##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number: 000-51002
 ZIPREALTY, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
(State of incorporation)
    
    94-3319956
(IRS employer identification number)2000 POWELL STREET, SUITE 300EMERYVILLE, CA
    
    94608(Address of principal executive offices)
    
    (Zip Code)
 (510) 735-2600
(Registrants telephone number)
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    4Item 1. Unaudited Condensed Consolidated Financial Statements
    
    
    4Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2007 and 2006
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II  OTHER INFORMATION
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    44EXHIBITS INDEX
    
    
    45EXHIBIT 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
  3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements:
 ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 June 30,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assetsCash and cash equivalents
    
    $
    6,712
    
    
    $
    8,575Short-term investments
    
    
    80,005
    
    
    
    80,233Accounts receivable, net of allowance of $19
and $30 at June 30, 2007 and December 31,
2006, respectively
    
    
    3,100
    
    
    
    1,781Prepaid expenses and other current assets
    
    
    3,214
    
    
    
    3,151Current and deferred income taxes
    
    
    32
    
    
    
    29Total current assets
    
    
    93,063
    
    
    
    93,769Restricted cash
    
    
    90
    
    
    
    90Property and equipment, net
    
    
    4,633
    
    
    
    4,114Investment in non-consolidated companies
    
    
    13
    
    
    
    17Other assets
    
    
    309
    
    
    
    367Total assets
    
    $
    98,108
    
    
    $
    98,357Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    2,696
    
    
    $
    2,184Accrued
expenses and other liabilities
    
    
    8,624
    
    
    
    7,791Total current liabilities
    
    
    11,320
    
    
    
    9,975Other long-term liabilities
    
    
    501
    
    
    
    513Total liabilities
    
    
    11,821
    
    
    
    10,488Commitments and contingencies (Note 8)Stockholders equityCommon stock: $0.001 par value; 100,000
shares authorized; 22,526 and 21,627 shares
issued and outstanding at June 30, 2007 and
December 31, 2006, respectively
    
    
    23
    
    
    
    22Additional paid-in capital
    
    
    139,518
    
    
    
    134,813Common stock warrants
    
    
    3,305
    
    
    
    5,519Deferred stock-based compensation
    
    
    (27
    )
    
    
    (71
    )Accumulated other comprehensive loss
    
    
    (138
    )
    
    
    (157
    )Accumulated deficit
    
    
    (56,394
    )
    
    
    (52,257
    )Total stockholders equity
    
    
    86,287
    
    
    
    87,869Total liabilities and stockholders equity
    
    $
    98,108
    
    
    $
    98,357
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net transaction revenues
    
    $
    30,506
    
    
    $
    26,195
    
    
    $
    53,181
    
    
    $
    44,843Referral and other revenues
    
    
    775
    
    
    
    714
    
    
    
    1,482
    
    
    
    1,283Net revenues
    
    
    31,281
    
    
    
    26,909
    
    
    
    54,663
    
    
    
    46,126Operating expensesCost of revenues
    
    
    17,312
    
    
    
    14,590
    
    
    
    30,387
    
    
    
    25,330Product development
    
    
    1,813
    
    
    
    1,351
    
    
    
    3,494
    
    
    
    2,752Sales and marketing
    
    
    9,829
    
    
    
    7,596
    
    
    
    18,676
    
    
    
    14,679General and administrative
    
    
    4,457
    
    
    
    3,030
    
    
    
    8,425
    
    
    
    6,329Total operating expenses
    
    
    33,411
    
    
    
    26,567
    
    
    
    60,982
    
    
    
    49,090Income (loss) from operations
    
    
    (2,130
    )
    
    
    342
    
    
    
    (6,319
    )
    
    
    (2,964
    )Other income (expense), netInterest income
    
    
    1,094
    
    
    
    896
    
    
    
    2,182
    
    
    
    1,696Other income
(expense), net
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense), net
    
    
    1,098
    
    
    
    896
    
    
    
    2,182
    
    
    
    1,696Income (loss) before income taxes
    
    
    (1,032
    )
    
    
    1,238
    
    
    
    (4,137
    )
    
    
    (1,268
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    1,458
    
    
    
    
    
    
    
    (260
    )Net loss
    
    $
    (1,032
    )
    
    $
    (220
    )
    
    $
    (4,137
    )
    
    $
    (1,008
    )Net loss per share:Basic
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )Weighted average common shares outstanding:Basic
    
    
    22,501
    
    
    
    20,366
    
    
    
    22,255
    
    
    
    20,329Diluted
    
    
    22,501
    
    
    
    20,366
    
    
    
    22,255
    
    
    
    20,329
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ZIPREALTY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Six months ended June 30,2007
    
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (4,137
    )
    
    $
    (1,008
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activitiesDeferred income tax benefit
    
    
    
    
    
    
    (261
    )Depreciation and amortization
    
    
    1,419
    
    
    
    1,124Stock-based compensation expense
    
    
    1,995
    
    
    
    1,169Provision for doubtful accounts
    
    
    (11
    )
    
    
    23Amortization of short-term investment premium (discount)
    
    
    (209
    )
    
    
    72Loss on disposal of property and equipment
    
    
    7
    
    
    
    Equity in net loss of non-consolidated companies
    
    
    4
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (1,308
    )
    
    
    (895
    )Prepaid expenses and other current assets
    
    
    (66
    )
    
    
    348Other assets
    
    
    43
    
    
    
    (41
    )Accounts payable
    
    
    512
    
    
    
    (302
    )Accrued
expenses and other liabilities
    
    
    833
    
    
    
    (875
    )Other long-term liabilities
    
    
    (12
    )
    
    
    552Net cash used in operating activities
    
    
    (930
    )
    
    
    (94
    )Cash flows from investing activitiesPurchases of short-term investments
    
    
    (35,735
    )
    
    
    (31,553
    )Proceeds from sale and maturity of short-term investments
    
    
    36,191
    
    
    
    40,823Purchases of property and equipment
    
    
    (1,910
    )
    
    
    (2,660
    )Investment in non-consolidated companies
    
    
    
    
    
    
    (37
    )Net cash provided by (used in) investing activities
    
    
    (1,454
    )
    
    
    6,573Cash flows from financing activitiesProceeds from stock option exercises
    
    
    71
    
    
    
    381Proceeds from common stock warrant exercises
    
    
    450
    
    
    
    Net cash provided by financing activities
    
    
    521
    
    
    
    381Net increase (decrease) in cash and cash equivalents
    
    
    (1,863
    )
    
    
    6,860Cash and cash equivalents at beginning of period
    
    
    8,575
    
    
    
    6,868Cash and cash equivalents at end of period
    
    $
    6,712
    
    
    $
    13,728
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
     Reclassifications
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Previously
    
    
    
    
    
    
    PreviouslyReported
    
    
    Reclassified
    
    
    Reported
    
    
    Reclassified(in thousands)Cost of revenues
    
    $
    14,590
    
    
    $
    14,590
    
    
    $
    25,330
    
    
    $
    25,330Product development
    
    
    1,275
    
    
    
    1,351
    
    
    
    2,554
    
    
    
    2,752Sales and marketing
    
    
    3,224
    
    
    
    7,596
    
    
    
    6,297
    
    
    
    14,679General and administrative
    
    
    7,478
    
    
    
    3,030
    
    
    
    14,909
    
    
    
    6,329Total operating expenses
    
    $
    26,567
    
    
    $
    26,567
    
    
    $
    49,090
    
    
    $
    49,090
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Seasonality
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value Option for Financial Assets and
Financial Liabilities
 3. SHORT-TERM INVESTMENTS
  Gross
    
    
    GrossGross Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(in thousands)Money market securities
    
    $
    3,671
    
    
    $
    
    
    
    $
    
    
    
    $
    3,671Asset backed
    
    
    30,620
    
    
    
    6
    
    
    
    (58
    )
    
    
    30,568Mortgage backed
    
    
    4,936
    
    
    
    3
    
    
    
    
    
    
    
    4,939Corporate obligations
    
    
    30,831
    
    
    
    3
    
    
    
    (66
    )
    
    
    30,768US Government and agency obligations
    
    
    13,756
    
    
    
    
    
    
    
    (26
    )
    
    
    13,730Total short-term investments
    
    $
    83,814
    
    
    $
    12
    
    
    $
    (150
    )
    
    $
    83,676
 June 30,2007(in thousands)Recorded as:Cash equivalents
    
    $
    3,671Short-term investments
    
    
    80,005$
    83,676
   June 30,2007(in thousands)Due within one year or less
    
    $
    32,759Due after one year through two years
    
    
    22,917Due after two years through four years
    
    
    28,000$
    83,676
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4. NET LOSS PER SHARE
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Numerator:Net loss
    
    $
    (1,032
    )
    
    $
    (220
    )
    
    $
    (4,137
    )
    
    $
    (1,008
    )Denominator:Weighted average common shares outstanding:Basic
    
    
    22,501
    
    
    
    20,366
    
    
    
    22,255
    
    
    
    20,329Diluted
    
    
    22,501
    
    
    
    20,366
    
    
    
    22,255
    
    
    
    20,329Net loss per share:Basic
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(in thousands)Stock options to purchase common stock
    
    
    4,733
    
    
    
    4,305
    
    
    
    4,538
    
    
    
    4,206Warrants to purchase common stock
    
    
    2,511
    
    
    
    4,603
    
    
    
    2,973
    
    
    
    4,603
 5. STOCK-BASED COMPENSATION EXPENSE
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Cost of revenues
    
    $
    122
    
    
    $
    127
    
    
    $
    261
    
    
    $
    247Product development
    
    
    31
    
    
    
    45
    
    
    
    62
    
    
    
    87Sales and marketing
    
    
    171
    
    
    
    136
    
    
    
    284
    
    
    
    268General and administrative
    
    
    848
    
    
    
    305
    
    
    
    1,388
    
    
    
    567Total stock-based compensation expense
    
    
    1,172
    
    
    
    613
    
    
    
    1,995
    
    
    
    1,169Tax effect on stock-based compensation
    
    
    (469
    )
    
    
    (245
    )
    
    
    (798
    )
    
    
    (468
    )Net effect on net income
    
    $
    703
    
    
    $
    368
    
    
    $
    1,197
    
    
    $
    701Effect on earnings per share:Basic
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.03Diluted
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.03
  9




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Valuation Assumptions
    Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    48
    %
    
    
    52
    %
    
    
    48-51
    %
    
    
    52
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    5.0
    %
    
    
    4.5-4.8
    %
    
    
    4.3-5.0
    %Expected life (years)
    
    
    5.5-6.1
    
    
    
    5.5-6.1
    
    
    
    5.5-6.1
    
    
    
    5.5-6.1Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted-average fair
value of options
granted during the
period
    
    $
    4.01
    
    
    $
    4.78
    
    
    $
    4.01
    
    
    $
    4.68
 Stock Option Activity
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber of
    
    Exercise
    
    Contractual
    
    AggregateShares
    
    Price
    
    Life (Years)
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    (in thousands)Outstanding at January 1, 2007
    
    
    4,235
    
    
    $
    7.71
    
    
    
    8.50
    
    
    $
    5,885Options granted
    
    
    976
    
    
    
    7.37Options exercised
    
    
    (14
    )
    
    
    1.51Options forfeited or expired
    
    
    (347
    )
    
    
    9.81Outstanding at March 31, 2007
    
    
    4,850
    
    
    
    7.51
    
    
    
    8.56
    
    
    
    4,929Options granted
    
    
    425
    
    
    
    7.69Options exercised
    
    
    (37
    )
    
    
    1.36Options forfeited or expired
    
    
    (1,084
    )
    
    
    6.64Outstanding at June 30, 2007
    
    
    4,154
    
    
    
    7.81
    
    
    
    8.33
    
    
    
    4,445Options exercisable at June 30, 2007
    
    
    1,865
    
    
    $
    7.27
    
    
    
    7.21
    
    
    $
    3,909
    10




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Stock Option Plans
   6. INCOME TAXES
     7. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Net loss
    
    $
    (1,032
    )
    
    $
    (220
    )
    
    $
    (4,137
    )
    
    $
    (1,008
    )Other
comprehensive income (loss):Change in accumulated unrealized gain (loss) on
available-for-sale securities, net of tax
    
    
    (102
    )
    
    
    (47
    )
    
    
    19
    
    
    
    (24
    )Comprehensive loss
    
    $
    (1,134
    )
    
    $
    (267
    )
    
    $
    (4,118
    )
    
    $
    (1,032
    )
 11




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8. COMMITMENTS AND CONTINGENCIES
   OperatingYear ending December 31,
    
    Leases2007
    
    $
    1,0932008
    
    
    1,9212009
    
    
    1,4972010
    
    
    1,3892011
    
    
    1,381Thereafter
    
    
    373Total minimum lease payments
    
    $
    7,654
 Legal Proceedings
 Lubocki, et al v. ZipRealty
  Indemnifications
   12




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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 in Risk Factors in Item 1A of Part II of this report
and elsewhere in this report. Except as otherwise required by law, we do not intend to update any
information contained in these forward-looking statements.
 OVERVIEW
 General
    Trends in our business
  13




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14




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Market seasonality, cyclicality and interest rate influences
     15




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Income Statement Reclassification
  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
 16




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Income taxes
   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
  Recently Issued Accounting Pronouncement
  17




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RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Statements of operations data (unaudited)
    
    (in thousands, except per share data)Net transaction revenues
    
    $
    30,506
    
    
    $
    26,195
    
    
    $
    53,181
    
    
    $
    44,843Referral and other revenues
    
    
    775
    
    
    
    714
    
    
    
    1,482
    
    
    
    1,283Net revenues
    
    
    31,281
    
    
    
    26,909
    
    
    
    54,663
    
    
    
    46,126Operating expenses:Cost of revenues
    
    
    17,312
    
    
    
    14,590
    
    
    
    30,387
    
    
    
    25,330Product development
    
    
    1,813
    
    
    
    1,351
    
    
    
    3,494
    
    
    
    2,752Sales and marketing
    
    
    9,829
    
    
    
    7,596
    
    
    
    18,676
    
    
    
    14,679General and administrative
    
    
    4,457
    
    
    
    3,030
    
    
    
    8,425
    
    
    
    6,329Total operating expenses
    
    
    33,411
    
    
    
    26,567
    
    
    
    60,982
    
    
    
    49,090Income (loss) from operations
    
    
    (2,130
    )
    
    
    342
    
    
    
    (6,319
    )
    
    
    (2,964
    )Other income (expense):Interest income
    
    
    1,094
    
    
    
    896
    
    
    
    2,182
    
    
    
    1,696Other expense, net
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense), net
    
    
    1,098
    
    
    
    896
    
    
    
    2,182
    
    
    
    1,696Income (loss) before income taxes
    
    
    (1,032
    )
    
    
    1,238
    
    
    
    (4,137
    )
    
    
    (1,268
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    1,458
    
    
    
    
    
    
    
    (260
    )Net loss
    
    $
    (1,032
    )
    
    $
    (220
    )
    
    $
    (4,137
    )
    
    $
    (1,008
    )Net loss per share:Basic
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.05
    )Weighted average common shares outstanding:Basic
    
    
    22,501
    
    
    
    20,336
    
    
    
    22,255
    
    
    
    20,329Diluted
    
    
    22,501
    
    
    
    20,336
    
    
    
    22,255
    
    
    
    20,329
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Statements of operations data (unaudited)
    
    2007
    
    2006
    
    2007
    
    2006Net transaction revenues
    
    
    97.5
    %
    
    
    97.3
    %
    
    
    97.3
    %
    
    
    97.2
    %Referral and other revenues
    
    
    2.5
    
    
    
    2.7
    
    
    
    2.7
    
    
    
    2.8Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Cost of revenues
    
    
    55.3
    
    
    
    54.2
    
    
    
    55.6
    
    
    
    54.9Product development
    
    
    5.8
    
    
    
    5.0
    
    
    
    6.4
    
    
    
    6.0Sales and marketing
    
    
    31.4
    
    
    
    28.2
    
    
    
    34.2
    
    
    
    31.8General and administrative
    
    
    14.2
    
    
    
    11.3
    
    
    
    15.4
    
    
    
    13.7Total operating expenses
    
    
    106.7
    
    
    
    98.7
    
    
    
    111.6
    
    
    
    106.4Income (loss) from operations
    
    
    (6.7
    )
    
    
    1.3
    
    
    
    (11.6
    )
    
    
    (6.4
    )Other income (expense):Interest income
    
    
    3.5
    
    
    
    3.3
    
    
    
    4.0
    
    
    
    3.7Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense), net
    
    
    3.5
    
    
    
    3.3
    
    
    
    4.0
    
    
    
    3.7Income (loss) before income taxes
    
    
    (3.2
    )
    
    
    4.6
    
    
    
    (7.6
    )
    
    
    (2.7
    )Provision for (benefit from) income taxes
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    (0.6
    )Net loss
    
    
    (3.2
    )%
    
    
    (0.8
    )%
    
    
    (7.6
    )%
    
    
    (2.1
    )%
 18




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Comparison of the three months ended June 30, 2007 and 2006
 Net transaction revenues
  Three Months EndedJune 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands, except statistical data)Net transaction revenuesComparable existing markets
    
    $
    27,617
    
    
    $
    25,986
    
    
    $
    1,631
    
    
    
    6.3
    %New markets
    
    
    2,889
    
    
    
    209
    
    
    
    2,680
    
    
    
    1,284.9
    %Total
    
    $
    30,506
    
    
    $
    26,195
    
    
    $
    4,311
    
    
    
    16.5
    %Statistical DataNumber of MarketsComparable existing markets
    
    
    17
    
    
    
    17
    
    
    
    0New markets
    
    
    10
    
    
    
    3
    
    
    
    7Total
    
    
    27
    
    
    
    20
    
    
    
    7Number of transactions closed during the period (2)Comparable existing markets
    
    
    3,492
    
    
    
    3,514
    
    
    
    (22
    )
    
    
    (0.6
    )%New markets
    
    
    496
    
    
    
    38
    
    
    
    458
    
    
    
    1,205.3
    %Total
    
    
    3,988
    
    
    
    3,552
    
    
    
    436
    
    
    
    12.3
    %Average net revenue per transaction (3)Comparable existing markets
    
    $
    7,908
    
    
    $
    7,395
    
    
    $
    513
    
    
    
    6.9
    %New markets
    
    
    5,825
    
    
    
    5,490
    
    
    
    335
    
    
    
    6.1
    %All markets
    
    $
    7,649
    
    
    $
    7,375
    
    
    $
    274
    
    
    
    3.7
    %
 
 (1)
    
    Comparable existing markets consist of Atlanta GA, Baltimore MD, Boston MA, Chicago IL,
Dallas TX, Fresno/Central Valley CA, Los Angeles CA, Houston TX, Las Vegas NV, Miami FL,
Orange County CA, Phoenix AZ, Sacramento CA, San Diego CA, San Francisco Bay Area CA, Seattle
WA and Washington DC. New markets are transferred to existing markets on January 1st following
the completion of their first full calendar year. The Las Vegas, Houston and Miami markets
opened during 2005 and, therefore, completed their first full calendar year at of the end of
2006. Accordingly, these markets were moved to existing markets as of January 1, 2007 and are
included in comparable existing markets for all periods presented. New markets and the month
opened consist of: Tampa, FL
    
    February 2006Orlando, FL
    
    April 2006Minneapolis, MN
    
    May 2006Austin, TX
    
    July 2006Palm Beach, FL
    
    September 2006Greater Philadelphia Area, PA
    
    December 2006Naples, FL
    
    March 2007Tucson, AZ
    
    March 2007Denver, CO
    
    April 2007Jacksonville, FL
    
    May 2007Salt
Lake City, UT (4)
    
    July 2007Richmond,
VA (4)
    
    July 2007Virginia
Beach, VA (4)
    
    August 2007
 (2)
    
    The term transaction refers to each representation of a buyer or seller in a real estate
purchase or sale.(3)
    
    Average net revenue per transaction equals net transaction revenues divided by number of
transactions with respect to each period.(4)
    
    Market opened after June 30, 2007; no net transaction
revenues were recorded in the three months ended June 30,
2007. 19




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##### Table of Contents



Referral and other revenues
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Referral and other revenues
    
    $
    775
    
    
    $
    714
    
    
    $
    61
    
    
    
    8.7
    %
   Cost of revenues
  Three Months EndedJune 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Cost of revenuesComparable existing markets
    
    $
    15,731
    
    
    $
    14,487
    
    
    $
    1,244
    
    
    
    8.6
    %New markets
    
    
    1,581
    
    
    
    103
    
    
    
    1,478
    
    
    
    1,445.9
    %Total
    
    $
    17,312
    
    
    $
    14,590
    
    
    $
    2,722
    
    
    
    18.7
    %
   20




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##### Table of Contents



Product development
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Product development
    
    $
    1,813
    
    
    $
    1,351
    
    
    $
    462
    
    
    
    34.1
    %
   Sales and marketing
  Three Months EndedJune 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Sales and marketing:Comparable existing markets
    
    $
    5,951
    
    
    $
    5,562
    
    
    $
    389
    
    
    
    7.0
    %New markets
    
    
    2,019
    
    
    
    612
    
    
    
    1,407
    
    
    
    230.3
    %Regional sales support and marketing
    
    
    1,859
    
    
    
    1,422
    
    
    
    437
    
    
    
    30.7
    %Total
    
    $
    9,829
    
    
    $
    7,596
    
    
    $
    2,233
    
    
    
    29.4
    %
   General and administrative
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)General and administrative
    
    $
    4,457
    
    
    $
    3,030
    
    
    $
    1,427
    
    
    
    47.1
    %
 21




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##### Table of Contents



Interest income
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Interest income
    
    $
    1,094
    
    
    $
    896
    
    
    $
    198
    
    
    
    22.0
    %
  Other income (expense), net
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Other income (expense), net
    
    $
    4
    
    
    $
    
    
    
    $
    4
    
    
    
    100.0
    %
 Provision for (benefit from) income taxes
  Three Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Provision
for income taxes
    
    $
    
    
    
    $
    1,458
    
    
    $
    (1,458
    )
    
    
    100.0
    %
   22




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##### Table of Contents



Comparison of the six months ended June 30, 2007 and 2006
 Net revenues
  Six Months EndedJune 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands, except statistical data)Net transaction revenuesComparable existing markets
    
    $
    48,610
    
    
    $
    44,634
    
    
    $
    3,976
    
    
    
    8.9
    %New markets
    
    
    4,571
    
    
    
    209
    
    
    
    4,362
    
    
    
    2,091.2
    %Total
    
    $
    53,181
    
    
    $
    44,843
    
    
    $
    8,338
    
    
    
    18.6
    %Statistical DataNumber of MarketsComparable existing markets
    
    
    17
    
    
    
    17
    
    
    
    0New markets
    
    
    10
    
    
    
    3
    
    
    
    7Total
    
    
    27
    
    
    
    20
    
    
    
    7Number of transactions closed during the period (2)Comparable existing markets
    
    
    6,274
    
    
    
    6,152
    
    
    
    122
    
    
    
    2.0
    %New markets
    
    
    824
    
    
    
    38
    
    
    
    786
    
    
    
    2,068.4
    %Total
    
    
    7,098
    
    
    
    6,190
    
    
    
    908
    
    
    
    14.7
    %Average net revenue per transaction (3)Comparable existing markets
    
    $
    7,748
    
    
    $
    7,255
    
    
    $
    493
    
    
    
    6.8
    %New markets
    
    
    5,548
    
    
    
    5,490
    
    
    
    58
    
    
    
    1.1
    %All markets
    
    $
    7,492
    
    
    $
    7,244
    
    
    $
    248
    
    
    
    3.4
    %
 
 (1)
    
    Comparable existing markets consist of Atlanta GA, Baltimore MD, Boston MA, Chicago IL,
Dallas TX, Fresno/Central Valley CA, Los Angeles CA, Houston TX, Las Vegas NV, Miami FL,
Orange County CA, Phoenix AZ, Sacramento CA, San Diego CA, San Francisco Bay Area CA, Seattle
WA and Washington DC. New markets are transferred to existing markets on January 1st following
the completion of their first full calendar year. The Las Vegas, Houston and Miami markets
opened during 2005 and, therefore, completed their first full calendar year at of the end of
2006. Accordingly, these markets were moved to existing markets as of January 1, 2007 and are
included in comparable existing markets for all periods presented. New markets and the month
opened consist of: Tampa, FL
    
    February 2006Orlando, FL
    
    April 2006Minneapolis, MN
    
    May 2006Austin, TX
    
    July 2006Palm Beach, FL
    
    September 2006Greater Philadelphia Area, PA
    
    December 2006Naples, FL
    
    March 2007Tucson, AZ
    
    March 2007Denver, CO
    
    April 2007Jacksonville, FL
    
    May 2007Salt
Lake City, UT (4)
    
    July 2007Richmond,
VA (4)
    
    July 2007Virginia
Beach, VA (4)
    
    August 2007
 (2)
    
    The term transaction refers to each representation of a buyer or seller in a real estate
purchase or sale.(3)
    
    Average net revenue per transaction equals net transaction revenues divided by number of
transactions with respect to each period.(4)
    
    Market opened after June 30, 2007; no net transaction
revenues were recorded in the six months ended June 30,
2007. 23




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##### Table of Contents



Referral and other revenues
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Referral and other revenues
    
    $
    1,482
    
    
    $
    1,283
    
    
    $
    199
    
    
    
    15.5
    %
  Cost of revenues
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Cost of revenuesComparable existing markets
    
    $
    27,929
    
    
    $
    25,227
    
    
    $
    2,702
    
    
    
    10.7
    %New markets
    
    
    2,458
    
    
    
    103
    
    
    
    2,355
    
    
    
    2,279.9
    %Total
    
    $
    30,387
    
    
    $
    25,330
    
    
    $
    5,057
    
    
    
    20.0
    %
  Product development
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Product development
    
    $
    3,494
    
    
    $
    2,752
    
    
    $
    742
    
    
    
    27.0
    %
  24




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##### Table of Contents



Sales and marketing
  Six Months EndedJune 30,
    
    
    Increase
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    Change(in thousands)Sales and marketing:Comparable existing markets
    
    $
    11,757
    
    
    $
    11,080
    
    
    $
    677
    
    
    
    6.1
    %New markets
    
    
    3,419
    
    
    
    795
    
    
    
    2,624
    
    
    
    329.8
    %Regional sales support and marketing
    
    
    3,500
    
    
    
    2,804
    
    
    
    696
    
    
    
    24.8
    %Total
    
    $
    18,676
    
    
    $
    14,679
    
    
    $
    3,997
    
    
    
    27.2
    %
  General and administrative
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)General and administrative
    
    $
    8,425
    
    
    $
    6,329
    
    
    $
    2,096
    
    
    
    33.1
    %
  Interest income
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Interest income
    
    $
    2,182
    
    
    $
    1,696
    
    
    $
    486
    
    
    
    28.6
    %
  25




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##### Table of Contents



Provision
for (benefit from) income taxes
  Six Months EndedJune 30,
    
    Increase
    
    Percent2007
    
    2006
    
    (Decrease)
    
    Change(in thousands)Provision
benefit from income taxes
    
    $
    
    
    
    $
    (260
    )
    
    $
    (260
    )
    
    
    (100.0
    )%
  LIQUIDITY AND CAPITAL RESOURCES
   Operating activities
    26




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##### Table of Contents



Investing activities
    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)Minimum lease payments
    
    $
    2,151
    
    
    $
    3,051
    
    
    $
    2,376
    
    
    $
    76
    
    
    $
    7,654
 OFF-BALANCE SHEET ARRANGEMENTS
  27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk:
 Interest rate sensitivity
   Exchange rate sensitivity
  
 Item 4. Controls and Procedures:
 Disclosure controls and procedures
 Changes in internal control over financial reporting
 
 PART II  OTHER INFORMATION
  
 Item 1. Legal Proceedings:
 Lubocki, et al v. ZipRealty
 28




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##### Table of Contents



Item 1A. Risk Factors:
  RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We
have experienced losses in recent 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.
   29




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##### Table of Contents



®
 ®
 ®
 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.
   The recent tightening in the availability of credit, particularly with respect to lenders in
the mortgage market, may negatively impact the housing market.
  30




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##### Table of Contents



Our business model is new and unproven, and we cannot guarantee our future success.
  If we fail to recruit, hire and retain qualified agents, we may be unable to service our clients
and our growth could be impaired.
   We may incur additional expenses or liabilities if our current or former compensation or expense
allowance or reimbursement policies are found to violate federal or state wage and hour laws.
  31




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##### Table of Contents



Our failure to effectively manage the growth of our ZipAgents and related technology could
adversely affect our ability to service our clients.
  Our failure to effectively manage the growth of our control systems could adversely affect our
ability to maintain legal compliance.
  If we fail to comply with real estate brokerage laws and regulations, we may incur significant
financial penalties or lose our license to operate.
  We may have liabilities in connection with real estate brokerage activities.
  32




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##### Table of Contents



We may have liabilities if any of our employees violates laws concerning settlement procedures.
  If any of our core services fails to comply with applicable federal and state law and regulations,
we may incur significant financial penalties or lose licenses require to provide these services.
    We may have liabilities in connection with our performance of core services.
  33




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##### Table of Contents



If our arrangements for providing core services become impaired, we may lose sources of revenue
that may be difficult to replace and we may be less likely to engage in related transactions with
our clients.
  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;
    
    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
 34




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##### Table of Contents




    
    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, innovative
business models and access to greater resources than we do.
  Trends.
  35




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##### Table of Contents



Changes in federal and state real estate laws and regulations, and rules of industry organizations
such as the National Association of REALTORS ® , could adversely affect our business.
  We derive a significant portion of our leads through third parties, and if any of our significant
lead generation relationships are terminated, impaired or become more expensive, our ability to
attract new clients and grow our business may be adversely affected.
  Our ability to expand our business may be limited by state laws governing cash rebates to home
buyers.
  36




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##### Table of Contents



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.
  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.
  37




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##### Table of Contents



We may need to change the manner in which we conduct our business if government regulation of the
Internet increases.
    Our operating results are subject to seasonality and vary significantly among quarters during each
calendar year, making meaningful comparisons of successive quarters difficult.
   
    
    timing of widely observed holidays and vacation periods and availability of home buyers
and sellers, real estate agents and related service providers during these periods;
    
    a desire to relocate prior to the start of the school year;
    
    inclement weather which can influence consumers desire or ability to visit properties;
    
    timing of employment compensation changes, such as raises and bonuses;
    
    the time between entry into a purchase contract for real estate and closing of the transaction; and
    
    the levels of housing inventory available for sale.
  Our reputation and client and agent service offerings may be harmed by system failures and
computer viruses.
  38




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##### Table of Contents



Our business is geographically concentrated, which makes us more susceptible to business
interruption and financial loss due to natural disasters, inclement weather, economic or market
conditions or other regional events outside of our control.
  Our intellectual property rights are valuable and our failure to protect those rights could
adversely affect our business.
  We may in the future be subject to intellectual property rights disputes, which could divert
management attention, be costly to defend and require us to limit our service offerings.
   
    
    pay damages;
    
    stop using the technology found to be in violation of a third partys rights;
    
    seek a license for the infringing technology; or
    
    develop alternative non-infringing technology.
 39




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##### Table of Contents



We have undergone significant management transitions recently and need to successfully integrate
new members of the management team as well as retain key personnel or our business could be
harmed.
  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.
 The value of our services could be diminished if anti-spam software filters out an increasing
portion of the emails we send.
  40




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##### Table of Contents



As we implement changes in our agent compensation policies, we may incent behaviors that cause a
decrease in our profit margin with the goal of increasing our profits.
  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.
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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.
  
    
    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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
     
 Item 6. Exhibits:
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SIGNATURE
  ZIPREALTY, INC.By:
    /s/ David A. RectorDavid A. RectorSenior Vice President and
Chief Financial Officer  44




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Exhibit Index
 Exhibit number
    
    Description10.20(1)*
    
    ZipRealty, Inc. Director Compensation Policy10.21(2)*
    
    Richard F. Sommer Termination and Release Agreement dated June 2, 200731.1
    
    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 Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 000-51002) filed with the Securities and Exchange Commission on June 19, 2007.(2)
    
    Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K
(File No. 000-51002) filed with the Securities and Exchange Commission on June 4, 2007.*
    
    Identifies a management contract or compensatory plan or agreement required to be filed as an
exhibit of this report. 45