-4.1%Expected life (years)
    
    
    5.5-6.1
    
    
    
    4
    
    
    
    5.5-6.1
    
    
    
    4Expected dividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%
    
    
    
    0%Weighted-average fair value of options granted during the period
    
    
    $4.78
    
    
    
    $4.71
    
    
    
    $4.68
    
    
    
    $4.73
 Stock Option Activity
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber of
    
    Exercise
    
    Contractual
    
    AggregateShares
    
    Price
    
    Life (Years)
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    3,652
    
    
    $
    7.01Options granted
    
    
    653
    
    
    $
    8.41Options exercised
    
    
    (45
    )
    
    $
    3.18Options forfeited or expired
    
    
    (82
    )
    
    $
    11.88Outstanding at March 31, 2006
    
    
    4,178
    
    
    $
    7.17
    
    
    
    7.68
    
    
    
    13,778Options granted
    
    
    474
    
    
    $
    8.80Options exercised
    
    
    (77
    )
    
    $
    3.08Options forfeited or expired
    
    
    (113
    )
    
    $
    11.22Outstanding at June 30, 2006
    
    
    4,462
    
    
    $
    7.31
    
    
    
    7.66
    
    
    
    12,442Options exercisable at June 30, 2006
    
    
    2,298
    
    
    $
    4.35
    
    
    
    6.33
    
    
    
    11,903
   Stock
Option Plans
    11




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##### Table of Contents



5. INCOME TAXES
   6. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net loss
    
    $
    (220
    )
    
    $
    (946
    )
    
    $
    (1,008
    )
    
    $
    (284
    )Other comprehensive loss:Change in accumulated
unrealized gain
(loss) on
available-for-sale
securities, net of
tax
    
    
    (47
    )
    
    
    127
    
    
    
    (24
    )
    
    
    (236
    )Comprehensive loss
    
    $
    (267
    )
    
    $
    (819
    )
    
    $
    (1,032
    )
    
    $
    (520
    )
 7. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    Leases2006
    
    $
    7612007
    
    
    1,5182008
    
    
    1,2322009
    
    
    7932010
    
    
    739Thereafter
    
    
    781Total minimum lease payments
    
    $
    5,824
 12




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##### Table of Contents



Legal Proceedings
  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. We undertake no obligation 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 interest rate influences
     15




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Recent accounting pronouncements
  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
 Stock-based compensation
 Share-Based
Payment Accounting for
Stock Issued to Employees
 16




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##### Table of Contents




    
    compensation cost for all unvested stock-based awards as of January 1, 2006 that
were granted subsequent to our filing of the registration statement for
an initial public offering in May 2004, and prior to January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123;
    
    compensation cost for stock-based awards granted subsequent, to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of SFAS
123(R); and
    
    compensation cost for options granted prior to our filing of the registration statement for
an initial public offering in May 2004, based on the intrinsic
value method.
  Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
   
    
    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
  17




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Statements of operations data (unaudited)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Net transaction revenues
    
    $
    26,195
    
    
    $
    25,228
    
    
    $
    44,843
    
    
    $
    42,546Referral and other revenues
    
    
    714
    
    
    
    529
    
    
    
    1,283
    
    
    
    1,029Net revenues
    
    
    26,909
    
    
    
    25,757
    
    
    
    46,126
    
    
    
    43,575Operating expenses:Cost of revenues
    
    
    14,590
    
    
    
    13,829
    
    
    
    25,330
    
    
    
    23,902Product development
    
    
    1,275
    
    
    
    611
    
    
    
    2,554
    
    
    
    1,205Marketing and business development
    
    
    3,224
    
    
    
    3,286
    
    
    
    6,297
    
    
    
    6,092General and administrative
    
    
    7,478
    
    
    
    5,483
    
    
    
    14,909
    
    
    
    9,745Litigation
    
    
    
    
    
    
    4,164
    
    
    
    
    
    
    
    4,164Total operating expenses
    
    
    26,567
    
    
    
    27,373
    
    
    
    49,090
    
    
    
    45,108Income (loss) from operations
    
    
    342
    
    
    
    (1,616
    )
    
    
    (2,964
    )
    
    
    (1,533
    )Other income (expense):Interest income
    
    
    896
    
    
    
    652
    
    
    
    1,696
    
    
    
    1,252Other expense, net
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Total other income (expense), net
    
    
    896
    
    
    
    651
    
    
    
    1,696
    
    
    
    1,249Income (loss) before income taxes
    
    
    1,238
    
    
    
    (965
    )
    
    
    (1,268
    )
    
    
    (284
    )Provision (benefit) for income taxes
    
    
    1,458
    
    
    
    (19
    )
    
    
    (260
    )
    
    
    Net loss
    
    $
    (220
    )
    
    $
    (946
    )
    
    $
    (1,008
    )
    
    $
    (284
    )Net loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.01
    )Weighted average common shares outstanding:Basic
    
    
    20,336
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001Diluted
    
    
    20,336
    
    
    
    20,005
    
    
    
    20,329
    
    
    
    20,001
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Statements of operations data (unaudited)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net transaction revenues
    
    
    97.3
    %
    
    
    97.9
    %
    
    
    97.2
    %
    
    
    97.6
    %Referral and other revenues
    
    
    2.7
    
    
    
    2.1
    
    
    
    2.8
    
    
    
    2.4Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    54.2
    
    
    
    53.7
    
    
    
    54.9
    
    
    
    54.9Product development
    
    
    4.7
    
    
    
    2.4
    
    
    
    5.5
    
    
    
    2.8Marketing and business development
    
    
    12.0
    
    
    
    12.8
    
    
    
    13.7
    
    
    
    14.0General and administrative
    
    
    27.8
    
    
    
    21.3
    
    
    
    32.3
    
    
    
    22.4Litigation
    
    
    
    
    
    
    16.2
    
    
    
    
    
    
    
    9.6Total operating expenses
    
    
    98.7
    
    
    
    106.4
    
    
    
    106.4
    
    
    
    103.7Income (loss) from operations
    
    
    1.3
    
    
    
    (6.4
    )
    
    
    (6.4
    )
    
    
    (3.7
    )Other income (expense):Interest income
    
    
    3.3
    
    
    
    2.5
    
    
    
    3.7
    
    
    
    2.9Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 18




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Statements of operations data (unaudited)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Total other income (expense), net
    
    
    3.3
    
    
    
    2.5
    
    
    
    3.7
    
    
    
    2.9Income (loss) before income taxes
    
    
    4.6
    
    
    
    (3.9
    )
    
    
    (2.7
    )
    
    
    (0.8
    )Provision for (benefit from) income taxes
    
    
    5.4
    
    
    
    0.1
    
    
    
    (0.6
    )
    
    
    Net loss
    
    
    (0.8
    )%
    
    
    (3.8
    )%
    
    
    (2.1
    )%
    
    
    (0.8
    )%
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Other operating data
    
    2006
    
    2005
    
    2006
    
    2005Number of ZipAgents at end of period
    
    
    1,669
    
    
    
    1,235
    
    
    
    1,669
    
    
    
    1,235Total value of real estate transactions closed during period (in billions)
    
    $
    1.26
    
    
    $
    1.24
    
    
    $
    2.16
    
    
    $
    2.07Number of transactions closed during period (1)
    
    
    3,552
    
    
    
    3,375
    
    
    
    6,190
    
    
    
    5,718Average net revenue per transaction during period (2)
    
    $
    7,375
    
    
    $
    7,475
    
    
    $
    7,244
    
    
    $
    7,441
 
 (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 three months ended June 30, 2006 and 2005
 Net revenues
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Net revenues
    
    $
    26,909
    
    
    $
    25,757
    
    
    $
    1,152
    
    
    
    4.5
    %
   Cost of revenues
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Cost of revenues
    
    $
    14,590
    
    
    $
    13,829
    
    
    $
    761
    
    
    
    5.5
    %
  19




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Product development
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Product development
    
    $
    1,275
    
    
    $
    611
    
    
    $
    664
    
    
    
    108.6
    %
    Marketing and business development
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Marketing and business development
    
    $
    3,224
    
    
    $
    3,286
    
    
    $
    (62
    )
    
    
    (1.9
    )%
    General and administrative
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)General and administrative
    
    $
    7,478
    
    
    $
    5,483
    
    
    $
    1,995
    
    
    
    36.4
    %
  20




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Litigation
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Litigation
    
    $
    
    
    
    $
    4,164
    
    
    $
    (4,164
    )
    
    
    (100.0
    )%
  Interest income
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Interest income
    
    $
    896
    
    
    $
    652
    
    
    $
    244
    
    
    
    37.5
    %
  Other income (expense), net
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Other income (expense), net
    
    $
    
    
    
    $
    (1
    )
    
    $
    1
    
    
    
    (100.0
    )%
  Provision for income taxes
 Three Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Provision for (benefit from) income taxes
    
    $
    1,458
    
    
    $
    (19
    )
    
    $
    1,477
    
    
    
    (7,773.7
    )%


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Comparison of the six months ended June 30, 2006 and 2005
 Net revenues
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Net revenues
    
    $
    46,126
    
    
    $
    43,575
    
    
    $
    2,551
    
    
    
    5.9
    %
  Cost of revenues
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Cost of revenues
    
    $
    25,330
    
    
    $
    23,902
    
    
    $
    1,428
    
    
    
    6.0
    %
   Product development
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Product development
    
    $
    2,554
    
    
    $
    1,205
    
    
    $
    1,349
    
    
    
    111.9
    %
   22




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##### Table of Contents



Marketing and business development
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Marketing and business development
    
    $
    6,297
    
    
    $
    6,092
    
    
    $
    205
    
    
    
    3.4
    %
   General and administrative
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)General and administrative
    
    $
    14,909
    
    
    $
    9,745
    
    
    $
    5,164
    
    
    
    53.0
    %
   Litigation
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005_
    
    (Decrease)
    
    Change(in thousands)Litigation
    
    $
    
    
    
    $
    4,164
    
    
    $
    (4,164
    )
    
    
    (100.0
    )%
  23




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Interest income
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Interest income
    
    $
    1,696
    
    
    $
    1,252
    
    
    $
    444
    
    
    
    35.5
    %
  Other income (expense), net
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Other income (expense), net
    
    $
    
    
    
    $
    (3
    )
    
    $
    3
    
    
    
    (100.0
    )%
  Provision for income taxes
 Six Months EndedJune 30,
    
    Increase
    
    Percent2006
    
    2005
    
    (Decrease)
    
    Change(in thousands)Provision for income taxes
    
    $
    (260
    )
    
    $
    
    
    
    $
    (260
    )
    
    
    
  LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
    24




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Investing activities
    Financing activities
   Future needs
  25




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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)Operating lease commitments
    
    $
    1,519
    
    
    $
    2,420
    
    
    $
    1,465
    
    
    $
    420
    
    
    $
    5,824
 OFF-BALANCE SHEET ARRANGEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk:
 Interest rate sensitivity
   Exchange rate sensitivity
  
 Item 4. Controls and Procedures:
 Disclosure controls and procedures
 Changes in internal control over financial reporting
 26




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##### Table of Contents



PART
II  OTHER INFORMATION
 
 Item 1. Legal Proceedings:
  
 Item 1A. Risk Factors:
  RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We have been profitable in only eight 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.
   27




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®
 Our business could be harmed by transitions in the real estate markets and economic events that
are out of our control and may be difficult to predict.
   Interest rates were at historic lows for the past several years, and increases in interest rates
have the potential to negatively impact the housing market.
  28




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##### Table of Contents



Our business model is new and unproven, and we cannot guarantee our future success.
  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 related technology could
adversely affect our ability to service our clients.
  29




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##### Table of Contents



Our failure to effectively manage the growth of our control systems could adversely affect our
ability to service our clients.
  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.
  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.
 30




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##### Table of Contents




    
    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.
   31




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##### Table of Contents



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.
  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.
 32




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##### Table of Contents



Our ability to expand our business may be limited by state laws governing cash rebates to home
buyers.
  We may be unable to integrate our technology with each MLS on a cost-effective basis, which may
harm our operating results and adversely affect our ability to service clients.
  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.
  33




---



##### Table of Contents



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.
    Our reputation and client and agent service offerings may be harmed by system failures and
computer viruses.
  34




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##### Table of Contents



Our business is geographically concentrated, which makes us more susceptible to business
interruption and financial loss due to natural disasters, inclement weather, economic or market
conditions or other regional events outside of our control.
  Our intellectual property rights are valuable and our failure to protect those rights could
adversely affect our business.
  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.
  35




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##### Table of Contents



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.
  The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  If any of our core services fails to comply with applicable federal and state law and regulations,
we may incur significant financial penalties or lose licenses require to provide these services.
  36




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##### Table of Contents



We may have liabilities in connection with our performance of core services.
  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.
  37




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##### Table of Contents



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 (such as the recent departure of our former
Chief Executive Officer, Eric A. Danziger), 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.
     38




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##### Table of Contents



Our principal stockholders, executive officers and directors own a significant percentage of our
stock, and as a result, the trading price for our shares may be depressed and these stockholders
can take actions that may be adverse to your interests.
  Our charter documents and Delaware law could prevent a takeover that stockholders consider
favorable and could also reduce the market price of our stock.
  
    
    providing for a classified board of directors with staggered, three-year terms;
    
    not providing for cumulative voting in the election of directors;
    
    authorizing the board to issue, without stockholder approval, preferred stock with rights senior to those of common stock;
    
    prohibiting stockholder action by written consent;
    
    limiting the persons who may call special meetings of stockholders; and
    
    requiring advance notification of stockholder nominations and proposals.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
   39




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Item 4. Submission of Matters to a Vote of Security Holders:
  Nominees
    
    Votes For
    
    
    Votes WithheldClass II Directors:Marc L. Cellier
    
    
    12,029,132
    
    
    
    667,186Robert C. Kagle
    
    
    12,029,336
    
    
    
    666,982Class I Director:Elisabeth H. DeMarse
    
    
    12,030,244
    
    
    
    666,074
   Proposal
    
    Votes For
    
    Votes Against
    
    Votes AbstainedRatification
of appointment of
PricewaterhouseCoopers LLP as the
Companys
independent
accountants for the
fiscal year ending
December 31, 2006
    
    
    12,442,442
    
    
    
    23,734
    
    
    
    230,139Approval of the
material terms of
the 2004 Equity
Incentive Plan for
purposes of Section
162(m) of the
Internal Revenue
Code
    
    
    11,742,925
    
    
    
    936,713
    
    
    
    16,679
 
 Item 5. Other Information:
  
 Item 6. Exhibits:
  40




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SIGNATURE
  ZIPREALTY, INC.By:
    
    /s/ Gary M. BeasleyGary M. BeasleyPresident and Chief Financial Officer
  41




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Exhibit Index
 Exhibitnumber
    
    Description3.1(a)(1)
    
    Amended and Restated Certificate of Incorporation3.2(a)(1)
    
    Bylaws4.1(1)
    
    Form of Common Stock Certificate10.14(2)*
    
    Termination Agreement and Release with Eric A. Danziger executed May 15, 200610.15(2)*
    
    Gary M. Beasley Employment Agreement executed May 15, 200631.1
    
    Certification of Interim Principal 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 Interim Principal 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
May 16, 2006.*
    
    Identifies a management contract or compensatory plan or agreement required to be filed as an
exhibit of this report. 42