##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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
    
    94-3319956(State of incorporation)
    
    (IRS employer identification number)2000 POWELL STEET, SUITE 1555EMERYVILLE, CA
    
    94608(Address of principal executive offices)
    
    (Zip Code)
 (510) 735-2600
(Registrants telephone number)
 þ o
 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 June 30, 2005 and December 31, 2004
    
    4Unaudited Condensed Statements of Operations for the Three and Six Months Ended June 30, 2005
and 2004
    
    5Unaudited Condensed Statements of Cash Flows for the Six Months Ended June 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
    
    36Item 1.
    
    Legal Proceedings
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    36Item 5.
    
    Other Information
    
    37Item 6.
    
    Exhibits
    
    37SIGNATURES
    
    38EXHIBITS INDEXEXHIBIT 10.11EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  
 2




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##### Table of Contents



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 10-K,
 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Financial Statements :
 
 UNAUDITED CONDENSED BALANCE SHEETS (In thousands)
 June 30,
    
    December 31,2005
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    5,269
    
    
    $
    11,525Short-term investments
    
    
    81,495
    
    
    
    71,972Accounts receivable, net of allowance of $55
and $29 at June 30, 2005 and December 31,
2004, respectively
    
    
    2,261
    
    
    
    1,089Prepaid expenses and other current assets
    
    
    2,331
    
    
    
    2,102Total current assets
    
    
    91,356
    
    
    
    86,688Restricted cash
    
    
    190
    
    
    
    190Property and equipment, net
    
    
    1,976
    
    
    
    1,236Other assets
    
    
    12
    
    
    
    12Total assets
    
    $
    93,534
    
    
    $
    88,126Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    1,171
    
    
    $
    1,478Accrued expenses
    
    
    10,155
    
    
    
    4,287Total current liabilities
    
    
    11,326
    
    
    
    5,765Other long-term liabilities
    
    
    61
    
    
    
    90Total liabilities
    
    
    11,387
    
    
    
    5,855Commitments and contingencies (Note 7)Stockholders equityCommon stock: $0.001 par value; 100,000 shares
authorized; 20,162 and 19,880 shares issued
and outstanding at June 30, 2005 and December
31, 2004, respectively
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    129,058
    
    
    
    128,555Common stock warrants
    
    
    6,148
    
    
    
    6,369Deferred stock-based compensation
    
    
    (324
    )
    
    
    (438
    )Accumulated other comprehensive loss
    
    
    (341
    )
    
    
    (105
    )Accumulated deficit
    
    
    (52,414
    )
    
    
    (52,130
    )Total stockholders equity
    
    
    82,147
    
    
    
    82,271Total liabilities and stockholders equity
    
    $
    93,534
    
    
    $
    88,126
  4




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##### Table of Contents



UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data)
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net transaction revenues
    
    $
    25,228
    
    
    $
    15,902
    
    
    $
    42,546
    
    
    $
    26,562Referral and other revenues
    
    
    529
    
    
    
    368
    
    
    
    1,029
    
    
    
    608Net revenues
    
    
    25,757
    
    
    
    16,270
    
    
    
    43,575
    
    
    
    27,170Operating expensesCost of revenues
    
    
    13,820
    
    
    
    8,709
    
    
    
    23,883
    
    
    
    14,803Product development
    
    
    610
    
    
    
    549
    
    
    
    1,203
    
    
    
    996Marketing and business development
    
    
    3,285
    
    
    
    2,203
    
    
    
    6,091
    
    
    
    3,863General and administrative
    
    
    5,458
    
    
    
    3,593
    
    
    
    9,696
    
    
    
    6,382Stock-based compensation
    
    
    36
    
    
    
    48
    
    
    
    71
    
    
    
    85Litigation
    
    
    4,164
    
    
    
    
    
    
    
    4,164
    
    
    
    Total operating expenses
    
    
    27,373
    
    
    
    15,102
    
    
    
    45,108
    
    
    
    26,129Income (loss) from operations
    
    
    (1,616
    )
    
    
    1,168
    
    
    
    (1,533
    )
    
    
    1,041Interest income
    
    
    652
    
    
    
    20
    
    
    
    1,252
    
    
    
    37Other income (expense), net
    
    
    (1
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (6
    )Total other income (expense), net
    
    
    651
    
    
    
    19
    
    
    
    1,249
    
    
    
    31Income (loss) before income taxes
    
    
    (965
    )
    
    
    1,187
    
    
    
    (284
    )
    
    
    1,072Provision
(benefit) for income taxes
    
    
    (19
    )
    
    
    30
    
    
    
    
    
    
    
    30Net income (loss)
    
    $
    (946
    )
    
    $
    1,157
    
    
    $
    (284
    )
    
    $
    1,042Cumulative preferred stock dividends
    
    $
    
    
    
    $
    157
    
    
    $
    
    
    
    $
    314Amount allocated to participating preferred
stockholders
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    728Net income (loss) available to common stockholders
    
    $
    (946
    )
    
    $
    
    
    
    $
    (284
    )
    
    $
    Net income (loss) per share:Basic
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Weighted average common shares outstanding:Basic
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484Diluted
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484Stock-based compensation can be allocated to the
following:Cost of revenues
    
    $
    9
    
    
    $
    12
    
    
    $
    19
    
    
    $
    25Product development
    
    
    1
    
    
    
    4
    
    
    
    2
    
    
    
    8Marketing and business development
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    4General and administrative
    
    
    25
    
    
    
    30
    
    
    
    49
    
    
    
    48Total stock-based compensation
    
    $
    36
    
    
    $
    48
    
    
    $
    71
    
    
    $
    85
  5




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UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
 Six months ended June 30,2005
    
    2004Cash flows from operating activitiesNet income (loss)
    
    $
    (284
    )
    
    $
    1,042Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation and amortization
    
    
    643
    
    
    
    385Amortization of deferred stock-based compensation
    
    
    71
    
    
    
    85Amortization of short-term investment premium
    
    
    376
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable, net
    
    
    (1,172
    )
    
    
    (728
    )Prepaid expenses and other current assets
    
    
    (229
    )
    
    
    (473
    )Other assets
    
    
    
    
    
    
    Accounts payable
    
    
    (307
    )
    
    
    88Accrued expenses
    
    
    5,868
    
    
    
    2,218Other long-term liabilities
    
    
    (29
    )
    
    
    (22
    )Net cash provided by operating activities
    
    
    4,937
    
    
    
    2,595Cash flows from investing activitiesPurchases of short-term investments
    
    
    (17,094
    )
    
    
    Purchases of property and equipment
    
    
    (1,383
    )
    
    
    (715
    )Proceeds from sale of short-term investments
    
    
    6,959
    
    
    
    Net cash used in investing activities
    
    
    (11,518
    )
    
    
    (715
    )Cash flows from financing activitiesProceeds from stock option exercises
    
    
    314
    
    
    
    84Proceeds from common stock warrant exercises
    
    
    11
    
    
    
    6,573Net cash provided by financing activities
    
    
    325
    
    
    
    6,657Net increase (decrease) in cash and cash equivalents
    
    
    (6,256
    )
    
    
    8,537Cash and cash equivalents at beginning of period
    
    
    11,525
    
    
    
    10,357Cash and cash equivalents at end of period
    
    $
    5,269
    
    
    $
    18,894Supplemental cash flow informationNon-cash investing and financing activitiesDeferred stock-based compensation
    
    $
    
    
    
    $
    430Recapture of deferred stock-based compensation upon employee
terminations
    
    $
    43
    
    
    $
    75Unrealized loss on available-for-sale securities
    
    $
    (236
    )
    
    $
    Recognition of preferred stock additional paid in capital
from preferred stock warrants due to exercise of preferred
stock series E-1 warrants
    
    $
    
    
    
    $
    757Recognition of common stock additional paid in capital from
common stock warrants due to exercise of common stock
warrants
    
    $
    221
    
    
    $
    Write-off of fully depreciated property, plant, and equipment
    
    $
    
    
    
    $
    2
  6




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##### Table of Contents



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 (LOSS) PER SHARE
 Participating Securities and the Two-Class Method
under FASB Statement No. 128
  Three Months ended June 30,
    
    Six Months ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Numerator:Net income (loss)
    
    $
    (946
    )
    
    $
    1,157
    
    
    $
    (284
    )
    
    $
    1,042Cumulative preferred stock dividends
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    314Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    728Net income (loss) available to common stockholders (for
basic and dilutive EPS computations)
    
    $
    (946
    )
    
    $
    
    
    
    $
    (284
    )
    
    $
    Denominator:Weighted average common shares outstanding used to
compute
EPS:Basic
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484Diluted
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484Net income (loss) per share:Basic
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    
  8




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Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Stock options to purchase common stock
    
    
    775
    
    
    
    97
    
    
    
    775
    
    
    
    97Participating convertible preferred stock
    
    
    
    
    
    
    12,478
    
    
    
    
    
    
    
    12,478Warrants to purchase preferred and common stock
    
    
    3
    
    
    
    13
    
    
    
    3
    
    
    
    13
 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 June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Net income (loss) as reported
    
    $
    (946
    )
    
    $
    1,157
    
    
    $
    (284
    )
    
    $
    1,042Add: Stock-based compensation expense
included in reported net income (loss), net of taxes
    
    
    36
    
    
    
    46
    
    
    
    71
    
    
    
    83Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net of taxes
    
    
    (322
    )
    
    
    (106
    )
    
    
    (602
    )
    
    
    (167
    )Pro forma net income (loss)
    
    $
    (1,232
    )
    
    $
    1,097
    
    
    $
    (815
    )
    
    $
    958Net income (loss) per share, as reported:Basic
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Pro forma income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    Diluted
    
    $
    (0.06
    )
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    
    36%
    
    
    
    0-50%(1)
    
    
    
    33-36%
    
    
    
    0-50%(1)Risk-free interest rate
    
    
     3.8%
    
    
    
    2.7-3.7%
    
    
    
    3.8-4.1%
    
    
    
        2.5-3.7%Expected life
    
    4 years
    
    4 years
    
    4 years
    
    4 yearsExpected dividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%
    
    
    
    0%
 
 (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.  9




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5. SHORT-TERM INVESTMENTS
  Gross
    
    GrossGross Amortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair Value(in thousands)Money market securities
    
    $
    4,604
    
    
    $
    
    
    
    $
    
    
    
    $
    4,604Repurchase agreements
    
    
    1,538
    
    
    
    
    
    
    
    (7
    )
    
    
    1,531Asset backed
    
    
    8,348
    
    
    
    
    
    
    
    (23
    )
    
    
    8,325Corporate obligations
    
    
    33,643
    
    
    
    
    
    
    
    (171
    )
    
    
    33,472US Government and agency obligations
    
    
    38,307
    
    
    
    10
    
    
    
    (150
    )
    
    
    38,167Total short-term investments
    
    $
    86,440
    
    
    $
    10
    
    
    $
    (351
    )
    
    $
    86,099
 June 30,2005(in thousands)Recorded as:Cash equivalents
    
    $
    4,604Short-term investments
    
    
    81,495$
    86,099
   June 30,2005(in thousands)Due within one year or less
    
    $
    59,312Due after one year through two years
    
    
    23,808Due after two years through three years
    
    
    2,979$
    86,099
 6. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(in thousands)Net income (loss)
    
    $
    (946
    )
    
    $
    1,157
    
    
    $
    (284
    )
    
    $
    1,042Other comprehensive income (loss):Change in accumulated unrealized
gain (loss) on
available-for-sale securities,
net
    
    
    127
    
    
    
    
    
    
    
    (236
    )
    
    
    Comprehensive income (loss)
    
    $
    (819
    )
    
    $
    1,157
    
    
    $
    (520
    )
    
    $
    1,042
 7. COMMITMENTS AND CONTINGENCIES
   10




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OperatingYear ending December 31,
    
    leases2005
    
    $
    4982006
    
    
    1,0262007
    
    
    4552008
    
    
    150Total minimum lease payments
    
    $
    2,129
 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
  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
 14




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##### Table of Contents



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.
  Income taxes
   15




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##### Table of Contents



RESULTS OF OPERATIONS
  Three months ended
    
    Six months endedJune 30,
    
    June 30,Statements of operations data
    
    2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Net transaction revenues
    
    $
    25,228
    
    
    $
    15,902
    
    
    $
    42,546
    
    
    $
    26,562Referral and other revenues
    
    
    529
    
    
    
    368
    
    
    
    1,029
    
    
    
    608Net revenues
    
    
    25,757
    
    
    
    16,270
    
    
    
    43,575
    
    
    
    27,170Operating expenses:Cost of revenues
    
    
    13,820
    
    
    
    8,709
    
    
    
    23,883
    
    
    
    14,803Product development
    
    
    610
    
    
    
    549
    
    
    
    1,203
    
    
    
    996Marketing and business development
    
    
    3,285
    
    
    
    2,203
    
    
    
    6,091
    
    
    
    3,863General and administrative
    
    
    5,458
    
    
    
    3,593
    
    
    
    9,696
    
    
    
    6,382Stock-based compensation
    
    
    36
    
    
    
    48
    
    
    
    71
    
    
    
    85Litigation
    
    
    4,164
    
    
    
    
    
    
    
    4,164
    
    
    
    Total operating expenses
    
    
    27,373
    
    
    
    15,102
    
    
    
    45,108
    
    
    
    26,129Income (loss) from operations
    
    
    (1,616
    )
    
    
    1,168
    
    
    
    (1,533
    )
    
    
    1,041Interest income
    
    
    652
    
    
    
    20
    
    
    
    1,252
    
    
    
    37Other income (expense), net
    
    
    (1
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (6
    )Total other income (expense), net
    
    
    651
    
    
    
    19
    
    
    
    1,249
    
    
    
    31Income (loss) before income taxes
    
    
    (965
    )
    
    
    1,187
    
    
    
    (284
    )
    
    
    1,072Provision (benefit) for income taxes
    
    
    (19
    )
    
    
    30
    
    
    
    
    
    
    
    30Net income (loss)
    
    $
    (946
    )
    
    $
    1,157
    
    
    $
    (284
    )
    
    $
    1,042Cumulative preferred stock dividends
    
    $
    
    
    
    $
    157
    
    
    $
    
    
    
    $
    314Amount allocated to participating preferred shares
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    728Net income (loss) available to common stockholders
    
    $
    (946
    )
    
    $
    
    
    
    $
    (284
    )
    
    $
    Net income (loss) per share:Basic
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Diluted
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    Weighted average common shares outstanding:Basic
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484Diluted
    
    
    20,005
    
    
    
    1,499
    
    
    
    20,001
    
    
    
    1,484
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Statements of operations data
    
    2005
    
    2004
    
    2005
    
    2004Net transaction revenues
    
    
    97.9
    %
    
    
    97.7
    %
    
    
    97.6
    %
    
    
    97.8
    %Referral and other revenues
    
    
    2.1
    
    
    
    2.3
    
    
    
    2.4
    
    
    
    2.2Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    53.7
    
    
    
    53.5
    
    
    
    54.8
    
    
    
    54.5Product development
    
    
    2.4
    
    
    
    3.4
    
    
    
    2.8
    
    
    
    3.7Marketing and business development
    
    
    12.8
    
    
    
    13.5
    
    
    
    14.0
    
    
    
    14.2General and administrative
    
    
    21.2
    
    
    
    22.1
    
    
    
    22.3
    
    
    
    23.5Stock-based compensation
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3Litigation
    
    
    16.2
    
    
    
    
    
    
    
    9.6
    
    
    
    Total operating expenses
    
    
    106.4
    
    
    
    92.8
    
    
    
    103.7
    
    
    
    96.2
 16




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Statements of operations data
    
    2005
    
    2004
    
    2005
    
    2004Income (loss) from operations
    
    
    (6.4
    )
    
    
    7.2
    
    
    
    (3.7
    )
    
    
    3.8Interest income
    
    
    2.5
    
    
    
    0.1
    
    
    
    2.9
    
    
    
    0.1Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense), net
    
    
    2.5
    
    
    
    0.1
    
    
    
    2.9
    
    
    
    0.1Income (loss) before income taxes
    
    
    (3.9
    )
    
    
    7.3
    
    
    
    (0.8
    )
    
    
    3.9Provision (benefit) for income taxes
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1Net income (loss)
    
    
    (3.8
    )%
    
    
    7.1
    %
    
    
    (0.8
    )%
    
    
    3.8
    %
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Other operating data
    
    2005
    
    2004
    
    2005
    
    2004Number of ZipAgents at end of period
    
    
    1,235
    
    
    
    717
    
    
    
    1,235
    
    
    
    717Total value of real estate transactions closed during period (in millions)
    
    $
    1,236
    
    
    $
    770
    
    
    $
    2,068
    
    
    $
    1,302Number of transactions closed during period (1)
    
    
    3,375
    
    
    
    2,192
    
    
    
    5,718
    
    
    
    3,792Average net revenue per transaction during period (2)
    
    $
    7,475
    
    
    $
    7,255
    
    
    $
    7,441
    
    
    $
    7,005
 
 (1)
    
    The term transaction refers to each representation of a buyer or seller in a real estate
purchase or sale.(2)
    
    Average net revenue per transaction equals net transaction revenues divided by number of
transactions with respect to each period. Comparison of the three months ended June 30, 2005 and 2004
 Net revenues
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Net revenues
    
    $
    25,757
    
    
    $
    16,270
    
    
    $
    9,487
    
    
    
    58.3
    %
   Cost of revenues
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Cost of revenues
    
    $
    13,820
    
    
    $
    8,709
    
    
    $
    5,111
    
    
    
    58.7
    %
  17




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##### Table of Contents



Product development
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Product development
    
    $
    610
    
    
    $
    549
    
    
    $
    61
    
    
    
    11.1
    %
    Marketing and business development
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Marketing and business development
    
    $
    3,285
    
    
    $
    2,203
    
    
    $
    1,082
    
    
    
    49.1
    %
    General and administrative
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)General and administrative
    
    $
    5,458
    
    
    $
    3,593
    
    
    $
    1,865
    
    
    
    51.9
    %
   18




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Stock-based compensation
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Stock-based compensation
    
    $
    36
    
    
    $
    48
    
    
    $
    (12
    )
    
    
    (24.6
    %)
  Share-Based Payment
 Litigation
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Litigation
    
    $
    4,164
    
    
    $
    
    
    
    $
    4,164
    
    
    
    100.0
    %
  Interest income
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Interest income
    
    $
    652
    
    
    $
    20
    
    
    $
    632
    
    
    
    3,216.9
    %
  19




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Other income (expense), net
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Other income (expense), net
    
    $
    (1
    )
    
    $
    (1
    )
    
    
    ($0
    )
    
    
    (81.0
    %)
  Provision for income taxes
 Three Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Provision for income taxes
    
    $
    (19
    )
    
    $
    30
    
    
    $
    (49
    )
    
    
    (164.2
    %)
  Comparison of the six months ended June 30, 2005 and 2004
 Net revenues
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Net revenues
    
    $
    43,575
    
    
    $
    27,170
    
    
    $
    16,405
    
    
    
    60.4
    %
   Cost of revenues
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Cost of revenues
    
    $
    23,883
    
    
    $
    14,803
    
    
    $
    9,080
    
    
    
    61.3
    %
  20




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##### Table of Contents



Product development
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Product development
    
    $
    1,203
    
    
    $
    996
    
    
    $
    207
    
    
    
    20.8
    %
    Marketing and business development
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Marketing and
business development
    
    $
    6,091
    
    
    $
    3,863
    
    
    $
    2,228
    
    
    
    57.7
    %
    General and administrative
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)General and administrative
    
    $
    9,696
    
    
    $
    6,382
    
    
    $
    3,314
    
    
    
    51.9
    %
   21




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##### Table of Contents



Stock-based compensation
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Stock-based compensation
    
    $
    71
    
    
    $
    85
    
    
    $
    (14
    )
    
    
    (16.7
    %)
  Share-Based Payment
 Litigation
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Litigation
    
    $
    4,164
    
    
    $
    
    
    
    $
    4,164
    
    
    
    100.0
    %
  Interest income
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Interest income
    
    $
    1,252
    
    
    $
    37
    
    
    $
    1,215
    
    
    
    3,329.1
    %
  22




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##### Table of Contents



Other income (expense), net
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Other income (expense), net
    
    $
    (3
    )
    
    $
    (6
    )
    
    $
    3
    
    
    
    (49.3
    %)
  Provision for income taxes
 Six Months EndedJune 30,
    
    Increase
    
    Percent2005
    
    2004
    
    (decrease)
    
    change(in thousands)Provision for income taxes
    
    $
    
    
    
    $
    30
    
    
    
    ($30
    )
    
    
    (100.0
    %)
  LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
   Investing activities
    23




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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
    
    $
    1,005
    
    
    $
    1,124
    
    
    $
    
    
    
    $
    
    
    
    $
    2,129
 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 six 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.
 25




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##### Table of Contents



If we fail to recruit, hire and retain qualified agents, we may be unable to service our clients
and our growth could be impaired.
    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;
 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.
  27




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##### Table of Contents



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.
  Unless we develop, maintain and protect a strong brand identity, our business may not grow and our
financial results may suffer.
   28




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##### Table of Contents



We have numerous competitors, many of which have valuable industry relationships and access to
greater resources than we do.
  Trends
 Changes in federal and state real estate laws and regulations, and rules of industry organizations
such as the National Association of REALTORS®, could adversely affect our business.
  We derive a significant portion of our leads through third parties, and if any of our significant
lead generation relationships are terminated or become more expensive, our ability to attract new
clients and grow our business may be adversely affected.
  29




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##### Table of Contents



Our business could be harmed by economic events that are out of our control and may be difficult to
predict.
  Our ability to expand our business may be limited by state laws governing cash rebates to home
buyers.
  We may be unable to integrate our technology with each MLS on a cost-effective basis, which may
harm our operating results and adversely affect our ability to service clients.
  If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our license to operate.
  We may have liabilities in connection with real estate brokerage activities.
 30




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##### Table of Contents



We may be subject to liability for the Internet content that we publish.
  We monitor and evaluate the use of our website by our registered users, which could raise privacy
concerns.
  We may need to change the manner in which we conduct our business if government regulation of the
Internet increases.
    Our reputation and client and agent service offerings may be harmed by system failures and computer

viruses.
  31




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##### Table of Contents



Our business is geographically concentrated, which makes us more susceptible to business
interruption and financial loss due to natural disasters, inclement weather 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.
   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; orØ
    
    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.
  32




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##### Table of Contents



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; andØ
    
    
    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.
  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;
 33




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##### Table of Contents



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; andØ
    
    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.
  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;
 34




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##### Table of Contents



Ø
    
    limiting the persons who may call special meetings of stockholders; andØ
    
    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:
 (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 second 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 second 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.
 35




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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 4. Submission of Matters to a Vote of Security Holders:
  Nominees
    
    Votes For
    
    
    Votes WithheldMatthew E. Crisp
    
    
    13,989,077
    
    
    
    217,653Donald F. Wood
    
    
    14,023,935
    
    
    
    182,795
   Proposal
    
    Votes For
    
    
    Votes Against
    
    
    Votes AbstainedRatification of
appointment of PricewaterhouseCoopers
LLP as the Companys
independent accountants
for the fiscal year
ending December 31, 2005
    
    
    14,185,199
    
    
    
    4,998
    
    
    
    16,533
 36




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##### Table of Contents



Item 5. Other Information:
  
 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 Certificate10.11*
    
    Director Compensation Policy31.1
    
    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 28, 2005.*
    
    Identifies a management contract or compensatory plan of arrangement required to be filed as an
exhibit to this report. 39