##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission
file number: 000-51002
 ZIPREALTY, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
(State of incorporation)
2000 POWELL STEET, SUITE 300
    
    94-3319956
(IRS employer identification number)
 EMERYVILLE, CA
(Address of principal executive offices)
    
    94608
(Zip Code)
 (510) 735-2600
(Registrants telephone number)
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
 o þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Unaudited Condensed Financial Statements
    
    
    4Unaudited Condensed Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    4Unaudited Condensed Statements of Operations for the Three Months Ended March 31, 2006 and 2005
    
    
    5Unaudited Condensed Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005
    
    
    6Notes to Unaudited Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38EXHIBITS INDEX
    
    
    39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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Statement regarding forward-looking statements
  
    
    our future financial results;
    
    our future growth and expansion into new markets;
    
    our future advertising and marketing activities; and
    
    our future investment in technology.
   Trademarks
 ®
 Internet Site
 www.ziprealty.com
 Where You Can Find Additional Information
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Financial Statements :
 ZIPREALTY, INC.
 
 UNAUDITED CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    12,482
    
    
    $
    6,868Short-term investments
    
    
    71,055
    
    
    
    82,041Accounts receivable, net of allowance of $53
and $42 at March 31, 2006 and December 31,
2005, respectively
    
    
    1,917
    
    
    
    1,634Prepaid expenses and other current assets
    
    
    3,719
    
    
    
    3,138Current and deferred income taxes
    
    
    2,219
    
    
    
    500Total current assets
    
    
    91,392
    
    
    
    94,181Restricted cash
    
    
    90
    
    
    
    90Property and equipment, net
    
    
    4,095
    
    
    
    2,538Deferred tax assets, net
    
    
    17,053
    
    
    
    17,053Other assets
    
    
    128
    
    
    
    91Total assets
    
    $
    112,758
    
    
    $
    113,953Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    2,124
    
    
    $
    1,631Accrued expenses
    
    
    6,322
    
    
    
    8,503Total current liabilities
    
    
    8,446
    
    
    
    10,134Other long-term liabilities
    
    
    594
    
    
    
    38Total liabilities
    
    
    9,040
    
    
    
    10,172Commitments and contingencies (Note 7)Stockholders equityCommon stock: $0.001 par value; 100,000 shares
authorized; 20,319 and 20,273 shares issued
and outstanding at March 31, 2006 and December
31, 2005, respectively
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    130,748
    
    
    
    130,077Common stock warrants
    
    
    6,094
    
    
    
    6,094Deferred stock-based compensation
    
    
    (226
    )
    
    
    (257
    )Accumulated other comprehensive loss
    
    
    (467
    )
    
    
    (490
    )Accumulated deficit
    
    
    (32,451
    )
    
    
    (31,663
    )Total stockholders equity
    
    
    103,718
    
    
    
    103,781Total liabilities and stockholders equity
    
    $
    112,758
    
    
    $
    113,953
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
 Three months ended March 31,2006
    
    
    2005(In thousands, except per share amounts)Net transaction revenues
    
    $
    18,648
    
    
    $
    17,318Referral and other revenues
    
    
    569
    
    
    
    500Net revenues
    
    
    19,217
    
    
    
    17,818Operating expensesCost of revenues
    
    
    10,740
    
    
    
    10,073Product development
    
    
    1,279
    
    
    
    594Marketing and business development
    
    
    3,073
    
    
    
    2,807General and administrative
    
    
    7,431
    
    
    
    4,262Total operating expenses
    
    
    22,523
    
    
    
    17,736Income (loss) from operations
    
    
    (3,306
    )
    
    
    82Other income (expense), netInterest income
    
    
    800
    
    
    
    600Other income (expense), net
    
    
    
    
    
    
    (1
    )Total other income (expense), net
    
    
    800
    
    
    
    599Income (loss) before income taxes
    
    
    (2,506
    )
    
    
    681Provision for (benefit from) income taxes
    
    
    (1,718
    )
    
    
    19Net income (loss)
    
    $
    (788
    )
    
    $
    662Net income (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.03Diluted
    
    $
    (0.04
    )
    
    $
    0.03Weighted average common shares outstanding:Basic
    
    
    20,291
    
    
    
    19,885Diluted
    
    
    20,291
    
    
    
    25,711
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
 Three months ended March 31,2006
    
    
    2005(In thousands)Cash flows from operating activitiesNet income (loss)
    
    $
    (788
    )
    
    $
    662Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Deferred income tax benefit
    
    
    (1,719
    )
    
    
    Depreciation and amortization
    
    
    536
    
    
    
    286Stock based compensation expense
    
    
    556
    
    
    
    35Provision for doubtful accounts
    
    
    11
    
    
    
    10Amortization of short-term investment premium
    
    
    62
    
    
    
    190Changes in operating assets and liabilitiesAccounts receivable
    
    
    (294
    )
    
    
    (500
    )Prepaid expenses and other current assets
    
    
    (581
    )
    
    
    (59
    )Other assets
    
    
    (37
    )
    
    
    Accounts payable
    
    
    493
    
    
    
    (661
    )Accrued expenses
    
    
    (2,181
    )
    
    
    480Other long-term liabilities
    
    
    556
    
    
    
    (16
    )Net cash provided by (used in) operating activities
    
    
    (3,386
    )
    
    
    427Cash flows from investing activitiesPurchases of short-term investments
    
    
    (5,994
    )
    
    
    (5,052
    )Purchases of property and equipment
    
    
    (2,093
    )
    
    
    (518
    )Proceeds from sale and maturity of short-term investments
    
    
    16,941
    
    
    
    715Net cash provided by (used in) investing activities
    
    
    8,854
    
    
    
    (4,855
    )Cash flows from financing activitiesProceeds from stock option exercises
    
    
    146
    
    
    
    39Proceeds from common stock warrant exercises
    
    
    
    
    
    
    6Net cash provided by financing activities
    
    
    146
    
    
    
    45Net increase (decrease) in cash and cash equivalents
    
    
    5,614
    
    
    
    (4,383
    )Cash and cash equivalents at beginning of period
    
    
    6,868
    
    
    
    11,525Cash and cash equivalents at end of period
    
    $
    12,482
    
    
    $
    7,142
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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
  Reclassifications
  Stock split
  Initial public offering
     Seasonality
  7




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2. SHORT-TERM INVESTMENTS
  Gross
    
    
    GrossGross Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
Fair Value(in thousands)Money market securities
    
    $
    2,131
    
    
    $
    
    
    
    $
    
    
    
    $
    2,131Repurchase agreements
    
    
    5,900
    
    
    
    
    
    
    
    
    
    
    
    5,900Asset backed
    
    
    10,210
    
    
    
    
    
    
    
    (51
    )
    
    
    10,159Corporate obligations
    
    
    29,006
    
    
    
    
    
    
    
    (194
    )
    
    
    28,812US Government and agency obligations
    
    
    32,306
    
    
    
    
    
    
    
    (222
    )
    
    
    32,084Total short-term investments
    
    $
    79,553
    
    
    $
    
    
    
    $
    (467
    )
    
    $
    79,086
 March 31,2006(in thousands)Recorded as:Cash equivalents
    
    $
    8,031Short-term investments
    
    
    71,055$
    79,086
   March 31,2006(in thousands)Due within one year or less
    
    $
    41,936Due after one year through two years
    
    
    29,130Due after two years through four years
    
    
    8,020$
    79,086
 3. NET INCOME (LOSS) PER SHARE
  Three Months ended March 31,2006
    
    
    2005(in thousands, except per sharedata)Numerator:Net income (loss) available to
common stockholders (for basic
and dilutive EPS computations)
    
    $
    (788
    )
    
    $
    662Denominator:Weighted average common shares
outstanding used to compute
EPS:Basic
    
    
    20,291
    
    
    
    19,885Diluted
    
    
    20,291
    
    
    
    25,711Net income (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.03Diluted
    
    $
    (0.04
    )
    
    $
    0.03
  8




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Three Months Ended March 31,2006
    
    
    2005(in thousands)Stock options to purchase common stock
    
    
    4,105
    
    
    
    551Warrants to purchase preferred and common stock
    
    
    4,603
    
    
    
    3
 4. STOCK BASED COMPENSATION
 Share-Based Payment
 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
 Prior to the adoption of SFAS 123(R)
 Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving Stock Compensation  an
Interpretation of APB No. 25 Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation  Transaction and Disclosure
  Three Months EndedMarch 31, 2005(in thousands, except pershare data)Net income as reported
    
    $
    662Add: Stock-based compensation expense included in
reported net income, net of tax
    
    
    35Deduct: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of tax
    
    
    (285
    )Pro forma net income
    
    $
    412Net income per share, as reported:Basic
    
    $
    0.03Diluted
    
    $
    0.03Pro forma income per share:Basic
    
    $
    0.02Diluted
    
    $
    0.02
 Impact of the Adoption of SFAS 123(R)
  9




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
    
    compensation cost for all unvested stock-based awards as of
January 1, 2006 that
were granted subsequent to May 2004, and prior to
January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123;
 
    
    compensation cost for stock-based awards granted subsequent
to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R); and
 
    
    compensation cost for options granted prior to May 2004, based on the intrinsic
value method
  Three Months EndedMarch 31, 2006(in thousands)Cost of revenues
    
    $
    120Product development
    
    
    42Marketing and business development
    
    
    27General and administrative
    
    
    367Total stock-based compensation
    
    
    556Tax effect on stock based compensation
    
    
    (222
    )Net effect on net income
    
    
    334Effect on earnings per share:Basic
    
    $
    0.02Diluted
    
    $
    0.02
  Valuation Assumptions
    Three Months Ended March 31,2006
    
    2005Expected volatility
    
    52%
    
    33%Risk-free interest rate
    
    4.3-4.7%
    
    4.1%Expected life
    
    6.1 years
    
    4 yearsExpected dividend yield
    
    0%
    
    0%Weighted-average fair value of options granted during the period
    
    $4.62
    
    $4.74
 10




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Stock Option Activity




WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    AggregateShares
    
    
    Price
    
    
    Life (Years)
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    3,652
    
    
    $
    7.01Options granted
    
    
    653
    
    
    $
    8.41Options exercised
    
    
    (45
    )
    
    $
    3.18Options forfeited or expired
    
    
    (82
    )
    
    $
    11.88Outstanding at March 31, 2006
    
    
    4,178
    
    
    $
    7.17
    
    
    
    7.68
    
    
    
    13,778Options exercisable at March 31, 2006
    
    
    2,205
    
    
    $
    3.79
    
    
    
    6.43
    
    
    
    12,718






Stock Option Plans


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5. INCOME TAXES
   6. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended March 31,2006
    
    
    2005(in thousands)Net income (loss)
    
    $
    (788
    )
    
    $
    662Other comprehensive loss:Change in accumulated unrealized
loss on available-for-sale
securities, net
    
    
    23
    
    
    
    (362
    )Comprehensive income (loss)
    
    $
    (765
    )
    
    $
    300
 7. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    leases2006
    
    
    1,0922007
    
    
    1,4632008
    
    
    1,1742009
    
    
    7562010
    
    
    739Thereafter
    
    
    782Total minimum lease payments
    
    $
    6,006
 Legal Proceedings
 Sullivan, et al v. ZipRealty
  12




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Indemnifications
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations:
 The following discussion should be read together with our financial statements and related
notes appearing elsewhere in this report. This discussion contains forward-looking statements based
upon current expectations that involve numerous risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements for many reasons,
including but not limited to those set forth in Risk Factors in Item 1A of Part II of this report
and elsewhere in this report. We undertake no obligation to update any information contained in
these forward-looking statements.
 OVERVIEW
 General
    Trends in our business
  13




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Market seasonality, cyclicality and interest rate influences
      CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Recent accounting pronouncements
  15




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Revenue recognition
  Internal-use software and website development costs
 Accounting for the Cost of Computer Software Developed or Obtained for Internal Use Accounting for Website Development Costs
 Stock-based compensation
 Share-Based
Payment Accounting for Stock Issued to Employee
 
    
    compensation cost for all unvested stock-based awards as of January 1, 2006 that
were granted subsequent to May 2004, and prior to January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123;
    
    compensation cost for stock-based awards granted subsequent, to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R); and
    
    compensation cost for options granted prior to May
2004, based on the intrinsic value method
  Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
  16




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
    
    comparable values of similar companies and the pricing of recent rounds of financing;
    
    revenue growth and profitability milestones achieved and as measured to budget;
    
    continued growth in experience of our management team;
    
    marketplace activity and competition;
    
    barriers to entry; and
    
    status of capital markets.
 Income taxes
   17




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RESULTS OF OPERATIONS
  Three months endedMarch 31,2006
    
    
    2005(in thousands, except perStatements of operations data (unaudited)
    
    share data)Net transaction revenues
    
    $
    18,648
    
    
    $
    17,318Referral and other revenues
    
    
    569
    
    
    
    500Net revenues
    
    
    19,217
    
    
    
    17,818Operating expenses:Cost of revenues
    
    
    10,740
    
    
    
    10,073Product development
    
    
    1,279
    
    
    
    594Marketing and business development
    
    
    3,073
    
    
    
    2,807General and administrative
    
    
    7,431
    
    
    
    4,262Total operating expenses
    
    
    22,523
    
    
    
    17,736Income (loss) from operations
    
    
    (3,306
    )
    
    
    82Other income (expense):Interest income
    
    
    800
    
    
    
    600Other income (expense), net
    
    
    
    
    
    
    (1
    )Total other income (expense), net
    
    
    800
    
    
    
    599Income (loss) before income taxes
    
    
    (2,506
    )
    
    
    681Provision for (benefit from) income taxes
    
    
    (1,718
    )
    
    
    19Net income (loss)
    
    $
    (788
    )
    
    $
    662Net income (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.03Diluted
    
    $
    (0.04
    )
    
    $
    0.03Weighted average common shares outstanding:Basic
    
    
    20,291
    
    
    
    19,885Diluted
    
    
    20,291
    
    
    
    25,711
 18




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Three Months EndedMarch 31,Statements of operations data
    
    2006
    
    
    2005Net transaction revenues
    
    
    97.0
    %
    
    
    97.2
    %Referral and other revenues
    
    
    3.0
    
    
    
    2.8Net revenues
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    55.9
    
    
    
    56.5Product development
    
    
    6.7
    
    
    
    3.3Marketing and business development
    
    
    16.0
    
    
    
    15.8General and administrative
    
    
    38.7
    
    
    
    23.9Total operating expenses
    
    
    117.3
    
    
    
    99.5Income (loss) from operations
    
    
    (17.3
    )
    
    
    0.5Other income (expense):Interest income
    
    
    4.2
    
    
    
    3.4Other income (expense)
    
    
    
    
    
    
    Total other income (expense), net
    
    
    4.2
    
    
    
    3.4Income (loss) before income taxes
    
    
    (13.1
    )
    
    
    3.9Provision for (benefit from) income taxes
    
    
    (8.9
    )
    
    
    0.1Net income (loss)
    
    
    (4.2
    %)
    
    
    3.8
    %
 Three Months EndedMarch 31,Other operating data
    
    2006
    
    2005Number of ZipAgents at end of period
    
    
    1,481
    
    
    
    983Total value of real estate transactions closed during period (in billions)
    
    $
    0.9
    
    
    $
    0.8Number of transactions closed during period (1)
    
    
    2,638
    
    
    
    2,343Average net revenue per transaction during period (2)
    
    $
    7,069
    
    
    $
    7,391
 
 (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 March 31, 2006 and 2005
 Net revenues
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Net revenues
    
    $
    19,217
    
    
    $
    17,818
    
    
    $
    1,399
    
    
    
    7.9
    %
  19




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Cost of revenues
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Cost of revenues
    
    $
    10,740
    
    
    $
    10,073
    
    
    $
    667
    
    
    
    6.6
    %
    Product development
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Product development
    
    $
    1,279
    
    
    $
    594
    
    
    $
    685
    
    
    
    115.4
    %
    Marketing and business development
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Marketing
and business
development
    
    $
    3,073
    
    
    $
    2,807
    
    
    $
    266
    
    
    
    9.5
    %
  20




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##### Table of Contents



General and administrative
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)General and
administrative
    
    $
    7,431
    
    
    $
    4,262
    
    
    $
    3,169
    
    
    
    74.3
    %
    Interest income
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Interest income
    
    $
    800
    
    
    $
    600
    
    
    $
    200
    
    
    
    33.2
    %
  Other income (expense), net
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Other income
(expense), net
    
    $
    
    
    
    $
    (1
    )
    
    $
    1
    
    
    
    (100.0
    )%
  Provision for income taxes
 Three Months EndedMarch 31,
    
    Increase
    
    Percent2006
    
    2005
    
    (decrease)
    
    change(in thousands)Provision for
(benefit from)
income taxes
    
    $
    (1,718
    )
    
    $
    19
    
    
    $
    (1,737
    )
    
    
    (8930.2
    )%
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LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
    Investing activities
    Financing activities
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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
    
    $
    1,462
    
    
    $
    2,472
    
    
    $
    1,473
    
    
    $
    599
    
    
    $
    6,006
 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
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Changes in internal control over financial reporting
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings:
 Sullivan, et al v. ZipRealty
  
 Item 1A. Risk Factors:
  RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We have been profitable in only eight quarters and may incur losses in the future, and our limited
operating history makes our future financial performance difficult to assess.
    Our business model requires access to real estate listing services provided by third parties that
we do not control, and the demand for our services may be reduced if our ability to display
listings on our website is restricted.
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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.
   Our business model is new and unproven, and we cannot guarantee our future success.
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If we fail to recruit, hire and retain qualified agents, we may be unable to service our clients
and our growth could be impaired.
    Our failure to effectively manage the growth of our ZipAgents and our information and control
systems could adversely affect our ability to service our clients.
   Our operating results are subject to seasonality and vary significantly among quarters during each
calendar year, making meaningful comparisons of successive quarters difficult.
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
    
    timing of widely observed holidays and vacation periods and availability home buyers and
sellers, real estate agents and related service providers during these periods;
    
    a desire to relocate prior to the start of the school year;
    
    inclement weather which can influence consumers desire or ability to visit properties;
    
    timing of employment compensation changes, such as raises and bonuses;
    
    the time between entry into a purchase contract for real estate and closing of the transaction; and
    
    the levels of housing inventory available for sale.
  Interest rates have been at historic lows for the past several years, and increases in interest
rates have the potential to negatively impact the housing market.
  If consumers do not continue to use the Internet as a tool in their residential real estate buying
or selling process, we may be unable to attract new clients and our growth and financial results
may suffer.
  Our success depends in part on our ability to successfully expand into additional real estate
markets.
  
    
    the economic conditions and demographics of a market;
    
    the general prices of real estate in a market;
    
    Internet use in a market;
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
    
    competition within a market from local and national brokerage firms;
    
    rules and regulations governing a market;
    
    the ability and capacity of our organization to manage expansion into additional
geographic areas, additional headcount and increased organizational complexity;
    
    the existence of local MLSs; and
    
    state laws governing cash rebates and other regulatory restrictions.
  Unless we develop, maintain and protect a strong brand identity, our business may not grow and our
financial results may suffer.
   We have numerous competitors, many of which have valuable industry relationships and access to
greater resources than we do.
  Trends
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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.
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We derive a significant portion of our leads through third parties, and if any of our significant
lead generation relationships are terminated, 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.
  If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our license to operate.
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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.
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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.
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If we fail to attract and retain our key personnel, our ability to meet our business goals will be
impaired and our financial condition and results of operations will suffer.
  We intend to evaluate acquisitions or investments in complementary technologies and businesses and
we may not realize the anticipated benefits from, and may have to pay substantial costs related
to, any acquisitions or investments that we undertake.
  
    
    our inability to successfully integrate acquired technologies or operations;
    
    diversion of managements attention;
    
    problems maintaining uniform standards, procedures, controls and policies;
    
    potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;
    
    expenses related to amortization of intangible assets;
    
    risks associated with operating a business or in a market in which we have little or no prior experience;
    
    potential write offs of acquired assets;
    
    loss of key employees of acquired businesses; and
    
    our inability to recover the costs of acquisitions or investments.
 Accounting for employee stock options using the fair value method could significantly reduce our
net income in future periods.
  The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  Because our marketing relationship with E-LOAN represents a source of revenue for us and funding
for our clients, we could be harmed if this relationship became impaired.
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OTHER RISKS RELATED TO OUR STOCK PRICE
 Our stock price may be volatile.
  
    
    variations in our quarterly results of operations;
    
    announcements by us or our competitors or lead source providers;
    
    the relatively low level of public float and average daily trading volumes of our common stock;
    
    changes in estimates of our performance or recommendations, or termination of coverage by securities analysts;
    
    inability to meet quarterly or yearly estimates or targets of our performance;
    
    the hiring or departure of key personnel, including agents or groups of agents or key executives;
    
    changes in our reputation;
    
    acquisitions or strategic alliances involving us or our competitors;
    
    changes in the legal and regulatory environment affecting our business; and
    
    market conditions in our industry and the economy as a whole.
  Our share price could decline due to the large number of outstanding shares of our common stock
eligible for future sale.
    Our principal stockholders, executive officers and directors own a significant percentage of our
stock, and as a result, the trading price for our shares may be depressed and these stockholders
can take actions that may be adverse to your interests.
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Our charter documents and Delaware law could prevent a takeover that stockholders consider
favorable and could also reduce the market price of our stock.
  
    
    providing for a classified board of directors with staggered, three-year terms;
    
    not providing for cumulative voting in the election of directors;
    
    authorizing the board to issue, without stockholder approval, preferred stock with rights senior to those of common stock;
    
    prohibiting stockholder action by written consent;
    
    limiting the persons who may call special meetings of stockholders; and
    
    requiring advance notification of stockholder nominations and proposals.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
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Item 5. Other Information:
  
 Item 6. Exhibits:
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SIGNATURE
  ZIPREALTY, INC.By:
    
    /s/ Gary M. BeasleyGary M. BeasleyPresident and Chief Financial Officer
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Exhibit Index
 Exhibitnumber
    
    Description3.1(a)(1)
    
    Amended and Restated Certificate of Incorporation3.2(a)(1)
    
    Bylaws4.1(1)
    
    Form of Common Stock Certificate10.12(2)*
    
    Summary of Cash Compensation for Named Executive Officers10.13(2)
    
    Management Incentive Plan  Fiscal Year 200631.1
    
    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 Annual Report
on Form 10-K (File No. 000-51002) filed with the Securities and Exchange Commission on March
16, 2006.*
    
    Identifies a management contract or compensatory plan or agreement required to be filed as an
exhibit of this report. 39