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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-KSB (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 333-110630 HARTVILLE GROUP, INC. (Name of Small Business Issuer in its Charter)
   NEVADA
    
    94-3360099(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 3840 GREENTREE AVENUE SWCANTON OHIO
    
    44706(Address of principal executive offices)
    
    (Zip Code)
 Issuers Telephone Number: (330) 484-8080 Securities registered under Section 12(b) of the Exchange Act: (Title of each class)
    
    (Name of each exchange on which registered)NONE
    
    N/A
 Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.001
(Title of each class)   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES o NO x Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained herein, and will not be contained, to the best of issuers knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o




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State issuers revenues for its most recent fiscal year: $5,663,057. State the aggregate market value of the voting stock held by non-affiliates of the issuer
(based upon 10,259,244 shares held by non-affiliates and the closing price of $1.72 per share for
Common Stock in the over-the-counter market as of December 31, 2004): $17,645,899. Number of shares of the issuers common stock, par value $.001, outstanding as of December 31,
2004: 14,576,296 shares. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrants proxy statement for its 2005
annual meeting of shareholders are incorporated herein by reference in response to Part III of this
Form 10-KSB. Transitional Small Business Disclosure Format            YES o NO x




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TABLE OF CONTENTS  EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  HARTVILLE GROUP, INC.
Form 10-KSB Table of Contents PART IItem 1.
    
    DESCRIPTION OF BUSINESSItem 2.
    
    DESCRIPTION OF PROPERTYItem 3.
    
    LEGAL PROCEEDINGSItem 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERSPART IIItem 5.
    
    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 6.
    
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSUREItem 8a
    
    CONTROLS AND PROCEDURESPART IIIItem 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACTItem 10.
    
    EXECUTIVE COMPENSATIONItem 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTItem 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 13.
    
    EXHIBITS AND REPORTS ON FORM 8-KItem 14.
    
    EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURESSIGNATURESEXHIBIT INDEX




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PART I THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE HARBOR FOR FORWARD
LOOKING STATEMENTS. This Form 10-KSB contains statements that are not historical facts. These
statements are called forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements
involve important known and unknown risks, uncertainties and other factors and can be identified by
phrases using estimate, anticipate, believe, project, expect, intend, predict,
potential, future, may, should and similar expressions or words. Our future results,
performance or achievements may differ materially from the results, performance or achievements
discussed in the forward-looking statements. There are numerous factors that could cause actual
results to differ materially from the results discussed in forward-looking statements, including:  
    Changes in existing product liability, tort or warranty laws or the
introduction of new laws, regulations or policies that could affect
our business practices: these laws, regulations or policies could
impact our industry as a whole, or could impact only those portions
in which we are currently active.
    Changes in economic conditions, including changes in interest
rates, financial market performance and our industry: these types
of changes can impact the economy in general, resulting in a
downward trend that impacts not only our business, but all
companies with which we compete; or, the changes can impact only
those parts of the economy upon which we rely in a unique fashion,
including, insurance related businesses.
    Changes in government regulations: these regulations could have a
negative impact on our earnings; for example, laws relating to
insurance regulation that could increase our costs of operations.
    Changes in relationships with major customers and/or suppliers: an
adverse change in our relationships with major customers and/or
suppliers would have a negative impact on our earnings and
financial position.
    Armed conflicts and other military actions: the considerable
political and economic uncertainties resulting from these events,
could adversely affect our order intake and sales, particularly in
the insurance market.
    Factors that we have discussed in previous public reports and other
documents filed with the Securities and Exchange Commission. This list provides examples of factors that could affect the results described by
forward-looking statements contained in this Form 10-KSB. However, this list is not intended to be
exhaustive; many other factors could impact our business and it is impossible to predict with any
accuracy which factors could result in which negative impacts. Although we believe that the
forward-looking statements contained in this Form 10-KSB are reasonable, we cannot provide you with
any guarantee that the anticipated results will be achieved. All forward-looking statements in this
Form 10-KSB are expressly qualified in their entirety by the cautionary statements contained in
this section and you are cautioned not to place undue reliance on the forward-looking statements
contained in this Form 10-KSB. In addition to the risks listed above, other risks may arise in the
future, and we disclaim any obligation to update information contained in any forward-looking
statement. 
 Item 1. DESCRIPTION OF BUSINESS The Company. Hartville Group, Inc. (Hartville, we, us) is a holding company formed in the State of
Nevada whose wholly-owned subsidiaries include Hartville Re formerly known as Hartville Insurance
Company, Ltd (Hartville Re) and Petsmarketing Insurance.com Agency, Inc. (Agency). Hartville Re
is a reinsurance company that is registered in the Cayman Islands, British West Indies. Hartville
Re was formed to reinsure pet health insurance that is currently being marketed by the Agency.
Projected U.S. Pet Insurance market revenues by 2007 is expected to reach $667 million as reported
by Packaged Facts August 2003, a Division of Market Research.com. Projected pet insurance revenues
continue to be forecasted at these levels as reported by Package Facts in their 2004 study entitled
The U.S. market for Pet Care Services. The Agency is primarily a marketing/administration company concentrating on the sale of its
proprietary health insurance plans for domestic pets. Its business plan calls for introducing its
product effectively and efficiently through a variety of distribution systems. We presently accept
applications, underwrite and issue policies electronically. The Agency, through its proprietary
policy fulfillment system  PUPPS (Pet Underwriting Policy Processing System has the capability
to provide online quotes, generate specific applications, approve applications, issue policies, and
monitor claim trends on a proactive basis. This




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capability enables us to effectively manage and
control losses. Also, having the ability to recognize loss trends early enables us to amend
underwriting guidelines quickly, thereby controlling and delivering appropriate underwriting
margins. PUPPS has been installed and is in full use as of July 1, 2004. Depreciation extends over a 36
month period. Previously Hartville had outsourced the administration and claims processing of its
pet insurance program. Management decided to bring the administration in-house since administrators
of property and casualty insurance plans were having difficulty processing pet health medical
claims. In the fourth quarter of 2001, efforts commenced to write a proprietary software program
specifically designed to service pet insurance policies. By the end of 2002 the beta test package
was ready for testing. This software includes the following modules: policy issuance, billing,
customer service, claims, call center, and reporting. Upon testing numerous features and mechanisms
management quickly identified that further features would need to be added before deployment of the
software could take place. Therefore, an additional specification was drafted that called for more
than 4,000 additional programming hours. Work commenced in mid 2003 and the program was delivered
following stress testing and cursory systems audit on July 1, 2004. Hartvilles business plan calls for a quota share participation on the pet health insurance
originated by the Agency. Quota share participation is where insurers elect to assume a certain
percentage of risk and thereby share in the amount of claims paid under policies. For example,
three insurers elect to assume all the risk on a policy: insurer 1 takes 60% of risk, insurer 2
takes 30% and insurer 3 takes 10%. If a 1,000 claim was made each insurer would be responsible for
their percentages; insurer 1 would pay $600, insurer 2 would pay $300 and insurer 3 would pay $100.
The products, known as the Petshealth Care Plan and the Companys generic brand for private label
partnerships Healthy Bark and Purr work like most major medical plans for people. The plans pay
eighty (80) percent of all veterinary costs and medications received for any covered illness or
injury (accident) following the annual deductible of $100 per pet. Selected plans provide coverage
for routine vaccinations, heartworm testing and flea preventive medications, dental cleanings, and
all plans cover the cost to spay or neuter a pet. Pet owners are free to use any veterinarian in
the United States and all plans provide a thirty-day risk free trial. In the event that a
policyholder is not completely satisfied with the plan and if they have not filed a claim, they can
return the policy within thirty days for a full refund (flat cancellation). There are four plans offered, Basic, Value, Choice, and Best, and they have the following per
incident and policy limits, respectively: Basic
    
    
    $1,500/$8,000Value
    
    
    $3,500/$11,000Choice
    
    
    $5,000/$13,000Best
    
    
    $2,500/$13,000
 The current offering (policy) is restricted to only dogs and cats. The Agency is licensed to act as insurance agency in all 50 states of the United States
including DC. Pet health insurance coverage has been successfully marketed in Europe for many years.
Hartvilles insurance policies and operations resemble the proven and successful practices of the
European market. Management has carefully researched the available market and has concluded that
there is a significant demand in the U.S. for companion pet health insurance. Management believes, based on their research from studies conducted by the American Veterinary
Medical Association (AVMA), veterinary colleges, and market researchers, that there is a demand
among pet owners and veterinarians for affordable, comprehensive pet health insurance. Articles in
veterinary journals and consumer publications reinforce this demand and the high intrinsic value
pet owners place on protecting their human-to-companion pet bonding. Pet health maintenance organizations or HMO or discount plans are not popular and almost
nonexistent because they are normally restricted to a limited number of local veterinary practices.
Pet owners must patronize only those practices. The HMO-type plan is not portable to other
veterinary practices or other parts of the U.S. when the owner is transferred or traveling, or if
the owner has different veterinarian specialist needs for one of their pets. The number of
participating veterinarians is relatively small. They are located primarily in the affluent
suburbs. Such limited and local geographic plans emerged because of an absence of insurance
alternatives. Pet owners continue to voice a strong demand for comprehensive veterinary health
insurance coverage and the freedom to choose their own veterinarians, not unlike their own human
health care needs.




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All our revenues are derived from premium dollars. The Agency sells pet insurance policies to
pet owners who pay insurance premiums, typically monthly using their credit card. As these premiums
are collected at the close of each month an insurance report is prepared that shows the total
collected premium for the month. This premium is then allocated to the appropriate parties: a) 30%
of the premium flows to the Agency as commissions and b) the remaining 70% flows to the reinsurers
to pay claims. Insureds can pay these insurance premiums either monthly, quarterly, semi-annually or
annually. Insureds can pay by credit card, automatic check withdrawal or by check. Hartville reinsured business in 2002 under a Managing General Agency (MGA) agreement with
Clarendon National Insurance Company. Hartville Re took a quota share reinsurance agreement
directly with Clarendon National Insurance Company wherein Hartville Re assumed 20% quota share of
the underwriting risk. Clarendon National Insurance Company also assumed 20% with the remaining
risk being ceded to other international reinsurers. Commencing April 2003, Hartville began writing
pet insurance policies through State National Insurance Company. Hartville Re offered and executed
reinsurance slips to continue assuming underwriting risk as previously, now at a 40% quota share.
Hartville Re posted a $2 million Letter of Credit as requested by State National Insurance Company;
however, State National Insurance Company never formalized this agreement. In July 2004 Hartville
canceled and re-wrote its entire book of pet insurance policies, with Department of Insurance
approval, on the insurance acquisition target, that is, the intended property and casualty
insurance company to be acquired and formalized. Hartville Re assumed 100% quota share reinsurance
of the underwriting risk initially and intended to reduce this post transfer of the pet insurance
book to 70% with other willing reinsurers. The potential underwriting income or (loss) from the
2003 treaty (book of business transfer) was now transferred to Hartville Re from the target
insurance acquisition and ceded to the 2004 account. On August 15, 2004, the Department of
Insurance, at no fault of Hartville, withdrew the Companys writing authority through the target
acquisition. As a result, Hartville Res underwriting risk retention was not reduced to 70%, but
was maintained at 100% in view that reinsurers would now not subscribe to the quota share
agreement. The Company secured writing authority from another carrier on August 25, 2004 and all
new and renewal business going forward was written with this international recognized insurer who
retained 100% of the underwriting risk. This underwriting agreement has been amended effective
January 1, 2005 with Hartville Re retaining 50% quota share of the underwriting risk going forward.
There are no related party transactions with these reinsurers or MGAs. We are direct solicitator of our pet insurance plans. We have an inbound call center to enroll
perspective pet owners that inquire about our plans. We also sell our plans through the internet.
All our personnel are salary based and do not receive commissions. The Company is introducing a
commission incentiveone timeto licensed agents in our inbound call center. We receive 100% of the
commissions paid on the policies. Hartville Group had test marketed using independent insurance
agents but discontinued this practice in December 1999. At the present time only one agent remains
that represent us and receives an on going commission for business written. The Company has used an
agent in Texas, as a requirement of the Texas State Department of Insurance a resident agent would
need to counter sign insurance policies sold in this State by an outside agency. Hartville Groups
pet insurance agency is an Ohio domiciled agency and is a non-resident agency and therefore
considered an outside agency in Texas. We had paid this agent a 2.5% commission on business written
in Texas. At the present time the monthly commission check paid to the Texas agent is less than
$60. Currently, non-residents are now licensed to solicit polices directly to Texas residents, thus
this agent and the need for a counter signature is no longer required by the State of Texas. The
other agent is in the State of New York. This agent specialized in selling commercial business
policies to veterinary clinics. We pay this agent a 10% commission on new business with 7% on
renewals on policies written in New York only. At the present time the monthly commission check to
this agent is less than $3,000. Our website address is www.petshealthplan.com or www.healthybarkandpurr.com. This system
provides inquiring pet owners the ability to enter their pet information into the system and
receive an insurance quote. The pet owner, at their option, may either enter their credit card and
submit their application for underwriting or simply print off an application and return via mail
with a check. Presently, less than 20% of applications received are from online enrollments. The
web site is used mostly for information that later result in an inbound call with an enrollment
with one of our customer service representatives. We do not depend on any one customer. We are unlike other insurance agencies where major
relationships can prove essential, for example, an agent issuing a policy to a major manufacture
might include a business policy, auto policy, and countless other risk coverage programs that in
total could be a substantial premium. Most people have and insure not more than 4 pets, thus the
amount of premium paid is not significant. We have and are dependent on our relationship with our
fronting insurance carrier. If the insurance carrier elected to no longer write this business
Hartville would be forced to find an alternate insurance provider and if unsuccessful would have to
cease writing business. This dependency is the basis for the Company seeking to own a US licensed
property and casualty insurance company. History




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Hartville Group, Inc. was incorporated in the State of Nevada on February 1, 2001 as a holding
company. Hartvilles subsidiaries include: Petsmarketing Insurance.com Agency, Inc., incorporated
in the state of Ohio on March 31, 2000, and sells sickness and accident policies for domestic
household pets, and Hartville Re formerly known as Hartville Insurance Company, LTD, which was
incorporated in the Cayman Islands on October 19, 2001 and holds a restricted class B Insurers
License under the law of the Cayman Islands. Class B Insurer is the designation given by the
Monetary Authorities of the Cayman
Islands for a property and casualty insurance company. This class designates that a company is not
authorized to write business other than property and casualty; for example we could not accept life
insurance risk. Petshealth Insurance Agency, Inc. was formed in 1997 as the original pet marketing agency.
This agency was dissolved and reorganized into Petsmarketing Insurance.com Agency. Petsmarketing
Insurance.com was a subsidiary of Petsmarketing Inc., a pink sheet company. The securities firm for
Petsmarketing Inc. defaulted on its investment and subsequently the subsidiary, Petsmarketing
Insurance.com Agency, was acquired by Hartville Group, Inc., which included the licenses of
Petsmarketing Insurance.com Agency. This, Petsmarketing Insurance.com Agency, Inc. through its
parent Petsmarketing Inc. was our predecessor. The term predecessor means a person the major
portion of the business and assets of which another person acquired in a single succession, or in a
series of related successions in each of which the acquiring person acquired the major portion of
the business and assets of the acquired person. Petsmarketing Inc. was a pink sheet company was
majority owned by a Capital Suisse fund named Zooley. Capital Suisse was to fund three million
dollars to Petsmarketing Inc. but defaulted. Capital Suisses venture fund collapsed. W. Russell
Smith and Bob Cashman were the officers of Petsmarketing Inc. After the sale of Petshealth
Insurance Agency, Inc. W. Russell Smith and Bob Cashman resigned and, one year later, Petsmarketing
Inc. changed its name to PS Management Holdings and retained a minority interest in Hartville
Group. New owners of PS Management Holdings established PS Management Holdings as a venture fund. On September 9, 2002, Hartville Group, Inc. changed its name to Hartville Equestrian, Inc.
Venturelist.com, a reporting company, provided an Internet portal for start-up businesses seeking
investment capital and accredited investors seeking to invest via the private equity market. Venturelist.coms executives and directors were Patrick R. Greene, the Secretary and Director
and Kris Lafour, the President and Director. In 2002, Venturelist.com had no operations and its
management was seeking a merger partner. Venturelist.com, Inc. changed its name to Hartville Group,
Inc. on September 9, 2002. On September 12, 2002, Hartville Group, Inc., formerly Venturelist.com,
Inc., acquired 100% of the issued and outstanding shares of Hartville Equestrian, Inc., formerly
Hartville Group, Inc. in exchange for 2,251,000 post forward split shares (Venturelist.com, Inc
affected a 4:1 forward stock split on September 11, 2002) of Venturelist.com, Inc.s common stock.
Patrick R. Greene and Kris Lafour resigned from Hartville Group, Inc. The reverse merger
transaction with Venturelist.com, Inc. gave us a listing on the NASD-OTC Bulletin Board. Our common
stock trades under the stock symbol HTVL. On October 3, 2003, the Board of Directors elected to
amend the Articles of Incorporation to eliminate the provisions for preferred stock. Hartville Equestrian, Inc. remains a subsidiary of Hartville Group and its officers and
directors are W. Russell Smith and Dr. Tom Neuzil. Government Regulation and Licenses Most aspects of Hartville Groups operations are regulated by government agencies. Each state
of the United States of America regulates the conduct of Insurance business within its borders.
This is done by the Department of Insurance, a subdivision of the State Government. The Department
sets forth the policies of insurance that may be sold in the state and licenses all persons and
companies that sell policies. Hartville Groups 100% owned subsidiary Petsmarketing Insurance.Com
Agency and its CEO W. Russell Smith, III is licensed by 50 State Departments of Insurance including
DC. Hartville Groups 100% owned subsidiary Hartville Re is licensed as a reinsurance company by
the governmentMonetary Authorityof the Cayman Islands, British West Indies. The government
regulates the kind of policies we may reinsure, who may manage us, the way our finances are
maintained, and the way our capital may be invested. We contract with Caledonian Insurance Services
Limited, a division of Caledonian Bank, to provide insurance
management services for Hartville Re. Caledonian Insurance Services Limited is validly licensed pursuant to the insurance law to
carry on insurance business in the Cayman Islands and is validly licensed pursuant to the insurance
law to carry on business as an insurance manager in the Cayman Islands. As the insurance manager
Caledonian shall provide to Hartville Re those services, acts or things as are reasonably necessary
and/or desirable for the efficient operation of the business which includes: a) Provide such
properly qualified and experienced staff and such premises and support services; b) keep separate
books of account, bank accounts and accounting records; c) collect and/or supervise the collection
of all monies due in connection with the business; d) purchase office supplies necessary to conduct
business; e) maintain minute books; f) all filings and returns required by the insurance law; g)
attend all board meetings; and h) act as general representative of Hartville for the purposes of
insurance law.




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The Competition Hartville Group, Inc.s major competitors are Veterinary Pet Insurance (VPI) and Pet Care. VPI
has by far the largest position with an estimated 85% of the insurance market in the United States
with premium revenue of approximately $70 million and more than 200,000 policies. VPI is 65% owned
by Scottsdale Insurance Company, which in turn is a wholly owned subsidiary
of Nationwide Mutual Insurance Company. Pet Care Insurance is a product offered by Pethealth Inc.,
and is underwritten by Lincoln National Insurance Company. In comparison, Hartville has written,
since commencing operations in December 1997, more than $8 million in premium to over 25,000
policyholders. As of December 31, 2004, 20,126 policies were in-force which totaled $6 million in
premium. The Company through its agency recognizes 30% of this premium, when earned, as commissions
with the balance (70% of premium) going to the reinsurers, of which Hartville Re is a participating
reinsurer, to pay claims. Hartville only reports as income the quota share portion ceded to our
reinsurance company, thus, since we have only reinsured 20% to 40% of the underwriting risk, the
remaining 80% to 60% of the premium has not been reflected in our financials since it does not flow
to Hartville Group. Management believes that we have a competitive advantage in the pet insurance industry because
our policys coverage design replicates a major medical plan and incorporates a wellness care
component. Hartvilles policy is a true indemnity plan with a $100 annual deductible with the
insurance company covering 80% of the customary veterinary costs with the insured responsible for
20%. Administrative costs have been held down thereby enabling the policy to be reasonably priced.
Marketing strategies can provide companies a competitive advantage. Hartville Group through its
exclusive marketing alliances with the Garfield and the Catalina Marketing Companythat markets
directly in grocery stores and pet super storesprevents competition from entering the same
distribution channels. Assuming the underwriting risk on the policies and acting as a sales and
marketing agency allows us to design specific and unique products for marketing strategies. For a
fee of not less than $250,000 per year Hartville Group may use any of the Garfield comic strip
characters in the promotion of its pet health insurance plans. The right to use these characters
ends December 2010. Usage of the characters in various marketing media includes: print
advertisement; product brochures; internet web page; and television media. Use of the character in
either of the aforementioned methods must be approved by the Paws Corporation, owners of the
Garfield Character rights for content and to ensure accurate character portrayal. Exclusivity in
the electronic checkout messaging network managed by the Catalina Marketing Company is contingent
upon Hartville continuing to print at least 500,000 messages per month. As long as Hartville Group
has, at the end of its contracted period, i.e., exhausting its specified print message quantity
with Catalina, the contract provides for renewal with continued exclusivity, being no other
provider of pet insurance may use the Catalina Marketing electronic checkout messaging system. Employees We employed 48 full-time personnel as of December 31, 2004. The staff reviews all policy
applications and issues policies; and reviews all claims and issues payment of claims when
appropriate. We usually pay all proper claims in 30 days or less. The staff maintains all records
and makes all required reports to the various regulating authorities and reinsurers. Recent Events In February, 2004, legal counsel was engaged by Hartville to assist them in connection with
the acquisition of an insurance company that was in conservation with an insurance department. On
March 8, 2004, a letter of intent between Hartville and the target insurance acquisition was
executed. On April 1, 2004, an agreement entitled Services Agreement was executed, with the
approval of the insurance department. This agreement allowed Hartville to manage the day to day
operations of the insurance company and to affect the companys rehabilitation. On May 24, 2004, a
Stock Purchase Agreement between Hartville and the target acquisition was executed. Hartville
through these two agreements commenced concurrently its rehabilitation of the insurance acquisition
along with its application with the department of insurance to have the insurance company license
of the target acquisition transferred to Hartville. On June 23, 2004, Hartville loaned $1,200,000
to the target to increase surplus of the insurance company through a promissory note payable to
Hartville in accordance with approval and authorization by the insurance department. Continuing the
rehabilitation of the insurance acquisition on June 30, 2004, through an Escrow and Contribution
Agreement, Hartville transferred to the insurance company all of the outstanding stock of
Petsmarketing Insurance.com Agency, Inc. In addition W. Russell Smith, III, CEO transferred 900,000
of his personal stock to the insurance company. On July 1, 2004, the department of insurance
authorized Hartville to begin writing pet insurance policies on the insurance company. On July 13,
2004, Hartville submited its application to have the insurance license of this insurance company
transferred to Hartville. With Hartville having been given authority by the Department of Insurance
to run the insurance company (service agreement); authorization to write pet insurance policies
through this insurance company; and through numerous discussions with the Department of Insurance
Hartville believed its application to acquire the insurance license would be fatumcomplete. On
August 15, 2004, the Department of Insurance ceased Hartville from writing any further




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pet insurance policies on the insurance company. From this date forward Hartville endeavored to bring
about an affective rehabilitation of the insurance acquisition. On March 30, 2005 the Board of
Directors decided that pursuing the acquisition of this property and casualty insurance company was
no longer in the best interest of shareholders. Consequently, the agreement to acquire this
insurance company did not proceed and negotiations with the Department of Insurance ended. The
Company and the Insurance Department executed a Mutual Release Agreement whereby the Department
returned the sum of $2,303,333 to the Hartville Group which represented monies contributed to
rehabilitate the insurance acquisition target. This amount has been included in other receivables
in the accompanying Balance Sheet at December 31, 2004 and was received on April 11,
2005. As the result of terminating this acquisition previously issued 10-QSBs for June 30, 2004 and
September 30, 2004 have been restated to reflect the de-consolidation of the insurance company and
include the Companys recoverable costs incurred in connection with the attempted acquisition. It was the decision of the Company to change its accounting practice with respect to the
capitalization of policy acquisition costs and the period over which the deferred costs are
amortized. Under its new policy, capitalized costs will be amortized over a three-year minimum
expected policy life. The Company previously amortized these costs over a five-year policy life. As
a result, previously issued financial statements have been restated to conform to the Companys
current policy. The December 31, 2003 financial statement and 10-KSB; March 31, 2004 financial
statement 10-QSB; June 30, 2004 financial statement 10-QSB; and September 30, 2004 financial
statement 10-QSB have been restated in accordance with this change and as the result of terminating
the acquisition of the insurance company wherein a de-consolidation of the target acquisition
financials in those presented by the Company. Additionally, the financial statements listed above
were also restated to conform with FASB 123 Accounting for Stock Based Compensation and EITF
00-27 Application of Issue No. 98-5 to Certain Convertible Instruments, as a result a beneficial
conversion discount was applied to convertible debenture transactions and compensation costs were
recorded for the issuance of options and warrants in exchange for services during 2003 and 2004
which contributed to the restatement. On May 8, 2004 the Company was in default in not registering those shares of Common stock pursuant
to the terms and conditions of a registration Rights Agreement that formed part of the October 8,
2003 Stock Purchase Agreement. Failure to register those shares and underlying warrants pursuant to
this agreement within six months of the closing date would result in liquidated damages to the
investors of 12% of the purchase per annum payable per month. The annual penalty was $1,020,000 for
$85,000 per month. At the present time the Company remains in default. 
 Item 2. Description Of Property At December 31, 2004 the Company leased a 7,000 square feet of office space at 1597 N. Main St
North Carton, Ohio. The space was leased for five years at a rate of $5,156 per month. The property
is in good condition but the space was not sufficient to meet our needs at this time; furthermore,
the lease ends 04/30/2005. The Company has moved into its new 12,395 square foot facility and held
its grand opening April 7, 2005. The office is now located at 3840 Greentree Ave SW, Canton, Ohio
44706. The lease rate at this new office is $11,879 per month with a ten year lease term that
includes an expansion option for additional space. 
 Item 3. Legal Proceedings None 
 Item 4. Submission Of Matters To Vote Of Security Holders None




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Part II 
 Item 5. Market for Common Equity and Related Stockholder Matters. Hartville Groups Common Stock trades on the NASDAQS OTC Bulletin Board under the symbol
HTVL. The high and low closing bid information for our Common Stock during the year ended December
31, 2004 is based on information received from Bloomberg L.P., the NASDAQ Trading and Market
Services, and a company market maker. Quarter Ended
    
    High
    
    
    LowMarch 31, 2003
    
    $
    0.71
    
    
    $
    0.63June 30, 2003
    
    $
    1.01
    
    
    $
    0.95September 30, 2003
    
    $
    1.65
    
    
    $
    1.48December 31, 2003
    
    $
    5.18
    
    
    $
    5.25March 31, 2004
    
    $
    4.35
    
    
    $
    4.26June 30, 2004
    
    $
    6.60
    
    
    $
    6.50September 30, 2004
    
    $
    3.55
    
    
    $
    3.50December 31, 2004
    
    $
    1.75
    
    
    $
    1.72
 The quotations reflect inter-dealer price, without mark-up, mark-down or commission and may
not represent actual transactions. As of December 31, 2004, there were approximately
2,091 shareholders of record of our common stock. Hartville Group has never declared or paid any cash dividends on the capital stock and does
not anticipate paying any cash dividends on the capital stock in the foreseeable future. Hartville
Group intends to retain the earnings, if any, to finance the expansion of the business. The
declaration and payment of dividends in the future, if any, will be determined by the Board of
Directors in light of conditions then existing, including our earnings, financial condition,
capital requirements and other factors. Recent Sales of Unregistered Securities On February 14, 2003, Hartville Group issued 2,163,885 shares to employees that exercised
their non-qualifying stock options wherein the Company recognized $480,000 in the value of
services. These shares were issued in a private transaction, not involving any public solicitation
or commissions, and without registration in reliance on the exemption provided by Rule 506 and
Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
The transaction benefited from such an exemption based on the facts that the recipients had
sufficient knowledge and experience in financial and business matters for them to be able to
evaluate the merits and risks of an investment in the Hartville Group, that they had access to the
type of information normally provided in a prospectus, and that the transaction was non-recurring
and privately negotiated. On October 8, 2003, Hartville Group issued 5,263,158 shares priced at $.95 along with
2,631,053 three year warrants priced at $1.90, which expire November 8, 2006, to accredited
investors in exchange for $5,000,000. These shares and warrants were issued in a private
transaction, not involving any public solicitation or commissions, and without registration in
reliance on the exemption provided by Rule 506 and Section 4(2) of the Securities Act as a
transaction by an Issuer not involving a public offering. The transaction benefited from such an
exemption based on the facts that the recipients had sufficient knowledge and experience in
financial and business matters for them to be able to evaluate the merits and risks of an
investment in the Hartville Group, that they had access to the type of information normally
provided in a prospectus, and that the transaction was non-recurring and privately negotiated. On July 1, 2004 the Company issued to its public relations firm 500,000 warrants.
The price on the warrants was set 250,000 at $5 and 250,000 at $6. In accordance with FASB 123
Accounting for Stock Based Compensation a compensation charge related to the fair value of these
warrants resulted is a non recurring non-cash expense of $787,011. On August 16, 2004 the Company raised $3,300,000 in a Secured Promissory Note. As part of the
Companys application to complete the insurance company acquisition, Hartville needed to
demonstrate the financial capability to make a capital contribution to the target acquisition. This
loan provided standby financing in the event the Company could not raise additional capital. The
note was at 18% interest. The note was due October 18, 2004 and was paid in full October 20, 2004.




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On August 31, 2004 Hartville Group entered into a security purchase agreement with an investment
fund. The security purchase agreement was for convertible debt with a face value of $3,000,000.
The debt was at 10% annual interest due monthly. The debt was convertible into common shares at
maturity, on November 18, 2004, at a price per share of $1. The holder of the note could not
convert to common shares until maturity and the Company could repay the debenture at any time
before maturity thus avoiding conversion into shares. This convertible debt was re-paid in full on
November 11, 2004 out of the Companys issuance of convertible debentures discussed below.
Attached to this convertible debenture were five-year warrants for 499,999 shares exercisable at a
price of $4.25 per share. The exercise price of these warrants was re-set to $0.95 per share as a
result of the November 26, 2004 Convertible Debenture transaction (see below). This re-pricing
resulted in a beneficial discount on the warrants issued in connection with the August 31, 2004
Convertible Debenture. This beneficial discount has been reflected as a non recurring non-cash
interest expense of $30,804 with the corresponding adjustment to paid-in capital. On November 11, 2004, the Company completed and issued on November 26, 2004 $11,038,780 of
two-year Convertible Debentures due November 11, 2006 together with five-year Warrants to purchase
up to 4,906,124 shares of common stock.. This convertible debt carries a 7% annual coupon. The full
amount of interest was prepaid. There was a 7% fee along with 237,495 five-year warrants priced at
$.95 issued to the lead investment banker. A portion of the funds raised were used to pay in full
the note due November 18, 2004. The conversion price in effect on any conversion date was set to
the lesser of $2.25 (subject to adjustment) or 80% of the average of the five closing prices
immediately prior to such conversion date with a floor of $0.95 per share (subject to adjustment).
Due to failure by the Company to file its registration statement within the agreed time period this
conversion price was re-set on February 17, 2005 to $0.95 per share with the stock registration
period extended to June 30, 2005 and liquidated damages suspended until that date. The warrants
were issued as exercisable at a price of $.95 per share, price that has not changed since their
issue. The fair value of the warrants issued resulted in a beneficial conversion impact on the
debt. The beneficial conversion impact was accounted for in accordance with EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingency Instruments.
Accordingly, additional paid-in capital of $1,032,980 and a non recurring non-cash discount of
these Convertible Debentures of $1,032,980 were recorded due to the beneficial conversion feature.
The non recurring non-cash discount has been reflected as a reduction in the outstanding balance of
the Convertible Debentures for financial reporting purposes. These non recurring non cash discounts
will be amortized over the life of the Debenture as an expense using the effective interest method.
However, the Company remains obligated for the entire contractual balance of the Convertible
Debentures of $11,038,780 which is due at November 11, 2006. Hartville Groups common stock is considered a penny stock as defined in certain rules (the
Rules) under the Securities Exchange Act of 1934. In general, a security which is not quoted on
NASDAQ or has a market price of less than $5 per share where the issuer does not have in excess of
$2,000,000 in net tangible assets (none of which conditions we meet) is considered a penny stock.
The SECs rules regarding penny stocks impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established customers and accredited
investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the Rules, the
broker-dealer must make a special suitability determination for the purchaser and receive the
purchasers written agreement to the transaction prior to the sale. Thus the Rules affect the
ability of broker-dealers to sell our shares should they wish to do so because of the adverse
effect that the Rules have upon liquidity of penny stocks. Unless the transaction is exempt under
the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,
broker-dealers effecting customer transactions in penny stocks are required to provide their
customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if
any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the
transaction; and (iv) monthly account statements showing the market value of each penny stock held
in the customers account. As a result of the penny stock rules, the market liquidity for Hartville
Groups securities may be severely adversely affected by limiting the ability of broker-dealers to
sell the Hartville Groups securities and the ability of purchasers of the securities to resell
them. 
 Item 6. Managements Discussion and Analysis Of Financial Condition and Results of
Operations. THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HARTVILLE
GROUP SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES,
HARTVILLE GROUP S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO
COMPETITION AND OVERALL MARKET CONDITIONS.




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We are organized into three reportable segments: the holding company (Hartville Group, Inc.),
and the old holding company (Hartville Equestrian, Inc.), the insurance agency (Petsmarketing
Insurance.com Agency, Inc.), and the reinsurance company
(Hartville Re formerly known as Hartville Insurance Company, LTD). Hartville Group currently
generates revenue from (2) two sources. First, Petsmarketing Insurance.com Agency (Agency) receives
30% of the premiums on policies written as a commission. Second, Hartville Re can earn underwriting
profit or (loss) on the insurance risk that it assumes. The policies written by the Agency are
partly reinsured by Hartville Re. The premiums received by Hartville Re less claims paid equals
underwriting profit. Our income is comprised of two business segments; First, commission income on the sale of pet
insurance policies; and second, underwriting profits generated from the insured policy risk
retained by us. In the period ending December 31, 2004, our reinsurance company reported sharing on
a quota share basis at a 40% ceded risk on business written through June 30, 2004. Therefore, 40%
of the 70% net premiums, that is, gross premium less commissions of 30%, are reflected on our
income statement as premium income. This amount is then adjusted to reflect all fees, claims, and
administrative expenses to arrive at the overall net income. Since our ceded risk participation is
only 40% the remaining 60% of the net premiums do not flow through our financial statements since
this represents income for non-related third party reinsurers. On July 1, 2004 all pet insurance
policies were canceled and re-written with our reinsurance company taking 100% of the underwriting
risk. Then on August 15, 2004, new and renewal business was written with Hartville Re taking no
underwriting risk. Managing risk to secure an underwriting profit is the principal activity of an insurance company,
i.e., spreading the risk. Achieving a favorable loss ratio to premium dollars, that is, actual paid
claims including reasonable estimates on claims incurred but not yet reported (IBNR) to earned
premium for the period best illustrates the profitability model of the insurance program. These
ratios also provide management with insight on the rate adequacy of the premiums offered on the
various pet insurance policies. Liquidity and Capital Resources.The Company has financed its operations and other working
capital requirements principally from operating cash flow and capital raised through the issuance
of convertible debt. On October 20, 2003, the Company completed a five million dollar ($5,000,000)
private placement of its securities. The Company used the proceeds of this transaction to retire a
$3,000,000 note payable with the remainder to be used for working capital. With this new financing
in place, management believes it can sustain operations and complete its business plans. On August
16, 2004 the Company raised $3,300,000 through Secured Convertible Promissory Notes. They are at
18% interest and were due October 18, 2004. This note was paid in full October 20, 2004. On
November 26, 2004, the Company raised $11,038,780 using Convertible Debentures due November 11,
2006, which included Warrants. The convertible debt is for 2 years with a 7% coupon. The full
amount of interest was prepaid. The conversion price in effect in any conversion date shall be
equal to the lesser of $2.25 (subject to adjustment) or 80% of the average of the five closing
prices immediately prior to such conversion date, provided, however, the Conversion Price shall
never be equal to a price lower than $0.95 (subject to adjustment). This price was later amended on
February 17, 2005 to a conversion price of $0.95. The warrants are five year warrants with the same
amended conversion price. The Warrants expire in five years and are to purchase up to 4,906,124
shares of common stock at $.95 a share. The Company has an obligation, pursuant to registration
rights agreement, to register for resale the shares underlying the Convertible Debentures and the
Warrants by June 30, 2005 in order to avoid liquidated damages to investors. The funds raised were
used to pay in full the note due November 19, 2004. There was a 7% fee along with 25,000 warrants
per $1,000,000 raised that is due to the lead investment banker. Financial Statements of the
Company as a result of raising capital through Convertible Debentures and warrants together with
unregistered shares of stock issued for services created a potential beneficial discount to
holders. The Company in accordance with FASB 123 Accounting for Stock Based Compensation and
EITF 98-5 has recognized in its restated 2003 financial statements the non-cash non recurring
expense of $554,861 and $1,859,911 for 2004 in connection with these instruments. The Company, as
part of EITF 98-5, will recognize through 2006 using the effective interest method $11,038,780 in
non-cash expenses in connection with the potential beneficial conversion discount on these
Convertible Debentures. The Company has sufficient operating cash for 2005. Outgoing cash flows for marketing initiatives
will be offset with incoming cash flows from the recoverable costs of $2,303,333 through the Mutual
Release with the Department of Insurance. General: Hartville Group currently generates revenue from two sources. First, commissions paid to our
marketing and administrative agencyPetsmarketing Insurance.com Agency for marketing and
administering the plan for insureds. At the present time, 30% of the premium represents the gross
revenue for this division;




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Second, Hartville Re earns underwriting profit on the insurance risk that it assumes. The policies
written by the Agency are partly reinsured by Hartville Re. The premiums received by us less claims
paid equals underwriting profit. The business risk cededassumedby us has historically been
approximately 20% of premiums written. Hartville reinsured business in 2002
under a Managing General Agency (MGA) agreement with Clarendon National Insurance Company.
Hartville Re took a quota share reinsurance agreement directly with Clarendon National Insurance
Company wherein Hartville Re assumed 20% quota share of the underwriting risk. Clarendon National
Insurance Company also assumed 20% with the remaining risk being ceded to other international
reinsurers. Commencing April 2003, Hartville began writing pet insurance policies through State
National Insurance Company. Hartville Re offered and executed reinsurance slips to continue
assuming underwriting risk as previously, now at a 40% quota share. Hartville Re posted a $2
million Letter of Credit as requested by State National Insurance Company; however, State National
Insurance Company never formalized this agreement. In July 2004 Hartville canceled and re-wrote its
entire book of pet insurance policies, with Department of Insurance approval, on the insurance
acquisition target, that is, the intended property and casualty insurance company to be acquired
and formalized. Hartville Re assumed 100% quota share reinsurance of the underwriting risk
initially and intended to reduce this post transfer of the pet insurance book to 70% with other
willing reinsurers. The potential underwriting income or (loss) from the 2003 treaty (book of
business transfer) was now transferred to Hartville Re from the target insurance acquisition and
ceded to the 2004 account. On August 15, 2004, the Department of Insurance, at no fault of
Hartville, withdrew the Companys writing authority through the target acquisition. As a result,
Hartville Res underwriting risk retention was not reduced to 70%, but was maintained at 100% in
view that reinsurers would now not subscribe to the quota share agreement. The Company secured
writing authority from another carrier on August 25, 2004 and all new and renewal business going
forward was written with this international recognized insurer who retained 100% of the
underwriting risk. This underwriting agreement has been amended effective January 1, 2005 with
Hartville Re retaining 50% quota share of the underwriting risk going forward. There are no related
party transactions as they relate with these reinsurance and MGA agreements. Our primary business line is pet health insurance. We are located in Canton, Ohio. This
location was chosen as a result of a favorable insurance regulationlittle to no retaliatory
barriers to entry in selling its pet insurance policy in all other states, and cost of living.
Since this product requires an efficient back office administrative center, cost of living plays an
important role in the selection process of a company location. The Akron Canton Ohio area is also
home to other successful full serviceback office insurance centerssuch as Progressive Insurance
and Nationwide. Management believes that there are strong indications that the pet insurance market is
shifting onto a more dynamic track and a preponderance of positive factors appear to support the
projection of potential gains in the years ahead for pet insurance providers. For example: a)
sharply rising veterinary costs are driving pet owners into the arms of pet insurance providers; b)
stimulating all pet-related markets is an ongoing psychographic trend sometimes referred to as the
humanization of pets, whereby pets are increasingly being treated as full-fledged members of the
family; c) Accordingly to the Pet Food Institutes 2002 Pet Incidence Trend Report, both the cat
and dog populations have experienced steady growth during the past two decades; d) due to better
veterinary care, expanded treatments options, and pet owners willingness to spend ever-larger
amounts to keep their pets healthy, more and more pets are living to a ripe old age; e)
direct-to-consumer marketing will be the primary pet insurance market driver in the years ahead;
and f) albeit indirectly, pet insurance marketers stand to benefit enormously from the entry of
large consumer packaged goods (CPG) companies into the field of pet products and services, a trend
that is already well underway. Management also recognizes the risks in our market. Management believes that during the next
five years, the U.S. pet insurance market will also witness an influx of companies from a number of
other providers. The prominence of the Sainsburys and Tesco supermarket chains as established pet
insurance providers in the United Kingdom, along with the more recent entry of Marks & Spencer,
indicates that a major retail fronteven one that is not pet-specificis an potential competitor. Our fiscal year end is December 31. Results of Operations The Company changed its accounting practice with respect to the capitalization of Policy
Acquisition Costs and the period over which the deferred costs are amortized. Under its new policy,
capitalized costs will be amortized over a three-year minimum expected policy life. The Company
previously amortized these costs over a five-year policy life. As a result, previously issued
financial statements have been restated to conform to the Companys current policy. The financial
statements have also been restated to reflect the impact of compensation costs incurred related to
stock and warrants issued for services.




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Premiums on in-force policies for the twelve-month period ending December 31, 2004 were $5,993,343.
This resulted in gross revenue of $5,663,057, as compared to the twelve months ended December 31,
2003, which had a premium on in-force policies of $8,241,408 resulting in gross revenue of
$4,811,850. The difference being in 2003 risk retention moved from 20% to 40% wherein 2004 risk
retention was a constant 40% increasing for a short duration to 100% in July 2004. The reducing
premium on in-force policies at December 31, 2004 was the result of discontinuing a marketing
campaign with PetPartners who had the marketing arrangement with the American Kennel Club. Loss
experience and administrative costs were above acceptable levels
on this program; therefore, the Company discontinued its relationship. Although sales continue on
new pet insurance policies the runoff of existing customers through the PetPartner/AKC relationship
was at a greater rate than new business growth. This runoff ended on March 2005; thus annualized
premium on in-force policies will be on the increase in 2005. Loss (claims) ratio for the periodtreaty April 2003 to June 2004 specificwas 54%. The loss
ratio for prior periods including loss adjustment expenses was 43% for 2003 and 50% for 2002. Casualty Actuarial Services Phil Heckman of Heckman Actuarial Consultants, LTD conducted an
actuarial study of the overall experience of Petshealth Care Plan from their inception in January
1998 through April 2002 and has provided annual updates. The review also analyzes the overall rate
adequacy of the new rates being used currently by the insurance company. The aggregate pure loss
ratio was 55.7% and was relatively stable month to month with some upward trending over time. The
new rates to be introduced in 2005 will reflect an overall 15% rate increase and are projected to
achieve a 50% loss ratio in the 2005 period. This leaves 30% to cover acquisition administration
and profit while delivering a gross underwriting margin of 20%. Operating expenses were $10,949,763 for the twelve-month period ended December 31, 2004
compared to operating expenses of $4,181,801 for the twelve months ended December 31, 2003. The
increase in operating expenses is principally due to losses and expenses from an increase in volume
of premium sales. The increased general and administrative expenses are due to an increase in
volume of premium sales. Operating expenses is a ratio of revenues, thereby increasing revenues
would bring down this ratio. Revenues as indicated come from Agency commissions and risk retention
that both stem from insurance premiums. The Agency had a reduction in the number of in-force
policies thereby reducing premiums. This reduction in premium reduced potential underwriting income
(loss) at the reinsurance subsidiary Hartville Re. These factors together with the temporary
placement of pet insurance policies with an underwriter who assumed 100% of the risk; the change in
accounting practice with respect to the capitalization of policy acquisition costs and the period
over which the deferred costs are amortized; termination of acquisition of the insurance company
acquisition; liquidation penalties for not registering shares in accordance with agreements; and
legal and brokerage fees associated with several capital raises increased the Companys expense
ratio. A good portion of these expenses are one time charges and should not be reoccurring. The
change in accounting treatment of policy acquisition contributed to 50% of agencys segmented loss
or $1.5 million loss. The parent company (Hartville Group) had one time fees of investment banking
costs on capital raised; non-recoverable costs of the terminated insurance acquisition; penalties
associated with not registering shares pursuant to stock purchase and in accordance with FASB 123
Accounting for Stock Based Compensation a compensation charge applied to the issuance of options,
warrants and shares in exchange for services, and in accordance with EITF 00-27, a beneficial
conversion change related to convertible debenture transactions in 2004 which contributed to this
net loss. These beneficial discounts were reflected as a non recurring non-cash interest expense
and totaled $1,859,911. The identified parent company expenses represented 82% of the holding
companys overall net loss. Operating income (loss) for the twelve-month period ending December 31, 2004 was $(7,101,457)
as compared to the twelve-month period ending December 31, 2003 of $75,188. Operating loss from
insurance operations is attributed to an increased operating expense ratio as explained above and
reduced income. Other income decreased from $95,559 for the year ended December 31, 2003 to $67,260 for the
year ended December 31, 2004. Other income is interest income on cash accounts. Other expense increased from $0 for the year ended December 31, 2003 to $1,009,910 for the
year ended December 31, 2004. Other expenses are expenses associated with the operations of the
parent company for interest penalties on failure to register shares of stock and warrants pursuant
to the October 8, 2003 Stock Purchase Agreement and financing costs on all convertible debenture
transactions. The net income (loss) for the twelve months ended December 31, 2004 was $(8,044,107) or
$(0.57) per share. This compares to a net income of $120,747 or $.02 per share for the year ended
December 31, 2003. The net loss is comprised of: First, the reinsurance segment (Hartville Re)
reduction in ceded premium due to policy runoff2003 premium was $8mm to $6mm in 2004from a
discontinued marketing campaign with PetPartners / American Kennel Club; reducing risk retention as
a result of placing business with a carrier that retained 100% of the underwriting risk; and
increased operating expense as a result of the short duration of risk retention at 100%, i.e.,
reinsurer unable to recapture earned premium in relation to claim occurrence. Second, agency
segment (Petsmarketing) change in accounting practice with respect to the capitalization of policy
acquisition costs and the period over which the deferred costs are amortized; reduction in
commission income do to premium runoff as




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noted in the reinsurance segment; and increased operating
expenses through expansion of staff. Third, holding company segment (Hartville) legal and brokerage
fees associated with capital funding transactions, i.e. the various debt transactions in 2004;
interest penalties on failure to register shares pursuant to the agreements; and non-recoverable
costs associated with the termination of the insurance company acquisition. Net income was affected
by a number of one time costs as discussed above in the Operating Expense segment. The Company in
2003 reported a net income which takes into account the change in accounting practice with policy
acquisition costs. The terminated insurance acquisition together with the Company failing to
register shares timely, which is due in part to the pending acquisition, impacted the Companys
overall business model. The
business model which calls for a self sufficient pet insurance delivery and risk retention
operation can deliver profitable and measurable returns to investors as demonstrated in 2003. In the next 12 operating months, we intend to refocus and grow the pet health insurance
business and establish a U.S. Property and Casualty insurance company in order to eliminate our
dependency on a frontingunderwritinginsurance company. New Accounting Standards In December 2004, FASB
issued a revision of Statement No. 123. Statement No. 123(R), Share-Based
Payment, is broader in scope than the original statement, which was more narrowly focused on
stock-based compensation, and makes significant changes to accounting for payments involving
employee compensation and shares or securities, in the form of stock options, restricted stock or
other arrangements settled in the reporting entitys securities. Most significant in the standard
is the requirement that all stock options be measured at estimated fair value at the grant date and
recorded as compensation expense over the requisite service period associated with the option,
usually the vesting period. The revised standard becomes effective for interim periods beginning
after June 30, 2005 and may be applied prospectively to stock options granted after the effective
date and any unvested stock options at that date. Although the Companys management has not completed its analysis of the revised standard, the
effect of the revised standards implementation will be recognition of compensation expense
associated with stock options. Previously, the Company has used the intrinsic-value method which
did not result in expense recognition but, instead, required pro forma presentation of what
compensation expense would have been recorded if the fair-value measurement and expense recognition
provisions had been applied. A variety of proposed or otherwise potential accounting standards are currently under study by
standard-setting organizations and various regulatory agencies. Because of the tentative and
preliminary nature of these proposed standards, management has not determined whether
implementation of such proposed standards would be material to the Companys consolidated financial
statements. 
 Item 7. Financial Statements And Supplementary Data Our financial statements and supplementary data are attached hereto. 
 Item 8. Changes in and Disagreements With Accountants On Accounting And Financial
Disclosure. On January 18, 2005, the Registrant declined to renew the engagement of Pollard-Kelley
Auditing Services, Inc. as the independent accountant engaged to audit the financial statements of
the Registrant and engaged BDO Seidman, LLP as its new independent registered public accounting
firm for fiscal year ending December 31, 2004. Pollard-Kelley Auditing Services, Inc. performed the audit of the Registrants financial
statements for year ending December 31, 2003. During this period and the subsequent interim period
prior to the Registrant declining to renew their engagement, there were no disagreements with
Pollard-Kelley Auditing Services, Inc. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which disagreements if not resolved
to Pollard-Kelley Auditing Services, Inc.s satisfaction would have caused Pollard-Kelley Auditing
Services, Inc. to make reference to this subject matter of the disagreements in connection with
Pollard-Kelley Auditing Services, Inc.s report, nor were there any reportable events as such
term is defined in Item 304(a)(3) of Regulation S-B, promulgated under the Securities Exchange Act
of 1934, as amended. The Registrant determined that a new independent certified public accountant would be in the
best interests of the shareholders of the Registrant. The decision to not to renew the engagement
with Pollard-Kelley Auditing Services, Inc. was approved by the Registrants Board of Directors and
Audit Committee. The audit reports of Pollard-Kelley Auditing Services, Inc. for the Registrants year ending
on December 31, 2003 did not contain an adverse opinion, or a disclaimer of opinion, or
qualification or modification as to uncertainty, audit scope, or accounting principles, other than
the uncertainty that the Registrant might not be able to operate as a going concern.




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It was the decision of the Company to change its accounting practice with respect to the
capitalization of policy acquisition costs and the period over which the deferred costs are
amortized. Under its new policy, capitalized costs will be amortized over a three-year minimum
expected policy life. The Company previously amortized these costs over a five-year policy life. As
a result, previously issued financial statements have been restated to conform to the Companys
current policy. The December 31, 2003 financial statement has been restated in this Form 10-KSB.
The Company has also restated its March 31, 2004, June 30, 2004, and September 30, 2004 financials,
by filing Form 10-QSB/A as a result of terminating the acquisition of the insurance company. The
financial statements have also been restated to reflect the impact of compensation costs incurred
related to stock and warrants issued for services. 
 Item 8a.Controls and Procedures The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. As of December 31, 2004, an evaluation was carried out,
under the supervision and with the participation of the Companys management, including the Chief
Executive Officer (the CEO) and the Chief Financial Officer (CFO), of the effectiveness of the
Companys disclosure controls and procedures as of December 31, 2004. The Company has not completed
its evaluation of the effectiveness of its internal control over financial reporting as of the end
of its most recent fiscal year. As permitted by the SECs final rule dated March 2, 2005 (Release
No. 33-8545), the Company expects to complete its evaluation of the effectiveness of its internal
control over financial reporting on or before December 31, 2006, and will include the results of
such evaluation in managements annual report on internal control over financial reporting to be
included in its Annual Report on Form 10-KSB as of December 31, 2006. In addition, the Company
anticipates that its independent registered public accounting firm will complete and provide to the
Company such firms attestation report on managements assessment of the Companys internal control
over financial reporting on December 31, 2006, and the Company will also include such attestation
report to its Annual Report on Form 10-KSB. Management have concluded that the Companys controls over accounting disclosures and related
procedures were not effective as of December 31, 2004. The Company has already instituted, and will
continue to implement, corrective actions with respect to the material weaknesses as described
below in further detail. The Company believes that the actions it has taken to date in this regard,
when taken as a whole, have mitigated the material weaknesses and other deficiencies with respect
to the preparation of this Annual Report on Form 10-KSB such that the information required to be
disclosed in this Form 10-KSB has been recorded, processed, summarized and reported correctly. Internal Control over Financial Reporting As described elsewhere in this Form 10-KSB and in our press release dated March 18, 2005 during the
first quarter of 2005 in conjunction with our financial statement closing procedures, we amended
our policy for the accounting of deferred policy acquisition costs. As a result of this change in
policy, we determined that certain prior period financial statements required restatement. As a
result, this Form 10-KSB includes restated consolidated financial statements as of and for the
fiscal year ended December 31, 2003. In addition the Form 10-QSBs for the quarterly periods ended
March 31, June 30 and September 30, 2004, including the corresponding periods in 2003 have been
restated. The financial statements have also been restated to reflect the impact of compensation
costs incurred related to stock and warrants issued for services. In connection with our restatement, we identified and reported to our audit committee the following
areas for improvement in our internal control over financial reporting. These matters constitute
material weaknesses as defined under stands established by the Public Company Accounting
Oversight Board or PCAOB.  
    Inadequate technical accounting expertise within the accounting department.
There was not adequate technical accounting expertise within our accounting department.
The personnel resources and technical accounting expertise in the accounting department
were not sufficient to adequately resolve complex accounting processes, such as the
disclosures required under US GAAP for insurance companies.
    Inadequate quarterly and year-end financial statement close and review process.
For each quarterly and fiscal year-end period, a financial statement close and review
process occurs. Our staffing for the quarterly and year-end financial statement close
process was not sufficient.




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##### Table of Contents




    The policy for the determination and identification of the types of costs that
should be capitalized in accordance with U.S. GAAP was inadequate, which affected our
fixed asset and deferred policy acquisition costs accounts. We lacked enough personnel
with sufficient expertise in the insurance accounting rules under U.S. GAAP. Remediation Activities Hartville Group, Inc. places the highest priority on addressing these matters. Under the direction
of our senior management and the participation and oversight of our audit committee, we have and
continue to implement significant changes in the infrastructure of our accounting department
personnel and related processes over financial reporting. Our recruiting efforts will involve the
hiring more senior staff and contracting with specialist firms who have sufficient expertise in
financial controls and insurance-related accounting rules in accordance with US GAAP. In addition,
we are implementing an enhanced quarterly and
annual financial review close process to include additional analysis and support for the financial
accounts as well as to ensure that all appropriate disclosures are made in accordance with US GAAP
and the rules and regulations of the SEC and PCAOB.




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##### Table of Contents



PART III 
 Items 9, 10, 11, 12 and 14  Part III (Items 9 through 12 and Item 14) is omitted since we expect to file with the U.S.
Securities and Exchange Commission within 120 days after the close of the fiscal year ended
December 31, 2004, a definitive proxy statement pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 that involves the election of directors. If for any
reason such statement is not filed within such period, this annual report will be
appropriately amended. 
 Item 13. Exhibits List and Reports On Form 8-K Index to Exhibits Exhibit No.
    
    Identification of Exhibit3.1(1)
    
    Amended and restated Articles of Incorporation3.2(1)
    
    By-Laws of Venturelist.com3.3(2)
    
    Certificate of Amendment to Articles of Incorporation.4.1(1)
    
    Form of Specimen of common stock10.1(3)
    
    Stock Purchase Agreement with Whiskers, Inc.10.2(3)
    
    Promissory Note with Samir Financial II, L.L.C.10.3(3)
    
    Loan and Security Agreement with Samir Financial II, L.L.C.10.4(3)
    
    Hartville Group, Inc. Common Stock Warrant10.5(4)
    
    Stock Purchase Agreement between Hartville Group, Inc. and certain investors.10.6(4)
    
    Common Stock Purchase Warrant between Hartville Group, Inc. and certain investors.10.6(5)
    
    Securities Purchase Agreement related to debentures and Warrants10.6(6)
    
    Securities Purchase Agreement, Form of Amendment to Securities Purchase Agreement and Form
of Securities Purchase Agreement14.(7)
    
    Code of Ethics23.1(*)
    
    Consent of Independent Auditors31.1(*)
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.31.2(*)
    
    Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.32.1(*)
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.32.2(*)
    
    Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
  *
    Filed herein.(1)
    Filed as an Exhibit to Hartville Groups registration statement on Form SB-2
(File No. 333-48544) and herein Incorporated by reference.(2)
    Filed as an Exhibit to Hartville Groups Form 8-K filed on September 16, 2002.(3)
    Filed as an Exhibit to Hartville Groups Form 10-KSB/A, filed on January 9, 2004.(4)
    Filed as an Exhibit to Hartville Groups Form 8-K filed on November 10, 2003.(5)
    Filed as an Exhibit to the Registrants Form 8-K file don September 8, 2004.(6)
    Filed as an Exhibit to the Registrants Form 8-K filed on November 26, 2004.(7)
    Filed as an Exhibit to Hartville Groups Form 10-KSB, filed on April 13, 2004.




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##### Table of Contents



Reports on Form 8-K  1.
    On January 28, 2004, Hartville Group, Inc. announced
On January 28, 2004, Hartville Group, Inc. announced
that it has executed a Letter Option Agreement to
purchase a property and casualty insurance company.2.
    On February 18, 2004, the Company announced record
financial results for the fourth quarter ended
December 31, 2003.3.
    On February 23, 2004, the Company announced that it
had appointed two new directors to its Board of
Directors, Nick Leighton and Alan Kaufman, MD.4.
    On June 21, 2004, Hartville Group, Inc. announced
that it has renewed its direct marketing contract
with Catalina Marketing Corporation5.
    On September 8, 2004, Hartville Group, Inc. completed
an agreement with certain purchasers for the issuance
and sale by Hartville Group, Inc. of $3,000,000
principal amount of Debentures and Warrants to
purchase shares of the Companys Common Stock.6.
    On November 4, 2004, the Company announced that it
had reached an agreement which allows the Company to
market its new pet health insurance brand, Healthy
Bark & Purr, to PetMed Express customers. Founded in
1996, PetMed Express, Inc..7.
    On November 26, 2004, Hartville Group, Inc. completed
an agreement with certain purchasers for the issuance
and sale by Hartville Group, Inc. of $11,038,780
principal amount of Convertible Debentures and
Warrants to purchase shares of the Companys Common
Stock.8.
    On December 6, 2004, the Company appointed two new
directors to its Board of Directors, Michael A.
Amsalem and Dennis C. Rushovich.9.
    On January 18, 2005 the Company engaged BDO Seidman
LLP as its new independent registered public
accounting firm.10.
    On March 18, 2005 the Company announced the
termination of acquisition of insurance company and
restatement of financial results.




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned. Thereunto duly Dated: April 22, 2005 Hartville Group, Inc. 
RegistrantBy:
    
    /s/ W. Russell Smith III

W. Russell Smith III 
President (Principal Executive Officer and
Principal Accounting Officer)
 In accordance with the Exchange Act. This report has be signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated. Signature and Capacity/s/ W. Russell Smith III
    
    Dated April 22, 2005W. Russell Smith IIIPresident and Director/s/ Nicholas J. Leighton
    
    Dated April 22, 2005Nicholas J . LeightonDirector / Audit Committee Chairman/s/ Tomas A. Neuzil
    
    Dated April 22, 2005Tomas A. NeuzilSecretary and Director/s/ Roger A. Kimmel, Jr
    
    Dated April 22, 2005Roger A. Kimmel, JrDirector/s/ Michel Amsalem
    
    Dated April 22, 2005Michel AmsalemDirector/s/ Dennis C. Rushovich
    
    Dated April 22, 2005Dennis C. RushovichDirector




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Report of Registered Independent Public Accounting Firm Board of Directors and Stockholders
Hartville Group, Inc. We have audited the accompanying consolidated balance sheet of Hartville Group, Inc. and
subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of
income (loss), changes in stockholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hartville Group, Inc. and subsidiaries as
of December 31, 2004, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America. BDO SEIDMAN, LLP
Grand Rapids, Michigan
April 20, 2005




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##### Table of Contents



Independent Auditors Report Continued Hartville Group, Inc. and Subsidiaries
Canton, Ohio We have audited the consolidated Balance Sheet of Hartville Group, Inc. and Subsidiaries as of
December 31, 2003 and the related Consolidated Statements of Income, Consolidated Changes in
Stockholders Equity, and Consolidated Statement of Cash Flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on those financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit, the financial statements referenced above present fairly, in
all material respects, the financial position of Hartville Group, Inc. and Subsidiaries as of
December 31, 2003 and the results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles accepted in the United States of
America. As described in Note 8, the consolidated financial statements as of December 31, 2003, and for the
year then ended have been restated. Pollard-Kelley Auditing Services, Inc. /S/ Pollard Kelley Auditing Services, Inc. Fairlawn, Ohio
January 29, 2004, except for Note 8 which is as of April 1, 2005.




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##### Table of Contents



Hartville Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003(as restated)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    6,104,053
    
    
    $
    7,653,463Commissions receivable
    
    
    159,130
    
    
    
    687,377Other receivables
    
    
    2,368,071
    
    
    
    154,284Prepaid taxes
    
    
    600,000
    
    
    
    Deferred tax asset
    
    
    
    
    
    
    300,000Prepaid expenses
    
    
    2,860,850
    
    
    
    69,588Total Current Assets
    
    
    12,092,104
    
    
    
    8,864,712Fixed AssetsProperty and equipment  net
    
    
    2,180,919
    
    
    
    264,417Deferred policy acquisition costs  net
    
    
    578,329
    
    
    
    2,759,248
    
    
    
    264,417Other AssetsLicensing fees, less accumulated
amortization of $42,473 and $32,886
    
    
    12,016
    
    
    
    21,603Other non-current assets
    
    
    76,263
    
    
    
    831,42088,279
    
    
    
    853,023Total Assets
    
    $
    14,939,631
    
    
    $
    9,982,152
 See accompanying notes to financial statements.




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##### Table of Contents



Hartville Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003(as restated)LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    779,117
    
    
    $
    8,456Reserve for losses
    
    
    176,998
    
    
    
    301,847Accrued expenses
    
    
    13,308
    
    
    
    172,877Premium deposits
    
    
    
    
    
    
    766,094Unearned commissions
    
    
    19,284
    
    
    
    Accrued taxes
    
    
    
    
    
    
    389,839Current portion of long-term debt
    
    
    6,000
    
    
    
    5,821Total Current Liabilities
    
    
    994,707
    
    
    
    1,644,934Long-Term Debt (offset by discount
of $1,032,980 on convertible
securities in 2004)
    
    
    10,025,503
    
    
    
    25,703Total Liabilities
    
    
    11,020,210
    
    
    
    1,670,637Stockholders EquityCommon stock, 50,000,000 shares authorized:$.001 par value; 14,576,296 and
12,096,909 issued and outstanding
at December 31, 2004 and 2003
    
    
    14,576
    
    
    
    12,097Additional paid in capital (including $1,032,980 of
beneficial conversion and warrants associated with
convertible securities at December 31, 2004)
    
    
    12,656,372
    
    
    
    9,006,838Retained earnings (deficit)
    
    
    (8,751,527
    )
    
    
    (707,420
    )3,919,421
    
    
    
    8,311,515Total Liabilities and
Stockholders Equity
    
    $
    14,939,631
    
    
    $
    9,982,152
 See accompanying notes to financial statements.




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Hartville Group, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003(as restated)Commissions
    
    $
    1,930,645
    
    
    $
    1,952,452Premiums
    
    
    3,732,412
    
    
    
    2,859,3985,663,057
    
    
    
    4,811,850Losses and expenses
    
    
    2,599,606
    
    
    
    1,588,185Ceded costs
    
    
    933,140
    
    
    
    737,878General and administrative
    
    
    9,231,768
    
    
    
    2,410,59912,764,514
    
    
    
    4,696,823Operating Income (loss)
    
    
    (7,101,457
    )
    
    
    75,188Other income
    
    
    67,260
    
    
    
    95,559Other expense
    
    
    (1,009,910
    )
    
    
    Income (loss) before taxes
    
    
    (8,044,107
    )
    
    
    170,747Provision for taxes
    
    
    
    
    
    
    50,000NET INCOME (LOSS)
    
    $
    (8,044,107
    )
    
    $
    120,747Basic net income (loss) per common share
    
    
    ($0.57
    )
    
    $
    0.02Diluted net income (loss) per common share
    
    
    ($0.57
    )
    
    $
    0.02
 See accompanying notes to financial statements




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Hartville Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003(as restated)Cash Flows From/For Operating ActivitiesNet Income (loss)
    
    $
    (8,044,107
    )
    
    $
    120,747Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activitiesDepreciation
    
    
    536,627
    
    
    
    56,566Amortization
    
    
    45,242
    
    
    
    9,357Stock for services expenses (non-cash)
    
    
    1,859,911
    
    
    
    607,961(Increase) decrease in commissions receivable
    
    
    528,247
    
    
    
    (581,719
    )(Increase) decrease in other receivables
    
    
    (2,213,787
    )
    
    
    14,489(Increase) decrease in prepaid taxes
    
    
    (600,000
    )
    
    
    (Increase) decrease in deferred tax asset
    
    
    300,000
    
    
    
    (300,000
    )(Increase) decrease in prepaid expenses
    
    
    (2,575,914
    )
    
    
    (18,230
    )(Increase) decrease in licensing fees
    
    
    
    
    
    
    (4,490
    )Increase (decrease) in accounts payable
    
    
    770,661
    
    
    
    231,881Increase (decrease) in accrued expenses
    
    
    (159,569
    )
    
    
    111,348Increase (decrease) in premium deposits
    
    
    (766,094
    )
    
    
    375,578Increase (decrease) in unearned commissions
    
    
    19,284
    
    
    
    (Decrease) increase in Reserve for Losses
    
    
    (124,849
    )
    
    
    (Decrease) in due to fronting carrier
    
    
    
    
    
    
    (46,630
    )(Decrease) increase in Accrued taxes
    
    
    (389,839
    )
    
    
    389,839Net Cash Provided by /(Used for) Operating Activities
    
    
    (10,814,187
    )
    
    
    966,697Cash Flows For Investing ActivitiesIncrease in deferred policy acquisition costs
    
    
    (613,984
    )
    
    
    Increase in property and equipment
    
    
    (1,404,198
    )
    
    
    (187,737
    )Increase in other non-current assets
    
    
    
    
    
    
    (545,463
    )Net Cash Used for Investing Activities
    
    
    (2,018,182
    )
    
    
    (733,200
    )




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##### Table of Contents



Hartville Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31, 2004 and 2003 20032004
    
    
    (as restated)Cash Flows from Financing ActivitiesDecrease in stock purchase receivable
    
    
    
    
    
    
    50,000Proceeds from notes payable
    
    
    14,038,780
    
    
    
    3,033,056Payments on notes payable
    
    
    (3,005,821
    )
    
    
    (3,020,551
    )Sale of common stock
    
    
    250,000
    
    
    
    6,755,654Net Cash Provided from Financing Activities
    
    
    11,282,959
    
    
    
    6,818,159Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (1,549,410
    )
    
    
    7,051,656Cash and Cash Equivalents  Beginning
    
    
    7,653,463
    
    
    
    601,807Cash and Cash Equivalents  Ending
    
    $
    6,104,053
    
    
    $
    7,653,463
 See accompanying notes to financial statements




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##### Table of Contents



Hartville Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2004 and 2003 Additional
    
    
    
    
    
    
    Stock
    
    
    TotalCommon
    
    
    Stock
    
    
    Paid in
    
    
    Retained
    
    
    Purchase
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Receivable
    
    
    EquityBalance December 31, 2002, as previously reported
    
    
    3,026,870
    
    
    $
    3,027
    
    
    $
    1,652,293
    
    
    $
    (408,505
    )
    
    $
    (50,000
    )
    
    $
    1,196,815Prior Period Adjustment (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (419,662
    )
    
    
    
    
    
    
    (419,662
    )Balance December 31, 2002, as restated
    
    
    3,026,870
    
    
    
    3,027
    
    
    
    1,652,293
    
    
    
    (828,167
    )
    
    
    (50,000
    )
    
    
    777,153Sale of shares
    
    
    7,794,177
    
    
    
    7,794
    
    
    
    6,747,860
    
    
    
    
    
    
    
    
    
    
    
    6,755,654Stock issued for services
    
    
    1,275,862
    
    
    
    1,276
    
    
    
    594,524
    
    
    
    
    
    
    
    
    
    
    
    595,800Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    12,161
    
    
    
    
    
    
    
    
    
    
    
    12,161Receipt of stock
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    50,000Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,747
    
    
    
    
    
    
    
    120,747Balance December 31, 2003, as restated
    
    
    12,096,909
    
    
    
    12,097
    
    
    
    9,006,838
    
    
    
    (707,420
    )
    
    
    
    
    
    
    8,311,515Sale of shares
    
    
    1,794,078
    
    
    
    1,794
    
    
    
    248,206
    
    
    
    
    
    
    
    
    
    
    
    250,000Beneficial conversion and repricing
impact on convertible debt
    
    
    
    
    
    
    
    
    
    
    1,063,784
    
    
    
    
    
    
    
    
    
    
    
    1,063,784Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    1,081,203
    
    
    
    
    
    
    
    
    
    
    
    1,081,203Stock issued for cashless warrant
    
    
    85,309
    
    
    
    85
    
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    Shares issued for services
    
    
    600,000
    
    
    
    600
    
    
    
    1,256,426
    
    
    
    
    
    
    
    
    
    
    
    1,257,026Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,044,107
    )
    
    
    
    
    
    
    (8,044,107
    )Balance December 31, 2004
    
    
    14,576,296
    
    
    $
    14,576
    
    
    $
    12,656,372
    
    
    $
    (8,751,527
    )
    
    $
    
    
    
    $
    3,919,421
 See accompanying notes to financial statements




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##### Table of Contents



HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) Hartville Group, Inc., (the Company) is a provider of dog and cat insurance policies in the
United States. The Company, through its wholly owned subsidiaries, Petsmarketing Insurance.com
Agency, Inc., and Hartville Re Ltd., formerly known as Hartville Insurance Company Ltd., offers
accident, illness and wellness care pet insurance policies to owners of dogs and cats in the United
States. NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. Inter-company transactions and balances are eliminated on consolidation. Development Stage Company Until October 1, 2003 Hartville Group, Inc. and Subsidiaries (the Company) were development stage
companies as defined under Statements of Financial Accounting Standards No. 7. Hartville Group,
Inc. was incorporated in the state of Nevada on February 1, 2001 as a holding company of
Petsmarketing Insurance.com Agency, Inc., incorporated in the state of Ohio, which sells sickness
and accident policies for domestic household pets, for Hartville Group, Inc. and for Hartville Re,
which was incorporated in the Cayman Islands on October 19, 2001 and holds a restricted class B
Insurers License under the laws of the Cayman Islands. On February 1, 2002 Petsmarketing, Inc. transferred its entire interest in Petsmarketing
Insurance.Com Agency, Inc. to Hartville Group, Inc. (A Nevada Corporation) in exchange for
1,500,000 shares of Hartville Group. Also at the same time Petsmarketing, Inc. transferred its
entire interest in Hartville Re (A Cayman Island Corporation) to Hartville Group Inc. in exchange
for 500,000 shares of Hartville Group. When the transfer was complete Petsmarketing, Inc. owned
2,000,000 of the 2,001,000 shares outstanding of Hartville Group, Inc., thereby making Hartville
Group, Inc. a subsidiary of Petsmarketing, Inc. Since there was no significant change in ownership,
the transaction was accounted for as similar to a pooling of interests with all assets and
liabilities recorded at historical values. On September 12, 2002 Hartville Group, Inc. the holding company was acquired by Venturelist.com,
Inc. a Nevada public reporting corporation. Venturelist.com was a shell at the time of the
acquisition and therefore the acquisition was treated as a reverse merger whereby the acquired
company is treated as the acquiring company for accounting purposes. Venturelist.com, Inc. changed
its name to Hartville Group, Inc. at the time of the acquisition and at the same time Hartville
Group, Inc. changed its name to Hartville Equestrian, Inc. On October 17, 2003 the Company completed a $5,000,000 private placement of its common stock. As
part of this transaction the majority stockholder of the Company returned 900,000 shares of its
holdings in satisfaction of $1,921,500 of amounts due the Company. The price received by the
majority shareholder was based on the quoted market price of the stock. These shares were included
in the 5,263,000 shares sold in the private placement. The Company used the proceeds of this
transaction to retire the $3,000,000 note payable. The agreement sold each share at $0.95 each and
gave the purchaser a warrant for every two shares of stock held to purchase an additional share of
the Companys stock for $1.90 per share. The warrants expire in three years. The Company is required to register the common shares thus sold within six months of the
transaction. If the Company fails to register the shares within the six-month period it is to pay
liquidating damages to the investors of 12% per annum of the purchase price. The Company is
currently subject to this requirement. The Company, when originally organized, was to include both an insurance agency and a reinsurance
company, which would take an 80% to 90% quota share participation in the pet health insurance
thereby increasing the portion of risk and profits retained by the Company. On October 1, 2003 this
goal was basically accomplished; therefore, the Company exited the development stage.




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For 2003, Hartville Insurance Company LTD has taken a 40% quota share (compared to a 20% per quota
share in 2002) participation in the pet health insurance originated by Petsmarketing Insurance.com
Agency, Inc. and insured by a nationally licensed insurance company. The remaining 60% of risk (80%
in 2002) was ceded to re-insurers. On July 1, 2004 the Company changed fronting carriers and used
the insurance acquisition target as a fronting carrier, therefore the Company was able to increase
its risk retention for the balance of 2004. On September 1, 2004 the Company discontinued use of
its target insurance company acquisition as its fronting carrier and began using a internationally
recognized carrier and in doing so did not retain any risk on new and renewal business until
January 1, 2005 and thereby decreased its re-insurance profits for the year. The policies have been
issued on a claims made basis with maximum policy limits of $5,000 per occurrence with an annum
aggregate of $13,000 for veterinarians fees and $5,000 per animal for injury or illness per claim. Revenue Recognition Policies Revenue from commissions is derived from the sale of dog and cat insurance policies, for which
premiums are billed principally on a monthly basis. Commissions are recognized as revenue on the
effective dates of the related monthly insurance premiums. The Company earns commission revenue
through the sales of policies through its subsidiary Petsmarketing Insurance.com Agency. The Company records premium revenues based on policies written during the year through its
subsidiary Hartville Re, with premiums earned over the policy period. The Company has in place Managing General Agency agreements (the MGA Agreements) with third party
insurance carriers. Pursuant to the MGA Agreements, the Company is responsible for certain product
development, marketing and sales, underwriting and claims handling activities. The insurance
carriers, including reinsurance carriers of the Company are responsible for the risk associated
with the insurance policies. In the United States, Petsmarketing Insurance.com Agency has obtained
agency licensing for direct sale of pet insurance in 50 states. Commissions receivable, represent commissions due the company from the fronting insurance company
for premiums received during the previous month. Premium deposits are recorded as cash at year-end
with the recording of a corresponding liability to the reinsurance carriers. Ceded costs represent
the proportional losses paid on policies under the reinsurance agreements. Hartville Re is a
reinsurance company. It receives its income on a net basis. That is, the Companys revenue is net
of claims paid and expenses. However, for accounting purposes this amount is grossed up to show
gross premium revenues and expenses of claims paid and loss allowances. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all short-term debt securities
purchased with a maturity of three months or less to be cash equivalents. Trust Funds Under the terms of the MGA Agreements with its insurance carriers, Petsmarketing Insurance.com
Agency collects premiums and pays claims on behalf of its insurance carriers. These funds are held
in trust for the benefit of the insurance carriers and cannot be used or applied for other
purposes. Income Taxes The Company provides for income taxes under the asset and liability method. Under the asset and
liability method, future tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Future tax assets and liabilities are measured using
enacted or substantively enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on future
tax assets and liabilities of a change in tax rates is recognized in income in the year that
includes the enactment or substantive enacted date.




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred Policy Acquisition Costs The Company has changed its accounting practice with respect to the capitalization of policy
acquisition costs and the period over which the deferred costs are amortized. Under its new
practice, the policy acquisition costs include only direct response advertising costs and the
compensation costs attributable to the Companys call-in department, which is responsible for
handling new and renewal policy requests. The capitalized costs are amortized over a three-year
minimum expected life of the policy period, subject to an assessment of the recoverability of the
costs from future revenues from acquired policies, net of related expenses. The Companys previous
policy for capitalization of certain costs, in addition to those which continue to be capitalized
under the new policy provided for a five-year amortization. As a result, the financial statements
for the year ended December 31, 2003 have been restated to conform to the Companys current
practice. See Note 12 for the impact of the restatement. Property and Equipment Property and equipment are carried at cost. Maintenance, repairs and renewals are expensed as
incurred. Depreciation of property and equipment is provided for over their estimated useful lives,
which range from three to seven years, using the straight-lined method. Effective July 1, 2004, the Company began amortizing $1,402,376 in software development costs for
internal use software over 3 years on a straight-line basis. The software is called PUPPS ©a proprietary software, which will provide a common data base for applications, policy
underwriting, billing, policy issuance, claims processing, reporting and interface with financial
reporting. The software is entirely proprietary. Net Income (Loss) per Share Basic income (loss) per share is computed by dividing net earnings (losses) by the weighted
averages shares outstanding during the reporting period. Diluted loss per share is computed
similar to basic income (loss) per share, except that the weighted average shares outstanding are
increased to include additional shares from the assumed exercise of stock options, if dilutive.
The number of additional shares is calculated by assuming that outstanding stock options were
exercised and that the proceeds from such exercises were used to acquire shares of common stock at
the average market price during the reporting period. The computations of basic and diluted net income (loss) per share were as follows: 2004
    
    
    2003Net Income (loss)
    
    $
    (8,044,107
    )
    
    $
    120,747Weighted average common shares outstanding
    
    
    14,016,975
    
    
    
    4,886,616Dilutive effect of outstanding warrants and options
    
    
    0
    
    
    
    Diluted common shares
    
    
    14,016,975
    
    
    
    4,886,616Basic net income (loss) per common share
    
    $
    (0.57
    )
    
    $
    0.02Diluted net income (loss) per common share
    
    
    (0.57
    )
    
    
    0.02
  Reserve for Claims Reserve for claims are based upon the accumulation of cost and expenses reported prior to the close
of the accounting period, together with a provision for the current estimate of the probable cost
of claims and expenses that have occurred but have not yet been reported. Such estimates are based
on many variables including historical and statistical information and other factors. The
Companys management utilizes an independently prepared actuarial report for its determination of
reserves and believes that the estimate of the reserve for claims is reasonable; however, there is
considerable variability inherent in the reserve estimates. These estimates are continually
reviewed and, as adjustments to these liabilities become necessary, such




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) adjustments are reflected
in current operations in the period of the adjustment. Given the inherent variability of such
estimates, it is possible the actual liability could differ from the amounts provided. NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Stock Option Accounting The Company utilizes the intrinsic value method under Accounting Principles Board Opinion No. 25
(APB No. 25) and related interpretations in accounting for stock options issued to employees,
officers and directors under the Companys equity compensation plans. FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation, as amended requires the fair value
method for recognition of cost on equity compensation plans similar to those used by the Company,
however SFAS 123 is optional. The pro forma disclosures as if we had adopted the cost recognition
requirements of SFAS 123 in 2004 are immaterial. Concentration of Credit Risks During 2004 and at December 31, the Company had deposits in banks in excess of the FDIC insurance
limit. New Accounting Standards In December 2004, FASB
issued a revision of Statement No. 123. Statement No. 123(R), Share-Based
Payment, is broader in scope than the original statement, which was more narrowly focused on
stock-based compensation, and makes significant changes to accounting for payments involving
employee compensation and shares or securities, in the form of stock options, restricted stock or
other arrangements settled in the reporting entitys securities. Most significant in the standard
is the requirement that all stock options be measured at estimated fair value at the grant date and
recorded as compensation expense over the requisite service period associated with the option,
usually the vesting period. The revised standard becomes effective for fiscal years beginning after
December 15, 2005 and may be applied prospectively to stock options granted after the effective
date and any unvested stock options at that date. Although the Companys management has not completed its analysis of the revised standard, the
effect of the revised standards implementation will be recognition of compensation expense
associated with stock options. Previously, the Company has used the intrinsic-value method which
did not result in expense recognition but, instead, required pro forma presentation of what
compensation expense would have been recorded if the fair-value measurement and expense recognition
provisions had been applied. A variety of proposed or otherwise potential accounting standards are currently under study by
standard-setting organizations and various regulatory agencies. Because of the tentative and
preliminary nature of these proposed standards, management has not determined whether
implementation of such proposed standards would be material to the Companys consolidated financial
statements.




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 2  FIXED ASSETS Property and equipment are summarized by major classifications as follows: December 31,
    
    
    December 31,20032004
    
    
    (as restated)Furniture and fixtures
    
    $
    72,841
    
    
    $
    51,784Equipment
    
    
    377,999
    
    
    
    222,996Software
    
    
    2,277,678
    
    
    
    107,129Leasehold Improvements
    
    
    47,781
    
    
    
    44,5202,776,299
    
    
    
    426,429Less: accumulated depreciation
    
    
    (595,380
    )
    
    
    (162,012
    )$
    2,180,919
    
    
    $
    264,417
 NOTE 3  DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs are summarized as follows: December 31,
    
    
    December 31,20032004
    
    
    (as restated)Balance at January 1
    
    $
    -
    
    
    $
    -Acquisition costs incurred
    
    
    1,988,306
    
    
    
    605,598Amortization of acquisition costs
    
    
    (1,409,977
    )
    
    
    (605,598
    )Balance at December 31
    
    $
    578,329
    
    
    $
    0
 NOTE 4  RESERVE FOR CLAIMS Activity in the reserve for claims is summarized as follows for the years ended December 31, 2004
and 2003: December 31,
    
    
    December 31,20032004
    
    
    (as restated)Net balance, beginning of year
    
    $
    301,847
    
    
    $
    15,000Incurred losses related to:Current year
    
    
    1,661,735
    
    
    
    903,535Prior year
    
    
    937,871
    
    
    
    684,650Total incurred
    
    
    2,599,606
    
    
    
    1,588,185Paid losses related to:Current year
    
    
    (1,475,244
    )
    
    
    (873,535
    )Prior year
    
    
    (1,249,211
    )
    
    
    (427,803
    )Total paid
    
    
    (2,724,455
    )
    
    
    (1,301,338
    )Net balance, end of year
    
    $
    176,998
    
    
    $
    301,847




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 4  RESERVE FOR CLAIMS (continued) Reserve for Claims is Represented by: December 31, 2004
    
    
    December 31, 2003Reserve for reported claims
    
    
    7,173
    
    
    
    301,847Reserve for losses incurred but not reported
    
    
    169,825
    
    
    
    $
    176,998
    
    
    $
    301,847
 NOTE 5  DEBT Notes Payable On February 19, 2003 Hartville Group, Inc. and Petsmarketing Insurance.com Agency, Inc. entered
into a loan and security agreement with a finance company. The amount borrowed was $3,000,000 at
30% interest due February 19, 2004 with an option to extend for an additional year as long as there
are no defaults under the agreement. The business assets of the Companys secure the loan. The
President of the Company and the Companys majority shareholder also guarantee the loan. Under a
separate agreement with the Companys majority shareholder; the shareholder will assume all costs
in connection with this loan including the periodic interest charges. The balance due on this note
was paid in full in the fourth quarter of 2003. On August 16, 2004 the Company raised $3,300,000 in a Secured Promissory Note. As part of the
Companys application to complete the insurance company acquisition, Hartville needed to
demonstrate the financial capability to make a capital contribution to the target acquisition. This
loan provided standby financing in the event the Company could not raise additional capital. The
note was at 18% interest. The note was due October 18, 2004 and was paid in full October 20, 2004. On August 31, 2004 Hartville Group entered into a security purchase agreement with an investment
fund. The security purchase agreement was for convertible debt with a face value of $3,000,000.
The debt was at 10% annual interest due monthly. The debt was convertible into common shares at
maturity, on November 18, 2004, at a price per share of $1. The holder of the note could not
convert to common shares until maturity and the Company could repay the debenture at any time
before maturity thus avoiding conversion into shares. This convertible debt was re-paid in full on
November 11, 2004 out of the Companys issuance of convertible debentures discussed below.
Attached to this convertible debenture were five-year warrants for 499,999 shares exercisable at a
price of $4.25 per share. The exercise price of these warrants was re-set to $0.95 per share as a
result of the November 26, 2004 Convertible Debenture transaction (see below). This re-pricing
resulted in a beneficial discount on the warrants issued in connection with the August 31, 2004
Convertible Debenture. This beneficial discount has been reflected as a non recurring non-cash
interest expense of $30,804 with the corresponding adjustment to paid-in capital. The Company has a revolving line of credit with a financial institution for $50,000. The line of
credit is unsecured with interest set at prime rate. Long-term Debt On June 14, 2001, the Company entered into a lease purchase arrangement with a finance company for
a phone system. The total borrowed was $17,807. The note calls for 24 monthly payments of $858
including interest at 15.7%. The last three payments were prepaid when the note was signed. The
note was paid off during 2003. On May 9, 2002, the Company entered into a lease purchase arrangement with a finance company for a
computer system. The total borrowed was $21,406. The note calls for 24 monthly payments of $1,021
including interest at 13.4%. The last three payments were prepaid when the note was signed. The
note was paid off during 2004 with an immaterial amount outstanding at December 31, 2003. On June 15, 2003, the Company entered into a lease purchase arrangement with a finance company for
the purchase of two printers. The total borrowed was $33,056. The note calls for 60 monthly
payments of $718 including interest at 13.4%. The




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) first payment was prepaid when the note was
signed. The balance outstanding at December 31, 2004 and 2003 was $25,703 and $31,524,
respectively. The equipment financed secures the note. On October 24, 2003, the Company signed a note for $150,000 at 10%, payable on demand after a
period of six months. Subsequently the Company loaned $150,000 to the same parties on the same
terms. For financial statement presentation the two loans and accrued interest have been offset. On November 11, 2004, the Company completed and issued on November 26, 2004 $11,038,780 of
two-year Convertible Debentures due November 11, 2006 together with five-year Warrants to purchase
up to 4,906,124 shares of common stock.. This convertible debt carries a 7% annual coupon. The full
amount of interest was prepaid. There was a 7% fee along with 237,495 five-year warrants priced at
$.95 issued to the lead investment banker. A portion of the funds raised were used to pay in full
the note due November 18, 2004. The conversion price in effect on any conversion date was set to
the lesser of $2.25 (subject to adjustment) or 80% of the average of the five closing prices
immediately prior to such conversion date with a floor of $0.95 per share (subject to adjustment).
Due to failure by the Company to file its registration statement within the agreed time period this
conversion price was re-set on February 17, 2005 to $0.95 per share with the stock registration
period extended to June 30, 2005 and liquidated damages suspended until that date. The warrants
were issued as exercisable at a price of $.95 per share, price that has not changed since their
issue. The fair value of the warrants issued resulted in a beneficial conversion impact on the
debt. The beneficial conversion impact was accounted for in accordance with EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingency Instruments.
Accordingly, additional paid-in capital of $1,032,980 and a non recurring non-cash discount of
these Convertible Debentures of $1,032,980 were recorded due to the beneficial conversion feature.
The non recurring non-cash discount has been reflected as a reduction in the outstanding balance of
the Convertible Debentures for financial reporting purposes. These non recurring non cash discounts
will be amortized over the life of the Debenture as an expense using the effective interest method.
However, the Company remains obligated for the entire contractual balance of the Convertible
Debentures of $11,038,780 which is due at November 11, 2006. Subsequent to year-end December 31, 2004, the Company signed a note with a financial institution
for $300,000 on March 23, 2005. The note is payable in 63 monthly installments with the first three
payments being interest only. The note is secured by business assets and a personal guarantee. The
interest rate on the note is fixed at 6.75%. Maturities on long-term debt are as follows: Amount2005
    
    $
    6,6292006
    
    $
    11,045,4092007
    
    $
    7,0262008
    
    $
    5,4192009 and thereafter
    
    $
    0
 NOTE 6  COMMITMENTS At December 31, 2004 the Company leased a 7,000 square feet of office space at 1597 N. Main St
North Canton, Ohio. The space was leased for five years at a rate of $5,156 per month. The property
is in good condition but the space was not sufficient to meet our needs at this time; furthermore,
the lease ends 04/30/2005. The Company has moved into its new 12,395 square foot facility and held
its grand opening April 7, 2005. The office is now located at 3840 Greentree Ave SW, Canton, Ohio
44706. The lease rate at this new office is $11,879 per month with a ten year lease term that
includes an expansion option for additional space. The following is a schedule, by years of future minimum rental payments required under operating
leases that have initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2004.




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 6  COMMITMENTS (continued) Amount2005
    
    $
    232,2862006
    
    $
    189,3442007
    
    $
    183,0802008
    
    $
    160,7022009
    
    $
    147,732Thereafter
    
    $
    750,000Total
    
    $
    1,663,144
 Rental expense was approximately $108,656 and $44,377 for the years ending December 31, 2004 and
2003, respectively. The Company has an ongoing Licensing Agreement for the Garfield comic strip characters created by
Jim Davis. The agreement was amended March 10, 2005. The agreement runs through December 31, 2010
and for years 2004 and after it calls for payment of royalties on a sliding scale of 5% on the
first $10 million in annual premiums to 1% on annual premiums over $100 million. In addition common
stock purchase warrants are paid each year on a sliding scale of 25,000 warrants on the first $10
million in annual premiums to 100,000 on annual premiums over $100 million. The warrants call price
shall be 75% of the Companys stock market price at the time the warrants are exercised. Amounts
expenses under this agreement in 2004 and 2003 amounted to $275,328 and $302,870. NOTE 7- RELATED PARTY TRANSACTIONS At December 31, 2004 the Company has an accounts receivable on its books from an officer for
$46,069 respectively the receivable has an interest of 5%. NOTE 8  INCOME TAXES The provision for income taxes consists of the following for the years ended December 31,: 2004
    
    
    2003(as restated)Current
    
    $
    
    
    
    $
    300,000Deferred expense (benefit)
    
    
    
    
    
    
    (300,000
    )State taxes
    
    
    
    
    
    
    50,000$
    
    
    
    $
    50,000




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) The provision for income taxes differs from the amount computed by applying the statutory income
tax rate to the loss before income taxes. The sources and tax effects of the differences are as
follows: 2004
    
    
    2003(as restated)Federal statutory tax rate
    
    $
    (2,734,996
    )
    
    $
    58,054Change in valuation allowance
    
    
    2,734,996
    
    
    
    (58,054
    )State tax expenses
    
    
    
    
    
    
    50,000Tax provision
    
    $
    
    
    
    $
    50,000




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 8  INCOME TAXES (continued) The net deferred tax asset at December 31, 2004 and 2003 is comprised of the following: 2004
    
    
    2003(as restated)Deferred tax assets:Reserve discounting
    
    $
    2,399
    
    
    $
    Policy acquisition costs
capitalized for tax purposes
    
    
    
    
    
    
    300,000Net operating loss carryforward
    
    
    2,929,229
    
    
    
    2,217,286
    
    
    
    300,000Deferred tax liabilitiesDeferred policy acquisition costs
    
    
    (196,632
    )
    
    
    Valuation allowance
    
    
    (2,734,996
    )
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    300,000
 In assessing the realizability of future tax assets, management considers whether it is more likely
than not that some portion or all of the future tax assets will not be realized. The ultimate
realization of future tax assets is dependent upon the generation of future taxable income during
the years in which those temporary differences become deductible. Management considered projected
planning strategies in making this assessment. Due to the uncertainties related to the industry in
which the Company operates, the tax benefit amounts of the above losses carried forward have been
completely offset by a valuation allowance. The Company has losses for income tax purposes amounting to approximately $8.0 million, which
expire in 2024. NOTE 9  OPERATING SEGMENTS The Company organizes its business into three reportable segments; the holding company, the
insurance agency and the reinsurance company A breakdown of the revenues and expenses by segment is as follows: December 31, 2003Year ended
    
    December 31, 2004
    
    
    (as restated)Holding CompanyRevenues
    
    $
    
    
    
    $
    Administrative Expenses
    
    
    3,950,787
    
    
    
    412,642Net Loss
    
    
    (4,903,376
    )
    
    
    (358,873
    )Insurance AgencyRevenues
    
    
    1,930,645
    
    
    
    1,952,452Administrative Expenses
    
    
    5,211,755
    
    
    
    1,944,914Net Loss
    
    
    (3,276,534
    )
    
    
    (3,682
    )ReinsuranceRevenues
    
    
    3,732,412
    
    
    
    2,859,398Administrative Expenses
    
    
    69,226
    
    
    
    53,043Net Income
    
    
    135,803
    
    
    
    483,302




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 10  TERMINATION OF PROPOSED INSURANCE COMPANY ACQUISITION On March 31, 2004, the Company entered into a contract to purchase a property casualty insurance
company, subject to customary closing conditions and the approval of the acquisition by the state
of domicile Department of Insurance. As of March 18, 2005, the Department of Insurance approval
had not been received and the Companys Board of Directors decided to no longer pursue this
acquisition. The December 31, 2004 balance sheet includes a receivable in the amount of
approximately $2.3 million which represents the agreed upon recoverable costs from the Department
of Insurance incurred by the Company in connection with the attempted acquisition. This receivable
is included in other receivables and was received on April 11, 2005. NOTE 11  NON-QUALIFIED STOCK OPTION PLAN In 2003, the Board of Directors of the Company adopted a Non-qualified Stock Option Plan (the
Plan), granting options to purchase an aggregate of not more than 2,500,000 shares of common stock
which may be granted from time to time to key employees (including officers), consultants and
members of the Board of Directors of Hartville Group, Inc. The Plan is administered by a
committee, which consists of the members of the Board of Directors. The per share exercise price
of the options granted under the Plan will be not less than 100% of the fair market value per share
of common stock on the date the options are granted. As part of this plan, the Board of Directors has established a simplified employee stock option
plan, whereby 500,000 options have been set aside to encourage employees to take ownership in the
Company. Managers will have a specific number of options that will vest over years of service
while employees will have a schedule based on service. Option price is determined by the stock
price close at December 31 and then authorized by the Board of Directors at a meeting following the
annual shareholders meeting. During 2004, under the Non-qualified Stock Option Plan, 382,600 options were granted to employees
and directors at an exercise price of $3 per share. No options have been exercised, expired or
cancelled since their grant date therefore the entire 382,600 shares remained outstanding at
December 31, 2004. No options were granted under the Plan during 2003. NOTE 12  RESTATEMENT OF 2003 FINANCIAL STATEMENTS The Company changed its accounting practice with respect to the capitalization of policy
acquisition costs and the period over which the deferred costs are amortized. Under its new
practice, the policy acquisition costs include only direct response advertising costs and the
compensation costs attributable to the Companys call-in department, which is responsible for
handling new and renewal policy requests. The capitalized costs are amortized over a three-year
minimum expected life of the policy period, subject to an assessment of the recoverability of the
costs from future revenues from acquired policies, net of related expenses. The Companys previous
policy for capitalization of certain costs, in addition to those which continue to be capitalized
under the new policy, also provided for a five-year amortization. The Company issued shares in
connection for professional services and warrants pursuant to two financing transactions. In
applying a Black-Scholes model to value the warrants issued resulted is a discounted expense of
$52,649 and a service expense of $37,500. As a result, the financial statements for the year ended
December 31, 2003 have been restated to reflect these expenses and to conform to the Companys
current practice. The financial statements have also been restated to reflect the impact of
compensation costs incurred related to stock and warrants issued for services. Following is a summary of the effects of these changes on the Companys consolidated balance sheet
as of December 31, 2003, as well as the effects of these changes on the Companys consolidated
statements of earnings and cash flows for fiscal year 2003:




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HARTVILLE GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003 (as restated) NOTE 12  RESTATEMENT OF 2003 FINANCIAL STATEMENTS (continued) Consolidated Statements of IncomeAs previouslyFiscal year ended December 31, 2003
    
    reported
    
    
    Adjustments
    
    
    As restatedGeneral and administrative expenses
    
    $
    1,370,928
    
    
    $
    1,039,671
    
    
    $
    2,410,599Operating income
    
    
    1,114,859
    
    
    
    (1,039,671
    )
    
    
    75,188Earnings before income taxes
    
    
    1,210,418
    
    
    
    (1,039,671
    )
    
    
    170,747Income taxes
    
    
    350,000
    
    
    
    (300,000
    )
    
    
    50,000Net income
    
    
    860,418
    
    
    
    (739,671
    )
    
    
    120,747Net earnings per common share  basic
    
    $
    .18
    
    
    $
    (0.16
    )
    
    $
    0.02Net earnings per common share  diluted
    
    $
    .18
    
    
    $
    (0.16
    )
    
    $
    0.02
 Consolidated Balance SheetAs PreviouslyDecember 31, 2003
    
    Reported
    
    
    Adjustments
    
    
    As RestatedProperty, plant and equipment, net
    
    $
    242,484
    
    
    $
    21,933
    
    
    $
    264,417Deferred policy acquisition costs, net
    
    
    886,566
    
    
    
    (886,566
    )
    
    
    Deferred income tax asset
    
    
    
    
    
    
    300,000
    
    
    
    300,000Total assets
    
    
    10,546,785
    
    
    
    (564,633
    )
    
    
    9,982,152Additional paid-in capital
    
    
    8,451,977
    
    
    
    554,861
    
    
    
    9,006,838Retained earnings (deficit)
    
    
    451,913
    
    
    
    (1,159,333
    )
    
    
    (707,420
    )Total shareholders equity
    
    
    8,915,987
    
    
    
    (604,472
    )
    
    
    8,311,515Total liabilities and shareholders equity
    
    
    10,564,785
    
    
    
    (564,633
    )
    
    
    9,982,152
 Consolidated Statement of Cash FlowsAs PreviouslyFiscal year ended December 31, 2003
    
    Reported
    
    
    Adjustments
    
    
    As RestatedNet cash provided by operating activities
    
    $
    1,831,330
    
    
    $
    (864,633
    )
    
    $
    966,697Net cash used by investing activities
    
    
    1,597,833
    
    
    
    (864,633
    )
    
    
    733,200




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Exhibit Index Exhibit No.
    
    DescriptionEX 23.1
    
    Consent of Independent AuditorsEX 31.1
    
    CertificationEX31.2
    
    CertificationEX32.1
    
    CertificationEX32.2
    
    Certification