##### 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 March 31, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
  
 PagePART I  FINANCIAL INFORMATION
    
    
    4Item 1. Unaudited Condensed Consolidated Financial Statements
    
    
    4Unaudited Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II  OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURE
    
    
    47EXHIBIT INDEX
    
    
    48EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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Statement regarding forward-looking statements
  
    
    trends in the residential real estate market, the market for mortgages, and the general
economy;
    
    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)
 March 31,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    16,924
    
    
    $
    7,818Short-term investments
    
    
    55,516
    
    
    
    72,649Accounts receivable, net of allowance of $26
and $29 at March 31, 2008 and December 31,
2007, respectively
    
    
    1,953
    
    
    
    1,170Prepaid expenses and other current assets
    
    
    2,963
    
    
    
    3,267Total current assets
    
    
    77,356
    
    
    
    84,904Restricted cash
    
    
    90
    
    
    
    90Property and equipment, net
    
    
    4,920
    
    
    
    5,366Intangible assets, net
    
    
    111
    
    
    
    119Other assets
    
    
    360
    
    
    
    340Total assets
    
    $
    82,837
    
    
    $
    90,819Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    2,708
    
    
    $
    2,095Accrued expenses and other current liabilities
    
    
    7,971
    
    
    
    10,495Total current liabilities
    
    
    10,679
    
    
    
    12,590Other long-term liabilities
    
    
    486
    
    
    
    503Total liabilities
    
    
    11,165
    
    
    
    13,093Commitments and contingencies (Note 8)Stockholders equityCommon stock: $0.001 par value; 100,000
shares authorized; 23,660 and 23,651 shares
issued and 23,650 and 23,641 shares
outstanding at March 31, 2008 and December
31, 2007, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    145,452
    
    
    
    144,499Common stock warrants
    
    
    168
    
    
    
    209Deferred stock-based compensation
    
    
    
    
    
    
    (3
    )Accumulated other comprehensive income
    
    
    480
    
    
    
    188Accumulated deficit
    
    
    (74,402
    )
    
    
    (67,141
    )Treasury stock, at cost
    
    
    (50
    )
    
    
    (50
    )Total stockholders equity
    
    
    71,672
    
    
    
    77,726Total liabilities and stockholders equity
    
    $
    82,837
    
    
    $
    90,819
  4




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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 Three Months Ended March 31,2008
    
    
    2007Net transaction revenues
    
    $
    20,121
    
    
    $
    22,675Referral and other revenues
    
    
    503
    
    
    
    707Net revenues
    
    
    20,624
    
    
    
    23,382Operating expensesCost of revenues
    
    
    12,342
    
    
    
    13,075Product development
    
    
    2,146
    
    
    
    1,681Sales and marketing
    
    
    10,028
    
    
    
    8,847General and administrative
    
    
    3,682
    
    
    
    3,968Litigation
    
    
    625
    
    
    
    Total operating expenses
    
    
    28,823
    
    
    
    27,571Loss from operations
    
    
    (8,199
    )
    
    
    (4,189
    )Other income (expense), netInterest income
    
    
    911
    
    
    
    1,088Other income (expense), net
    
    
    27
    
    
    
    (4
    )Total other income (expense), net
    
    
    938
    
    
    
    1,084Loss before income taxes
    
    
    (7,261
    )
    
    
    (3,105
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (7,261
    )
    
    $
    (3,105
    )Net loss per share:Basic
    
    $
    (0.31
    )
    
    $
    (0.14
    )Diluted
    
    $
    (0.31
    )
    
    $
    (0.14
    )Weighted average common shares outstanding:Basic
    
    
    23,450
    
    
    
    22,008Diluted
    
    
    23,450
    
    
    
    22,008
  5




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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months Ended March 31,2008
    
    
    2007Cash flows from operating activitiesNet loss
    
    $
    (7,261
    )
    
    $
    (3,105
    )Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization
    
    
    708
    
    
    
    685Stock-based compensation expense
    
    
    1,009
    
    
    
    823Provision for doubtful accounts
    
    
    (3
    )
    
    
    (11
    )Amortization of short-term investment premium (discount)
    
    
    (85
    )
    
    
    (100
    )Amortization of intangible assets
    
    
    8
    
    
    
    8Loss on disposal of property and equipment
    
    
    5
    
    
    
    3Equity in net loss of non-consolidated companies
    
    
    
    
    
    
    1Changes in operating assets and liabilitiesAccounts receivable
    
    
    (780
    )
    
    
    (836
    )Prepaid expenses and other current assets
    
    
    304
    
    
    
    (110
    )Other assets
    
    
    (20
    )
    
    
    39Accounts payable
    
    
    613
    
    
    
    107Accrued expenses and other current liabilities
    
    
    (2,633
    )
    
    
    (314
    )Other long-term liabilities
    
    
    (17
    )
    
    
    (15
    )Net cash used in operating activities
    
    
    (8,152
    )
    
    
    (2,825
    )Cash flows from investing activitiesPurchases of short-term investments
    
    
    (48
    )
    
    
    (12,553
    )Proceeds from sale and maturity of short-term investments
    
    
    17,558
    
    
    
    13,675Purchases of property and equipment
    
    
    (254
    )
    
    
    (935
    )Net cash provided by investing activities
    
    
    17,256
    
    
    
    187Cash flows from financing activitiesProceeds from stock option exercises
    
    
    2
    
    
    
    21Proceeds from common stock warrant exercises
    
    
    
    
    
    
    226Net cash provided by financing activities
    
    
    2
    
    
    
    247Net increase (decrease) in cash and cash equivalents
    
    
    9,106
    
    
    
    (2,391
    )Cash and cash equivalents at beginning of period
    
    
    7,818
    
    
    
    8,575Cash and cash equivalents at end of period
    
    $
    16,924
    
    
    $
    6,184
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
  Principles of consolidation
    Seasonality
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value Measurements Effective Date of FASB Statement 157
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Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 3. SHORT-TERM INVESTMENTS AND FAIR VALUE MEASUREMENTS
  Gross
    
    
    GrossGross Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Money market securities
    
    $
    12,305
    
    
    $
    
    
    
    $
    
    
    
    $
    12,305Asset backed
    
    
    22,092
    
    
    
    178
    
    
    
    (13
    )
    
    
    22,257Mortgage backed
    
    
    9,801
    
    
    
    183
    
    
    
    
    
    
    
    9,984Corporate obligations
    
    
    14,391
    
    
    
    95
    
    
    
    (65
    )
    
    
    14,421US Government and agency obligations
    
    
    8,752
    
    
    
    102
    
    
    
    
    
    
    
    8,854Total
    
    $
    67,341
    
    
    $
    558
    
    
    $
    (78
    )
    
    $
    67,821
 March 31,2008(In thousands)Recorded as:Cash equivalents
    
    $
    12,305Short-term investments
    
    
    55,516$
    67,821
  8




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March 31,2008(In thousands)Due within one year or less
    
    $
    39,540Due after one year through two years
    
    
    5,609Due after two years through four years
    
    
    22,672$
    67,821
 Fair Value Measurements
  
    
    Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets;
    
    Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the asset or the liability, or inputs that
are derived principally from or corroborated by observable market date by correlation or
other means;
    
    Level 3: Unobservable inputs reflecting the Companys own assumptions incorporated in
valuation techniques used to determine fair value. These assumptions are required to be
consistent with market participant assumptions that are reasonably available.
   Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Money market securities
    
    $
    12,305
    
    
    $
    
    
    
    $
    
    
    
    $
    12,305Asset backed
    
    
    
    
    
    
    22,257
    
    
    
    
    
    
    
    22,257Mortgage backed
    
    
    
    
    
    
    9,984
    
    
    
    
    
    
    
    9,984Corporate obligations
    
    
    
    
    
    
    14,421
    
    
    
    
    
    
    
    14,421US Government and agency obligations
    
    
    
    
    
    
    8,854
    
    
    
    
    
    
    
    8,854Total
    
    $
    12,305
    
    
    $
    55,516
    
    
    $
    
    
    
    $
    67,821
  9




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4. NET INCOME (LOSS) PER SHARE
  Three Months EndedMarch 312008
    
    
    2007(In thousands, except pershare data)Numerator:Net loss
    
    $
    (7,261
    )
    
    $
    (3,105
    )Denominator:Weighted average common shares outstanding:Basic
    
    
    23,450
    
    
    
    22,008Diluted
    
    
    23,450
    
    
    
    22,008Net loss per share:Basic
    
    $
    (0.31
    )
    
    $
    (0.14
    )Diluted
    
    $
    (0.31
    )
    
    $
    (0.14
    )
  Three Months EndedMarch 31,2008
    
    
    2007(In thousands)Stock options to purchase common stock
    
    
    4,296
    
    
    
    4,342Warrants to purchase common stock
    
    
    136
    
    
    
    2,899Nonvested common stock
    
    
    197
    
    
    
    Restricted stock issuable
    
    
    48
    
    
    
    4,677
    
    
    
    7,241
 5. STOCK-BASED COMPENSATION EXPENSE
 Stock option plans
  
 Other stock options
  10




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Stock-based compensation expense
  Three Months Ended March 31,2008
    
    
    2007(In thousands, except per share data)Cost of revenues
    
    $
    142
    
    
    $
    139Product development
    
    
    68
    
    
    
    31Sales and marketing
    
    
    262
    
    
    
    113General and administrative
    
    
    537
    
    
    
    540Total stock-based compensation expense
    
    
    1,009
    
    
    
    823Tax effect on stock-based compensation
    
    
    
    
    
    
    (329
    )Net effect on net income
    
    $
    1,009
    
    
    $
    494Effect on earnings per share:Basic
    
    $
    0.04
    
    
    $
    0.02Diluted
    
    $
    0.04
    
    
    $
    0.02
  Valuation assumptions
    Three Months Ended March 31,2008
    
    2007Expected volatility
    
    
    44
    %
    
    
    51
    %Risk-free interest rate
    
    
    2.8
    %
    
    
    4.5-4.8
    %Expected life (years)
    
    
    6.1
    
    
    
    6.1Expected dividend yield
    
    
    0
    %
    
    
    0
    %Weighted-average fair value of options granted
    
    $
    2.55
    
    
    $
    4.00
 11




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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, 2008
    
    
    4,318
    
    
    $
    7.66
    
    
    
    8.19
    
    
    $
    1,901Options granted
    
    
    52
    
    
    
    5.49Options exercised
    
    
    (1
    )
    
    
    1.76Options forfeited or expired
    
    
    (75
    )
    
    
    9.00Outstanding at March 31, 2008
    
    
    4,294
    
    
    
    7.61
    
    
    
    7.54
    
    
    
    1,708Vested and expected to vest at March 31, 2008
    
    
    4,048
    
    
    
    7.65
    
    
    
    7.43
    
    
    
    1,699Options exercisable at March 31, 2008
    
    
    2,065
    
    
    $
    7.71
    
    
    
    6.07
    
    
    $
    1,662
      WeightedAverage Grant DateNumber of
    
    Fair ValueShares
    
    Per Share(In thousands)Nonvested at January 1, 2008
    
    
    197
    
    
    $
    6.68Shares granted
    
    
    Shares vested
    
    
    Shares forfeited
    
    
    Nonvested at March 31, 2008
    
    
    197
    
    
    $
    6.68
 6. INCOME TAXES
   12




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Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement 109
 7. COMPREHENSIVE INCOME (LOSS)
  Three Months EndedMarch 31,2008
    
    
    2007(In thousands)Net loss
    
    $
    (7,261
    )
    
    $
    (3,105
    )Other comprehensive income (loss):Change in accumulated unrealized gain (loss) on available-for-sale securities, net of tax
    
    
    292
    
    
    
    121Comprehensive loss
    
    $
    (6,969
    )
    
    $
    (2,984
    )
 8. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    Leases2008
    
    $
    1,8052009
    
    
    1,9462010
    
    
    1,7952011
    
    
    1,7542012
    
    
    691Thereafter
    
    
    34Total minimum lease payments
    
    $
    8,025
 Legal proceedings
 Lubocki, et al v. ZipRealty
 13




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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.
 Simon et al. v. ZipRealty, Inc.
  Indemnifications
   14




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9. SUBSEQUENT EVENT
  
 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
    Trends in our business and financial and real estate markets
 Softness in the residential real estate market.
 15




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® ® ®
 ®
    Impact of softened residential real estate market on availability of mortgages.
 16




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##### Table of Contents



Changes to our business model.
    Fluctuations in quarterly profitability.
 17




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Industry declines in commission percentages. Trends
 Changes in competitive landscape.
 Industry seasonality and cyclicality.
  Historical variations in U.S. interest rates.
 18




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue recognition
  Internal-use software and website development costs
 Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, Accounting for Website Development Costs.
 19




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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
  Income taxes
   20




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Recently issued accounting pronouncements
 Fair Value Measurements Effective Date of FASB
Statement 157
 Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 RESULTS OF OPERATIONS
  Three Months EndedMarch 31,2008
    
    
    2007(In thousands, except perStatements of operations data (unaudited)
    
    share data)Net transaction revenues
    
    $
    20,121
    
    
    $
    22,675Referral and other revenues
    
    
    503
    
    
    
    707Net revenues
    
    
    20,624
    
    
    
    23,382Operating expenses:Cost of revenues
    
    
    12,342
    
    
    
    13,075Product development
    
    
    2,146
    
    
    
    1,681Sales and marketing
    
    
    10,028
    
    
    
    8,847General and administrative
    
    
    3,682
    
    
    
    3,968Litigation
    
    
    625
    
    
    
    Total operating expenses
    
    
    28,823
    
    
    
    27,571Loss from operations
    
    
    (8,199
    )
    
    
    (4,189
    )Other income (expense):Interest income
    
    
    911
    
    
    
    1,088Other income (expense), net
    
    
    27
    
    
    
    (4
    )Total other income (expense), net
    
    
    938
    
    
    
    1,084Loss before income taxes
    
    
    (7,261
    )
    
    
    (3,105
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (7,261
    )
    
    $
    (3,105
    )Net loss per share:Basic
    
    $
    (0.31
    )
    
    $
    (0.14
    )Diluted
    
    $
    (0.31
    )
    
    $
    (0.14
    )Weighted average common shares outstanding:Basic
    
    
    23,450
    
    
    
    22,008Diluted
    
    
    23,450
    
    
    
    22,008
  Three Months EndedMarch 31,Statements of operations data (unaudited)
    
    2008
    
    2007Net transaction revenues
    
    
    97.6
    %
    
    
    97.0
    %Referral and other revenues
    
    
    2.4
    
    
    
    3.0Net revenues
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    59.8
    
    
    
    55.9Product development
    
    
    10.4
    
    
    
    7.2Sales and marketing
    
    
    48.6
    
    
    
    37.8General and administrative
    
    
    17.9
    
    
    
    17.0Litigation
    
    
    3.0
    
    
    
    Total operating expenses
    
    
    139.7
    
    
    
    117.9Loss from operations
    
    
    (39.7
    )
    
    
    (17.9
    )Other income (expense):Interest income
    
    
    4.4
    
    
    
    4.7Other income (expense)
    
    
    0.1
    
    
    
    Total other income (expense), net
    
    
    4.5
    
    
    
    4.7Loss before income taxes
    
    
    (35.2
    )
    
    
    (13.2
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    
    (35.2
    )%
    
    
    (13.2
    )%
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Comparison of the three months ended March 31, 2008 and 2007
 Other operating data
 Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeNumber of markets (1)Comparable existing markets
    
    
    23
    
    
    
    23
    
    
    
    0New markets
    
    
    11
    
    
    
    2
    
    
    
    9Total
    
    
    34
    
    
    
    25
    
    
    
    9Number of transactions closed during the period (2)Comparable existing markets
    
    
    2,785
    
    
    
    3,109
    
    
    
    (324
    )
    
    
    (10.4
    )%New markets
    
    
    336
    
    
    
    1
    
    
    
    335
    
    
    
    33,500.0
    %Total
    
    
    3,121
    
    
    
    3,110
    
    
    
    11
    
    
    
    0.4
    %Average net revenue per transaction (3)Comparable existing markets
    
    $
    6,662
    
    
    $
    7,292
    
    
    $
    (630
    )
    
    
    (8.6
    )%New markets
    
    
    4,661
    
    
    
    6,000
    
    
    
    (1,339
    )
    
    
    (22.3
    )%All markets
    
    $
    6,447
    
    
    $
    7,291
    
    
    $
    (844
    )
    
    
    (11.6
    )%Number of ZipAgents at end of the periodComparable existing markets
    
    
    1,951
    
    
    
    1,857
    
    
    
    94
    
    
    
    5.1
    %New markets
    
    
    334
    
    
    
    18
    
    
    
    316
    
    
    
    1,755.6
    %All markets
    
    
    2,285
    
    
    
    1,875
    
    
    
    410
    
    
    
    21.9
    %
 
 (1)
    
    New markets are transferred to existing markets on January 1st
following the completion of their first full calendar year of
operation. The Tampa, Orlando, Minneapolis, Austin, Palm Beach and the
Greater Philadelphia Area markets opened during 2006 and, therefore,
completed their first full calendar year at of the end of 2007.
Accordingly, these markets were moved to existing markets as of
January 1, 2008 and are included in comparable existing markets for
all periods presented. Comparable existing markets:Atlanta, GA
    
    Houston, TX
    
    Phoenix, AZAustin, TX
    
    Las Vegas, NV
    
    Sacramento, CABaltimore, MD
    
    Los Angeles, CA
    
    San Diego, CABoston, MD
    
    Miami, FL
    
    San Francisco Bay Area, CAChicago, IL
    
    Minneapolis, MN
    
    Seattle, WADallas, TX
    
    Orange County, CA
    
    Tampa, FLFresno/Central Valley, CA
    
    Orlando, FL
    
    Washington, DCGreater Philadelphia Area, PA
    
    Palm Beach, FLNew markets and the month opened:Naples, 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 2007Westchester County, NY
    
    
    
    December 2007Long Island, NY
    
    
    
    March 2008
 22




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(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. Net transaction revenues
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Net transaction revenuesComparable existing markets
    
    $
    18,555
    
    
    $
    22,669
    
    
    $
    (4,114
    )
    
    
    (18.1
    )%New markets
    
    
    1,566
    
    
    
    6
    
    
    
    1,560
    
    
    
    26,000.0
    %Total
    
    $
    20,121
    
    
    $
    22,675
    
    
    $
    (2,554
    )
    
    
    (11.3
    )%
     Referral and other revenues
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Referral and
other revenuesComparable existing markets
    
    $
    79
    
    
    $
    67
    
    
    $
    12
    
    
    
    17.9
    %New markets
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    100.0
    %Corporate
    
    
    420
    
    
    
    640
    
    
    
    (220
    )
    
    
    (34.4
    )%Total
    
    $
    503
    
    
    $
    707
    
    
    $
    (204
    )
    
    
    (28.9
    )%
  23




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Cost of revenues
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Cost of revenuesComparable existing markets
    
    $
    11,553
    
    
    $
    13,071
    
    
    $
    (1,518
    )
    
    
    (11.6
    )%New markets
    
    
    789
    
    
    
    4
    
    
    
    785
    
    
    
    26,200.0
    %Total
    
    $
    12,342
    
    
    $
    13,075
    
    
    $
    (733
    )
    
    
    (5.6
    )%
     Product development
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Product development
    
    $
    2,146
    
    
    $
    1,681
    
    
    $
    465
    
    
    
    27.6
    %
   24




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Sales and marketing
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Sales and marketingComparable existing markets
    
    $
    6,392
    
    
    $
    7,062
    
    
    $
    (670
    )
    
    
    (9.5
    )%New markets
    
    
    1,719
    
    
    
    144
    
    
    
    1,575
    
    
    
    1,093.8
    %Regional/corporate sales support and marketing
    
    
    1,917
    
    
    
    1,641
    
    
    
    276
    
    
    
    16.8
    %Total
    
    $
    10,028
    
    
    $
    8,847
    
    
    $
    1,181
    
    
    
    13.3
    %
      General and administrative
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)General and administrative
    
    $
    3,682
    
    
    $
    3,968
    
    
    $
    (268
    )
    
    
    (7.2
    )%
   25




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Litigation
 Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Litigation
    
    $
    625
    
    
    $
    
    
    
    $
    625
    
    
    
    100.0
    %
  Interest income
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Interest income
    
    $
    911
    
    
    $
    1,088
    
    
    $
    (177
    )
    
    
    (16.3
    )%
  Other income (expense), net
  Three Months EndedMarch 31,
    
    
    Increase
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change(In thousands)Other income (expense), net
    
    $
    27
    
    
    $
    (4
    )
    
    $
    31
    
    
    
    811.4
    %
 LIQUIDITY AND CAPITAL RESOURCES
  Operating activities
   26




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Investing activities
    Financing activities
    Future needs
   27




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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)Minimum lease payments
    
    $
    2,347
    
    
    $
    3,650
    
    
    $
    2,017
    
    
    $
    11
    
    
    $
    8,025
 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
 28




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Changes in internal control over financial reporting
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings:
 Lubocki, et al v. ZipRealty
 Crystal Alexander, et al. v. ZipRealty
 ZipRealty Inc., v. Squire, Sanders & Dempsey, LLP, Michael W. Kelly Esq., et. al.
 Simon et al. v. ZipRealty, Inc.
  
 Item 1A. Risk Factors:
  29




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RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We have experienced losses in recent quarters and expect to 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 we expect that the demand for our services would be reduced if our ability
to display listings on our website, or to communicate to our clients that our website displays MLS
listings, is restricted.
   ®
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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.
  ®
 31




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We may not be able to continue to grow market share to offset the impact of the current
contraction in the residential real estate market.
  If the percentage of our business that is composed of representing home sellers, as opposed to
home buyers, increases, we may incur additional costs and achieve lower profit margins,
particularly in a softened market.
  The recent tightening in the availability of credit, particularly with respect to lenders in the
mortgage market, has and may continue to negatively impact the housing market.
   Softness in the residential real estate market may reduce the availability of home loans, which
may further negatively impact the housing market.
  32




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Foreclosures and short sales may cause significant disruption in our business.
  Recently adopted federal legislation designed to bolster the market for nonconforming mortgage
loans may result in short or long-term fluctuations in the number of residential real estate
transactions, which could negatively impact our operating results.
  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 model is relatively new and unproven, and we cannot guarantee our future success.
  33




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If we fail to recruit, hire and retain qualified agents, we would be less able to service our
clients and our growth would most likely be impaired.
    We would likely incur additional expenses or liabilities if our current or former compensation
plans, including 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 and harm operating results.
  34




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Our failure to effectively manage the growth of our control systems could adversely affect our
ability to maintain legal compliance.
  If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our 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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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.
  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.
  36




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If consumers do not continue to use the Internet as a tool in their residential real estate buying
or selling process, we may be unable to attract new clients and our growth and financial results
may suffer.
  Our success depends in part on our ability to expand successfully 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, and ease of access to information from, local MLSs; and
    
    state laws governing cash rebates and other regulatory restrictions.
  37




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Unless we develop, maintain and protect a strong brand identity, our business may not grow and our
financial results would 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.
  39




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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.
  As we implement changes in our agent compensation policies, we may incent behaviors that cause an
increase in our expenses and potentially a decrease in our profit margin with the goal of
increasing our sales and overall profitability.
  We monitor and evaluate the use of our website by our registered users, which could raise privacy
concerns.
  The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  40




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We may be subject to liability for the Internet content that we publish.
  We may need to change the manner in which we conduct our business if government regulation of the
Internet increases.
    Our operating results are subject to seasonality and vary significantly among quarters during each
calendar year, making meaningful comparisons of successive quarters difficult.
   
    
    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.
 41




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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.
  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.
 
 42




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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;
    
    our inability to recover the costs of acquisitions or investments; and
    
    our inability to increase earnings per share.
 OTHER RISKS RELATED TO OUR STOCK PRICE
 Our stock price may be volatile.
  
    
    variations in our quarterly results of operations;
    
    changes in our financial guidance for future periods;
    
    announcements by us or our competitors or lead source providers;
    
    the relatively low level of public float and average daily trading volumes of our common
stock;
    
    changes in estimates of our performance or recommendations, or termination of coverage,
by securities analysts;
    
    inability to meet quarterly or yearly estimates or targets of our performance;
    
    the hiring or departure of key personnel, including agents or groups of agents or key
executives;
    
    changes in our reputation;
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##### Table of Contents




    
    acquisitions or strategic alliances involving us or our competitors;
    
    changes in the legal and regulatory environment, as well as the rules of trade
associations, 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.
   The relatively small average daily trading volume of our stock could result in volatility in our
trading prices, particularly if a large block of our stock is traded.
  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.
  44




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
    
    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:
      45




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Item 5. Other Information:
  
 Item 6. Exhibits:
  46




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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)
    
    Bylaws4.1(1)
    
    Form of Common Stock Certificate10.1(2)
    
    Securities Purchase Agreement entered into as of April 2, 2008 between the
Company and Pyramid Technology Ventures I, L.P.10.2*
    
    Settlement Agreement and Release with Thomas M. Perrault dated January 23, 200810.3*
    
    Management Incentive Plan  Fiscal Year 2008 (Clarified)31.1
    
    Certification of Chief Executive Officer, as required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 193431.2
    
    Certification of 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
April 8, 2008.*
    
    Identifies a management contract or compensatory plan or agreement required to be filed as an
exhibit of this report. 48