##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-31376
 ZIPREALTY, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
(State of incorporation)
    
    94-3319956
(IRS employer identification number)
 2000 POWELL STEET, SUITE 1555
EMERYVILLE, CA
(Address of principal executive offices)
    
    94608
(Zip Code)
 (510) 735-2600
(Registrants telephone number)
 þ o
 o þ
 o þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION

4Item 1. Unaudited Condensed Financial Statements

4Unaudited Condensed Balance Sheets as of September 30, 2005 and December 31, 2004

4Unaudited Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004

5Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004

6Notes to Unaudited Condensed Financial Statements

7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3. Quantitative and Qualitative Disclosures About Market Risk

35Item 4. Controls and Procedures

35PART II  OTHER INFORMATION

37Item 1. Legal Proceedings

37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37Item 6. Exhibits

37SIGNATURES

38EXHIBITS INDEX

39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Statement regarding forward-looking statements
  Ø
    
    our future financial results;
 Ø
    
    our future growth and expansion into new markets;
 Ø
    
    our future advertising and marketing activities; and
 Ø
    
    our future investment in technology.
   Trademarks
  Internet Site
 www.ziprealty.com
 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Financial Statements :
 
 UNAUDITED CONDENSED BALANCE SHEETS (In thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    7,629
    
    
    $
    11,525Short-term investments
    
    
    81,549
    
    
    
    71,972Accounts receivable, net of allowance of $42
and $29 at September 30, 2005 and December 31,
2004, respectively
    
    
    2,051
    
    
    
    1,089Prepaid expenses and other current assets
    
    
    2,581
    
    
    
    2,102Total current assets
    
    
    93,810
    
    
    
    86,688Restricted cash
    
    
    190
    
    
    
    190Property and equipment, net
    
    
    2,125
    
    
    
    1,236Other assets
    
    
    81
    
    
    
    12Total assets
    
    $
    96,206
    
    
    $
    88,126Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    1,353
    
    
    $
    1,478Accrued expenses
    
    
    9,793
    
    
    
    4,287Total current liabilities
    
    
    11,146
    
    
    
    5,765Other long-term liabilities
    
    
    49
    
    
    
    90Total liabilities
    
    
    11,195
    
    
    
    5,855Commitments and contingencies (Note 7)Stockholders equityCommon stock: $0.001 par value; 100,000 shares
authorized; 20,232 and 19,880 shares issued
and outstanding at September 30, 2005 and
December 31, 2004, respectively
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    129,231
    
    
    
    128,555Common stock warrants
    
    
    6,129
    
    
    
    6,369Deferred stock-based compensation
    
    
    (308
    )
    
    
    (438
    )Accumulated other comprehensive loss
    
    
    (497
    )
    
    
    (105
    )Accumulated deficit
    
    
    (49,564
    )
    
    
    (52,130
    )Total stockholders equity
    
    
    85,011
    
    
    
    82,271Total liabilities and stockholders equity.
    
    $
    96,206
    
    
    $
    88,126
  4




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##### Table of Contents



UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data)
 Three months ended September 30,
    
    
    Nine Months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net transaction revenues
    
    $
    27,576
    
    
    $
    17,108
    
    
    $
    70,122
    
    
    $
    43,670Referral and other revenues
    
    
    667
    
    
    
    463
    
    
    
    1,696
    
    
    
    1,071Net revenues
    
    
    28,243
    
    
    
    17,571
    
    
    
    71,818
    
    
    
    44,741Operating expensesCost of revenues
    
    
    15,555
    
    
    
    9,587
    
    
    
    39,438
    
    
    
    24,389Product development
    
    
    759
    
    
    
    643
    
    
    
    1,962
    
    
    
    1,639Marketing and business development
    
    
    3,636
    
    
    
    2,462
    
    
    
    9,727
    
    
    
    6,325General and administrative
    
    
    6,039
    
    
    
    3,631
    
    
    
    15,735
    
    
    
    10,013Stock-based compensation
    
    
    35
    
    
    
    41
    
    
    
    106
    
    
    
    127Litigation
    
    
    
    
    
    
    
    
    
    
    4,164
    
    
    
    Total operating expenses
    
    
    26,024
    
    
    
    16,364
    
    
    
    71,132
    
    
    
    42,493Income from operations
    
    
    2,219
    
    
    
    1,207
    
    
    
    686
    
    
    
    2,248Interest income
    
    
    715
    
    
    
    59
    
    
    
    1,967
    
    
    
    96Other income (expense), net
    
    
    (8
    )
    
    
    5
    
    
    
    (11
    )
    
    
    (1
    )Total other income (expense), net
    
    
    707
    
    
    
    64
    
    
    
    1,956
    
    
    
    95Income before income taxes
    
    
    2,926
    
    
    
    1,271
    
    
    
    2,642
    
    
    
    2,343Provision for income taxes
    
    
    76
    
    
    
    17
    
    
    
    76
    
    
    
    47Net income
    
    $
    2,850
    
    
    $
    1,254
    
    
    $
    2,566
    
    
    $
    2,296Cumulative preferred stock dividends
    
    $
    
    
    
    $
    158
    
    
    $
    
    
    
    $
    472Amount allocated to participating preferred
stockholders
    
    
    
    
    
    
    1,096
    
    
    
    
    
    
    
    1,824Net income available to common stockholders
    
    $
    2,850
    
    
    $
    
    
    
    $
    2,566
    
    
    $
    Net income per share:Basic
    
    $
    0.14
    
    
    $
    
    
    
    $
    0.13
    
    
    $
    Diluted
    
    $
    0.11
    
    
    $
    
    
    
    $
    0.10
    
    
    $
    Weighted average common shares outstanding:Basic
    
    
    20,198
    
    
    
    1,563
    
    
    
    20,031
    
    
    
    1,509Diluted
    
    
    25,328
    
    
    
    1,563
    
    
    
    25,487
    
    
    
    1,509Supplemental operations informationStock-based compensation can be allocated to
the following:Cost of revenues
    
    $
    10
    
    
    $
    13
    
    
    $
    29
    
    
    $
    38Product development
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    10Marketing and business development
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    5General and administrative
    
    
    23
    
    
    
    25
    
    
    
    72
    
    
    
    74Total stock-based compensation
    
    $
    35
    
    
    $
    41
    
    
    $
    106
    
    
    $
    127
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##### Table of Contents



UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
 Nine Months ended September 30,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    2,566
    
    
    $
    2,296Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    1,065
    
    
    
    614Amortization of deferred stock-based compensation
    
    
    106
    
    
    
    127Provision for doubtful accounts
    
    
    13
    
    
    
    3Amortization of short-term investment premium
    
    
    515
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (975
    )
    
    
    (552
    )Prepaid expenses and other current assets
    
    
    (479
    )
    
    
    (1,187
    )Other assets
    
    
    (69
    )Accounts payable
    
    
    (125
    )
    
    
    1,206Accrued expenses
    
    
    5,506
    
    
    
    1,508Other long-term liabilities
    
    
    (41
    )
    
    
    (36
    )Net cash provided by operating activities
    
    
    8,082
    
    
    
    3,979Cash flows from investing activitiesPurchases of property and equipment
    
    
    (1,954
    )
    
    
    (1,100
    )Purchases of short-term investments
    
    
    (26,650
    )
    
    
    Proceeds from sale and maturity of short-term investments
    
    
    16,167
    
    
    
    Net cash used in investing activities
    
    
    (12,437
    )
    
    
    (1,100
    )Cash flows from financing activitiesProceeds from stock option exercises
    
    
    448
    
    
    
    114Proceeds from Series E-1 preferred stock warrant exercises
    
    
    
    
    
    
    8,177Proceeds from common stock warrant exercises
    
    
    11
    
    
    
    Net cash provided by financing activities
    
    
    459
    
    
    
    8,291Net increase (decrease) in cash and cash equivalents
    
    
    (3,896
    )
    
    
    11,170Cash and cash equivalents at beginning of period
    
    
    11,525
    
    
    
    10,357Cash and cash equivalents at end of period
    
    $
    7,629
    
    
    $
    21,527Supplemental cash flow informationNon-cash investing and financing activitiesDeferred stock-based compensation
    
    $
    
    
    
    $
    430Recapture of deferred stock-based compensation upon employee
terminations
    
    $
    23
    
    
    $
    89Unrealized loss on available-for-sale securities
    
    $
    (392
    )
    
    $
    Recognition of preferred stock additional paid in capital
from preferred stock warrants due to exercise of preferred
stock series E-1 warrants
    
    $
    
    
    
    $
    970Recognition of common stock additional paid in capital from
common stock warrants due to exercise of common stock
warrants
    
    $
    240
    
    
    $
    Write-off of fully depreciated property, plant, and equipment
    
    $
    
    
    
    $
    2
  6




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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
  Stock split
  Initial public offering
     Seasonality
  7




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2. RECENT ACCOUNTING PRONOUNCEMENTS
 Share-Based Payment
  The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
  3. NET INCOME PER SHARE
 Participating Securities and the Two-Class Method
under FASB Statement No. 128
  Three Months ended September 30,
    
    
    Nine Months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Numerator:Net income
    
    $
    2,850
    
    
    $
    1,254
    
    
    $
    2,566
    
    
    $
    2,296Cumulative preferred stock dividends
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    472Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    1,096
    
    
    
    
    
    
    
    1,824Net income available to common stockholders (for basic
and dilutive EPS computations)
    
    $
    2,850
    
    
    $
    
    
    
    $
    2,566
    
    
    $
    Denominator:Weighted average common shares outstanding used to
compute EPS:Basic
    
    
    20,198
    
    
    
    1,563
    
    
    
    20,031
    
    
    
    1,509
 8




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Three Months ended September 30,
    
    
    Nine Months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Diluted
    
    
    25,328
    
    
    
    1,563
    
    
    
    25,487
    
    
    
    1,509Net income per share:Basic
    
    $
    0.14
    
    
    $
    
    
    
    $
    0.13
    
    
    $
    Diluted
    
    $
    0.11
    
    
    $
    
    
    
    $
    0.10
    
    
    $
    
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Stock options to purchase common stock
    
    
    866
    
    
    
    2,895
    
    
    
    633
    
    
    
    2,895Participating convertible preferred stock
    
    
    
    
    
    
    12,298
    
    
    
    
    
    
    
    12,298Warrants to purchase preferred and common stock
    
    
    3
    
    
    
    4,913
    
    
    
    3
    
    
    
    4,913
 4. STOCK BASED COMPENSATION
 Accounting for Stock Issued to Employees Accounting for Certain
Transactions Involving Stock Compensationan Interpretation of APB No. 25 Accounting
for Stock-Based Compensation Accounting for Stock-Based CompensationTransaction and Disclosure .
 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Net income as reported
    
    $
    2,850
    
    
    $
    1,254
    
    
    $
    2,566
    
    
    $
    2,296Add: Stock-based compensation
expense included in reported net
income, net of taxes
    
    
    34
    
    
    
    40
    
    
    
    103
    
    
    
    123Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of taxes
    
    
    (377
    )
    
    
    (134
    )
    
    
    (975
    )
    
    
    (301
    )Pro forma net income
    
    $
    2,507
    
    
    $
    1,160
    
    
    $
    1,694
    
    
    $
    2,118Net income per share, as reported:Basic
    
    $
    0.14
    
    
    $
    
    
    
    $
    0.13
    
    
    $
    Diluted
    
    $
    0.11
    
    
    $
    
    
    
    $
    0.10
    
    
    $
    Pro forma income per share:Basic
    
    $
    0.12
    
    
    $
    
    
    
    $
    0.08
    
    
    $
    Diluted
    
    $
    0.10
    
    
    $
    
    
    
    $
    0.07
    
    
    $
    
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    
    40%
    
    
    
    0-50%
    (1)
    
    
    33-40%
    
    
    
    0-50%
    (1)Risk-free interest rate
    
    
    4.0%
    
    
    
    3.2%
    
    
    
    3.8-4.1%
    
    
    
    2.5-3.7%Expected life
    
    
    4 years
    
    
    
    4 years
    

    
    
    4 years
    

    
    
    4 yearsExpected dividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%
    
    
    
    0%
 9




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##### Table of Contents



(1)
    
    The Company was a private company and, therefore, used the minimum value method under which
volatility is not considered until the initial Form S-1 was filed on May 20, 2004. The Company
used a 50% volatility from May 20, 2004 until the effective date of the initial public offering on
November 9, 2004.    5. SHORT-TERM INVESTMENTS
  Gross Amortized
    
    
    Gross Unrealized
    
    
    Gross Unrealized
    
    
    Estimated FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(in thousands)Money market securities
    
    $
    3,962
    
    
    $
    
    
    
    $
    
    
    
    $
    3,962Asset backed
    
    
    7,737
    
    
    
    
    
    
    
    (28
    )
    
    
    7,709Corporate obligations
    
    
    36,502
    
    
    
    
    
    
    
    (233
    )
    
    
    36,269US Government and agency obligations
    
    
    37,807
    
    
    
    
    
    
    
    (236
    )
    
    
    37,571Total short-term investments
    
    $
    86,008
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    85,511
 September 30,2005(in thousands)Recorded as:Cash equivalents
    
    $
    3,962Short-term investments
    
    
    81,549$
    85,511
   September 30,2005(in thousands)Due within one year or less
    
    $
    58,432Due after one year through two years
    
    
    23,591Due after two years through four years
    
    
    3,488$
    85,511
 6. COMPREHENSIVE INCOME
  10




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Three Months Ended
    
    

Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Net income
    
    $
    2,850
    
    
    $
    1,254
    
    
    $
    2,566
    
    
    $
    2,296Other comprehensive income (loss):Change in accumulated unrealized
(loss) on available-for-sale
securities, net
    
    
    (156
    )
    
    
    
    
    
    
    (392
    )
    
    
    Comprehensive income
    
    $
    2,694
    
    
    $
    1,254
    
    
    $
    2,174
    
    
    $
    2,296
 7. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    leases2005
    
    $
    2902006
    
    
    1,1832007
    
    
    6162008
    
    
    264Total minimum lease payments
    
    $
    2,353
 Legal Proceedings
 Sullivan, et al v. ZipRealty
 Indemnifications
   11




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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 under Risk factors and elsewhere in this report. We
undertake no obligation to update any information contained in these forward-looking statements.
 OVERVIEW
 General
    Trends in our business
  12




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Market seasonality, cyclicality and interest rate influences
  13




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue recognition
  14




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Internal-use software and website development costs
 Accounting for the Cost of Computer Software Developed or Obtained for Internal Use Accounting for Website Development Costs.
 Deferred stock-based compensation
 Accounting for Stock Issued to Employees, Accounting for Certain Transactions Involving
Stock Compensationan Interpretation of APB No. 25 Accounting for Stock-Based Compensation, Accounting for
Stock-Based CompensationTransaction and Disclosure. Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Share-Based Payment
   Ø
    
    comparable values of similar companies and the pricing of recent rounds of financing;
 Ø
    
    revenue growth and profitability milestones achieved and as measured to budget;
 Ø
    
    continued growth in experience of our management team;
 Ø
    
    marketplace activity and competition;
 Ø
    
    barriers to entry; and
 Ø
    
    status of capital markets.
  15




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##### Table of Contents



Income taxes
   RESULTS OF OPERATIONS
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,Statements of operations data
    
    2005
    
    
    2004
    
    
    2005
    
    2004(in thousands, except per share data)Net transaction revenues
    
    $
    27,576
    
    
    $
    17,108
    
    
    $
    70,122
    
    
    $
    43,670Referral and other revenues
    
    
    667
    
    
    
    463
    
    
    
    1,696
    
    
    
    1,071Net revenues
    
    
    28,243
    
    
    
    17,571
    
    
    
    71,818
    
    
    
    44,741Operating expenses:Cost of revenues
    
    
    15,555
    
    
    
    9,587
    
    
    
    39,438
    
    
    
    24,389Product development
    
    
    759
    
    
    
    643
    
    
    
    1,962
    
    
    
    1,639Marketing and business development
    
    
    3,636
    
    
    
    2,462
    
    
    
    9,727
    
    
    
    6,325General and administrative
    
    
    6,039
    
    
    
    3,631
    
    
    
    15,735
    
    
    
    10,013Stock-based compensation
    
    
    35
    
    
    
    41
    
    
    
    106
    
    
    
    127Litigation
    
    
    
    
    
    
    
    
    
    
    4,164
    
    
    
    Total operating expenses
    
    
    26,024
    
    
    
    16,364
    
    
    
    71,132
    
    
    
    42,493Income from operations
    
    
    2,219
    
    
    
    1,207
    
    
    
    686
    
    
    
    2,248Other income (expense):Interest income
    
    
    715
    
    
    
    59
    
    
    
    1,967
    
    
    
    96Other income (expense), net
    
    
    (8
    )
    
    
    5
    
    
    
    (11
    )
    
    
    (1
    )Total other income (expense), net
    
    
    707
    
    
    
    64
    
    
    
    1,956
    
    
    
    95Income before income taxes
    
    
    2,926
    
    
    
    1,271
    
    
    
    2,642
    
    
    
    2,343Provision for income taxes
    
    
    76
    
    
    
    17
    
    
    
    76
    
    
    
    47Net income
    
    $
    2,850
    
    
    $
    1,254
    
    
    $
    2,566
    
    
    $
    2,296Cumulative preferred stock dividends
    
    $
    
    
    
    $
    158
    
    
    $
    
    
    
    $
    472Amount allocated to participating preferred shares
    
    
    
    
    
    
    1,096
    
    
    
    
    
    
    
    1,824Net income available to common stockholders
    
    $
    2,850
    
    
    $
    
    
    
    $
    2,566
    
    
    $
    Net income per share:Basic
    
    $
    0.14
    
    
    $
    
    
    
    $
    0.13
    
    
    $
    Diluted
    
    $
    0.11
    
    
    $
    
    
    
    $
    0.10
    
    
    $
    Weighted average common shares outstanding:Basic
    
    
    20,198
    
    
    
    1,563
    
    
    
    20,031
    
    
    
    1,509Diluted
    
    
    25,328
    
    
    
    1,563
    
    
    
    25,487
    
    
    
    1,509
  16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Statements of operations data
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net transaction revenues
    
    
    97.6
    %
    
    
    97.4
    %
    
    
    97.6
    %
    
    
    97.6
    %Referral and other revenues
    
    
    2.4
    
    
    
    2.6
    
    
    
    2.4
    
    
    
    2.4Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    55.1
    
    
    
    54.6
    
    
    
    54.9
    
    
    
    54.5Product development
    
    
    2.7
    
    
    
    3.7
    
    
    
    2.7
    
    
    
    3.7Marketing and business development
    
    
    12.9
    
    
    
    14.0
    
    
    
    13.5
    
    
    
    14.1General and administrative
    
    
    21.4
    
    
    
    20.7
    
    
    
    21.9
    
    
    
    22.4Stock-based compensation
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Litigation
    
    
    
    
    
    
    
    
    
    
    5.8
    
    
    
    Total operating expenses
    
    
    92.2
    
    
    
    93.2
    
    
    
    99.0
    
    
    
    95.0Income from operations
    
    
    7.8
    
    
    
    6.8
    
    
    
    1.0
    
    
    
    5.0Other income (expense):Interest income
    
    
    2.5
    
    
    
    0.3
    
    
    
    2.7
    
    
    
    0.2Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other income, net
    
    
    2.5
    
    
    
    0.3
    
    
    
    2.7
    
    
    
    0.2Income before income taxes
    
    
    10.3
    
    
    
    7.1
    
    
    
    3.7
    
    
    
    5.2Provision for income taxes
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Net income
    
    
    10.0
    %
    
    
    7.0
    %
    
    
    3.6
    %
    
    
    5.1
    %
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Other operating data
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Number of ZipAgents at end of period
    
    
    1,383
    
    
    
    782
    
    
    
    1,383
    
    
    
    782Total value of real estate transactions closed during period (in millions)
    
    $
    1,355
    
    
    $
    823
    
    
    $
    3,423
    
    
    $
    2,125Number of transactions closed during period (1)
    
    
    3,689
    
    
    
    2,371
    
    
    
    9,407
    
    
    
    6,163Average net revenue per transaction during period (2)
    
    $
    7,475
    
    
    $
    7,215
    
    
    $
    7,454
    
    
    $
    7,086
 
 (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 September 30, 2005 and 2004
 Net revenues
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Net revenues
    
    $
    28,243
    
    
    $
    17,571
    
    
    $
    10,672
    
    
    
    60.7
    %
 .
 17




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##### Table of Contents



Cost of revenues
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Cost of revenues
    
    $
    15,555
    
    
    $
    9,587
    
    
    $
    5,968
    
    
    
    62.3
    %
    Product development
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Product development
    
    $
    759
    
    
    $
    643
    
    
    $
    116
    
    
    
    18.0
    %
    Marketing and business development
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Marketing and business development
    
    $
    3,636
    
    
    $
    2,462
    
    
    $
    1,174
    
    
    
    47.7
    %
   18




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##### Table of Contents



General and administrative
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)General and administrative
    
    $
    6,039
    
    
    $
    3,631
    
    
    $
    2,408
    
    
    
    66.3
    %
    Stock-based compensation
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Stock-based compensation
    
    $
    35
    
    
    $
    41
    
    
    $
    (6
    )
    
    
    (14.2
    %)
  Share-Based Payment
 Interest income
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Interest income
    
    $
    715
    
    
    $
    59
    
    
    $
    656
    
    
    
    1,115.5
    %
  19




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##### Table of Contents



Other income (expense), net
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    Change(in thousands)Other income (expense), net
    
    $
    (8
    )
    
    $
    5
    
    
    
    ($13
    )
    
    
    (258.5
    %)
  Provision for income taxes
 Three Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Provision for income taxes
    
    $
    76
    
    
    $
    17
    
    
    $
    59
    
    
    
    348.5
    %
  Comparison of the Nine Months ended September 30, 2005 and 2004
 Net revenues
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Net revenues
    
    $
    71,818
    
    
    $
    44,741
    
    
    $
    27,077
    
    
    
    60.5
    %
  Cost of revenues
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Cost of revenues
    
    $
    39,438
    
    
    $
    24,389
    
    
    $
    15,049
    
    
    
    61.7
    %
 20




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##### Table of Contents



Product development
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Product development
    
    $
    1,962
    
    
    $
    1,639
    
    
    $
    323
    
    
    
    19.7
    %
   Marketing and business development
 Nine Months EndedSeptember 30September 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Marketing and business development
    
    $
    9,727
    
    
    $
    6,325
    
    
    $
    3,402
    
    
    
    53.8
    %
   General and administrative
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)General and administrative
    
    $
    15,735
    
    
    $
    10,013
    
    
    $
    5,722
    
    
    
    57.1
    %
  21




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##### Table of Contents



Stock-based compensation
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Stock-based compensation
    
    $
    106
    
    
    $
    127
    
    
    $
    (21
    )
    
    
    (15.9
    %)
  Litigation
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    Change(in thousands)Litigation
    
    $
    4,164
    
    
    $
    
    
    
    $
    4,164
    
    
    
    100.0
    %
  Interest income
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    Change(in thousands)Interest income
    
    $
    1,967
    
    
    $
    96
    
    
    $
    1,871
    
    
    
    1,963.1
    %
  22




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##### Table of Contents



Other income (expense), net
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    Change(in thousands)Other income (expense), net
    
    $
    (11
    )
    
    $
    (1
    )
    
    
    ($10
    )
    
    
    (1,822.6
    %)
  Provision for income taxes
 Nine Months EndedSeptember 30,
    
    
    Increase
    
    
    Percent2005
    
    
    2004
    
    
    (decrease)
    
    
    change(in thousands)Provision for income taxes
    
    $
    76
    
    
    $
    47
    
    
    $
    29
    
    
    
    63.0
    %
  LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
   Investing activities
  23




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##### Table of Contents



Financing activities
   Future needs
  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More than1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 years
    
    
    Total(in thousands)Operating lease commitments
    
    $
    1,173
    
    
    $
    1,180
    
    
    $
    
    
    
    $
    
    
    
    $
    2,353
  OFF-BALANCE SHEET ARRANGEMENTS
  EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
 Share-Based Payment
 24




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##### Table of Contents



The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
  RISK FACTORS
  RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 Our business model is new and unproven, and we cannot guarantee our future success.
  We have been profitable in only seven quarters and may incur losses in the future, and our limited
operating history makes our future financial performance difficult to assess.
   25




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##### Table of Contents



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.
      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.
   If we fail to recruit, hire and retain qualified agents, we may be unable to service our clients
and our growth could be impaired.
 26




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##### Table of Contents



Our failure to effectively manage the growth of our ZipAgents and our information and control
systems could adversely affect our ability to service our clients.
   Our operating results are subject to seasonality and vary significantly among quarters during each
calendar year, making meaningful comparisons of successive quarters difficult.
   Ø
    
    timing of widely observed holidays and vacation periods and availability home buyers and sellers, real estate agents
and related service providers during these periods;
 Ø
    
    a desire to relocate prior to the start of the school year;
 27




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##### Table of Contents



Ø
    
    inclement weather which can influence consumers desire or ability to visit properties;
 Ø
    
    timing of employment compensation changes, such as raises and bonuses;
 Ø
    
    the time between entry into a purchase contract for real estate and closing of the transaction; and
 Ø
    
    the levels of housing inventory available for sale.
  Interest rates have been at historic lows for the past several years, and increases in interest
rates have the potential to negatively impact the housing market.
  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.
  Ø
    
    the economic conditions and demographics of a market;
 Ø
    
    the general prices of real estate in a market;
 Ø
    
    Internet use in a market;
 Ø
    
    competition within a market from local and national brokerage firms;
 Ø
    
    rules and regulations governing a market;
 Ø
    
    the ability and capacity of our organization to manage expansion into additional geographic areas, additional headcount
and increased organizational complexity;
 Ø
    
    the existence of local MLSs; and
 Ø
    
    state laws governing cash rebates and other regulatory restrictions.
  28




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##### Table of Contents



Unless we develop, maintain and protect a strong brand identity, our business may not grow and our
financial results may suffer.
   We have numerous competitors, many of which have valuable industry relationships 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.
  29




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##### Table of Contents



We derive a significant portion of our leads through third parties, and if any of our significant
lead generation relationships are terminated, impaired or become more expensive, our ability to
attract new clients and grow our business may be adversely affected.
  Our ability to expand our business may be limited by state laws governing cash rebates to home
buyers.
  We may be unable to integrate our technology with each MLS on a cost-effective basis, which may
harm our operating results and adversely affect our ability to service clients.
  30




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##### Table of Contents



If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our license to operate.
  We may have liabilities in connection with real estate brokerage activities.
  We may be subject to liability for the Internet content that we publish.
  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.
 31




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##### Table of Contents



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 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.
  32




---



##### Table of Contents



Ø
    
    pay damages;
 Ø
    
    stop using the technology found to be in violation of a third partys rights;
 Ø
    
    seek a license for the infringing technology; or
 Ø
    
    develop alternative non-infringing technology.
  If we fail to attract and retain our key personnel, our ability to meet our business goals will be
impaired and our financial condition and results of operations will suffer.
  We intend to evaluate acquisitions or investments in complementary technologies and businesses and
we may not realize the anticipated benefits from, and may have to pay substantial costs related to,
any acquisitions or investments that we undertake.
  Ø
    
    our inability to successfully integrate acquired technologies or operations;
 Ø
    
    diversion of managements attention;
 Ø
    
    problems maintaining uniform standards, procedures, controls and policies;
 Ø
    
    potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;
 Ø
    
    expenses related to amortization of intangible assets;
 Ø
    
    risks associated with operating a business or in a market in which we have little or no prior experience;
 Ø
    
    potential write offs of acquired assets;
 Ø
    
    loss of key employees of acquired businesses; and
 Ø
    
    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.
  33




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##### Table of Contents



The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  OTHER RISKS RELATED TO OUR STOCK PRICE
 Our stock price may be volatile.
  Ø
    
    variations in our quarterly results of operations;
 Ø
    
    announcements by us or our competitors or lead source providers;
 Ø
    
    the relatively low level of public float and average daily trading volumes of our common stock;
 Ø
    
    changes in estimates of our performance or recommendations, or termination of coverage by securities analysts;
 Ø
    
    inability to meet quarterly or yearly estimates or targets of our performance;
 Ø
    
    the hiring or departure of key personnel, including agents or groups of agents or key executives;
 Ø
    
    changes in our reputation;
 Ø
    
    acquisitions or strategic alliances involving us or our competitors;
 Ø
    
    changes in the legal and regulatory environment affecting our business; and
 Ø
    
    market conditions in our industry and the economy as a whole.
  Our share price could decline due to the large number of outstanding shares of our common stock
eligible for future sale.
    Our principal stockholders, executive officers and directors own a significant percentage of our
stock, and as a result, the
 34




---



##### Table of Contents



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.
  Ø
    
    providing for a classified board of directors with staggered, three-year terms;
 Ø
    
    not providing for cumulative voting in the election of directors;
 Ø
    
    authorizing the board to issue, without stockholder approval, preferred stock with rights senior to those of common stock;
 Ø
    
    prohibiting stockholder action by written consent;
 Ø
    
    limiting the persons who may call special meetings of stockholders; and
 Ø
    
    requiring advance notification of stockholder nominations and proposals.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk:
 Interest rate sensitivity
   Exchange rate sensitivity
  
 Item 4. Controls and Procedures:
 35




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##### Table of Contents



(a)
    
    Disclosure controls and procedures. Our management evaluated, with the participation of our
Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures as of the end of the period covered by this report are
effective to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.The evaluation included certain internal control areas in which we have made and are continuing
to make changes to improve and enhance controls. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in evaluating the cost
benefit relationship of possible controls and procedures.(b)
    
    Changes in internal control over financial reporting. In the third quarter of 2005, we
continued our assessment of our internal controls to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. We accordingly made changes to our internal controls, primarily
with respect to better documentation and enhanced controls. We believe the changes made during
the third quarter of 2005 did not, individually or in the aggregate, have a material effect
on, and are not reasonably likely to materially affect, our internal control over financial
reporting.
 36




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings:
 Sullivan, et al v. ZipRealty
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
     
 Item 6. Exhibits:
  37




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##### Table of Contents



SIGNATURE
  ZIPREALTY, INC.By:
    /s/ Gary M. BeasleyGary M. BeasleyExecutive Vice President and Chief Financial Officer  38




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##### Table of Contents



Exhibit Index
 Exhibitnumber
    
    Description3.1(a)(1)
    
    Amended and Restated Certificate of Incorporation3.2(a)(1)
    
    Bylaws4.1(1)
    
    Form of Common Stock Certificate31.1
    
    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. 39