##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-KSB
  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, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 000-51993
 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
(Address of principal executive offices)
    
    44706
(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)
 
 o
 þ o
 þ
 o þ
     o þ




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##### 



PART IItem 1. Description of Business
    
    
    4Item 2. Description of Property
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    9Part IIItem 5. Market for Common Equity and Related Stockholder Matters
    
    
    9Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    10Item 7. Financial Statements
    
    
    18Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    18Item 8A. Controls and Procedures
    
    
    18Item 8B. Other Information
    
    
    19PART IIIItem 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(A) of the Exchange Act
    20Item 10. Executive Compensation
    
    
    20Item 11. Security Ownership of Certain Beneficial Owners and Management
    
    
    20Item 12. Certain Relationships and Related Transactions, and Director Independence
    
    
    20Item 13. Exhibits
    
    
    20Item 14. Principal Accountant Fees and Services
    
    
    21SIGNATURES
    
    
    22EXHIBIT INDEXCERTIFICATIONSEX-31.1EX-31.2EX-32.1
  2




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
    
    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: changes in 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.
  3




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Item 1. Description of Business
      
 4




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Principal Product
  Distribution Methods
  The Competition
  Royalty Agreements and Trademarks
 ® ®
   Government Regulation and Licenses
   Employees
  5




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RISK FACTORS
 We will require continued financing to meet our working capital needs.
  Many other pet insurance companies have gone out of business and without development and growth we
may not be able to continue as a viable entity.
  We are dependent on property casualty insurance companies without which we may not be able to
operate our business.
  We have experienced net losses in the past, and we may be unable to achieve or maintain
profitability in the future.
  We are dependent on the proper functioning of our information systems.
  Our dependence on short term policies makes us vulnerable to loss of customers.
  Any failure by us to comply with applicable regulations may result in fines or injunctions against
the operation of our business and harm our financial results.
  6




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Certain of our stockholders have registration rights that can cause us to file a registration
statement under the Securities Act covering resales of their stock, which sales could cause our
stock price to decline.
  Dilution of our stock is probable because of the number and price of warrants outstanding.
  Volatility in our common share price may subject us to securities litigation, thereby diverting our
resources, which may have a material adverse affect on our results of operations.
  Securities and Exchange Commission rules concerning sales of low-priced securities may hinder the
purchase or sale of our common stock by investors.
  Our securities have been thinly traded on the over-the-counter bulletin board, which may not
provide liquidity for our investors.
  7




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Investors must contact a broker-dealer to trade Over-the-Counter Bulletin Board securities. As a
result, you may not be able to buy or sell our securities at the times that you may wish.
  We do not intend to pay dividends in the foreseeable future; therefore, you may never see a return
on your investment.
  Our stock price is volatile and you may not be able to sell your shares for more than what you
paid.
  
 Item 2. Description of Property
  
 Item 3. Legal Proceedings
  
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Item 4. Submission of Matters to a Vote of Security Holders
  
 Part II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
 
 High
    
    LowFiscal 2006March 31, 2006
    
    $
    5.40
    
    
    $
    2.25June 30, 2006
    
    $
    3.15
    
    
    $
    1.05September 30, 2006
    
    $
    2.25
    
    
    $
    1.05December 31, 2006
    
    $
    3.15
    
    
    $
    1.50Fiscal 2007March 31, 2007
    
    $
    2.70
    
    
    $
    1.80June 30, 2007
    
    $
    2.40
    
    
    $
    1.50September 30, 2007
    
    $
    2.10
    
    
    $
    1.35December 31, 2007
    
    $
    2.10
    
    
    $
    1.25
   Equity Compensation Plan Information
  9




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Recent Sales of Unregistered Securities
 Conversion of Convertible Debt
  
 Item 6. Managements Discussion and Analysis or Plan of Operation
  Managements Plans
    Results of Operations
 Fiscal Year ended December 31, 2007 compared to fiscal year ended December 31, 2006
    10




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
    
    Marketing expenses increased by approximately $2,885,000 due to the following factors:
 o
    
    Increased $2,538,000 with the utilization of direct marketing campaignso
    
    Increased $347,000 for royalties in connection to the strategic
partnership with the ASPCA and increase in royalties/commissions for other
partnership arrangements.
 
    
    Compensation increased by approximately $1,594,000 due to the following factors:
 o
    
    Increased $1,433,000 (65%) as the result of the increase in sales and overall number of petso
    
    Increased $381,000 due to the valuation and expensing of 419,481 more vested options to employeeso
    
    Decreased $220,000 due to the valuation and expensing of 66,666 fewer shares of restricted stock issued to an employee
 
    
    A number of other items increased as the result of the increase in sales and overall number of pets, including:
 o
    
    Communication costs increased approximately $241,000o
    
    Paper and printing costs increased approximately $202,000o
    
    Merchant credit card fees increased approximately $195,000
 
    
    Depreciation has decreased approximately $281,000 as the result of older assets being completely depreciated
    
    Recording of additional marketing expenses for approximately $1,044,000 which related to
certain prior year deferred acquisition costs that were expensed during fiscal year 2007.
The immediate expensing of direct marketing campaign amounts decreased amortization expense
approximately $555,000. A detailed explanation is included in footnote 1 under Deferred
Acquisition Costs of our consolidated financial statements.
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Fiscal Year ended December 31, 2006 compared to fiscal year ended December 31, 2005
         
    
    Compensation increased by approximately $1,092,000 due to the following factors:
 o
    
    Increased $732,000 due to the valuation and expensing of approximately
379,000 vested options to employeeso
    
    Increased $360,000 due to the valuation and expensing of approximately
133,000 vested shares of restricted stock issued to an employee
 
    
    Marketing expenses increased by approximately $605,000 due the utilization of direct
marketing campaigns
    
    Amortization has increased approximately $132,000 as a result of an increase in deferred
acquisition cost from increased marketing activities
    
    Professional, audit and legal fees decreased approximately $617,000 due mainly to the
cost of restating the financial statements in 2005 and from the Company discontinuing the
pursuit of acquiring a property & casualty insurance company
 12




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Liquidity and Capital Resources
 Cash Requirements
   Sources and Uses of Cash  Operations
  
    
    Marketing expenses increased by approximately $2,885,000 due to the following factors:
 o
    
    Increased $2,538,000 with the utilization of direct marketing campaignso
    
    Increased $347,000 for royalties in connection to the strategic
partnership with the ASPCA and increase in royalties/commissions for other
partnership arrangements.
 
    
    Compensation increased by approximately $1,433,000 (65%) as the result of the increase
in sales and overall number of pets
    
    A number of other items increased as the result of the increase in sales and overall number of pets, including:
 o
    
    Communication costs increased approximately $241,000o
    
    Paper and printing costs increased approximately $202,000o
    
    Merchant credit card fees increased approximately $195,000
  Sources and Uses of Cash  Investing
  Sources and Uses of Cash  Financing
  13




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Notes Payable and Convertible Debentures
 July 2006 Debenture Issuance
       February 2007 Debenture Issuance
   14




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May 2007 Debenture Issuance
     September 2007 Debenture Issuance
    15




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Conversion of Convertible Debt
  Debt Instruments, Guarantees and Related Covenants
  Cash Management
    Critical Accounting Policies
  Reserve for Future Losses
  16




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.
  Favorable Claims
    
    
    UnfavorableAs Reported
    
    
    Loss Ratio
    
    
    Claims Loss RatioPremiums
    
    $
    6,779,682
    
    
    $
    6,779,682
    
    
    $
    6,779,682Losses
    
    
    (3,860,955
    )
    
    
    (3,558,793
    )
    
    
    (4,215,170
    )Ceded costs
    
    
    (2,261,845
    )
    
    
    (2,564,007
    )
    
    
    (2,261,845
    )Reinsurance results
    
    
    656,882
    
    
    
    656,882
    
    
    
    302,667Commission income
    
    
    3,785,855
    
    
    
    4,443,795
    
    
    
    3,785,855General and administrative
    
    
    (13,960,647
    )
    
    
    (13,960,647
    )
    
    
    (13,960,647
    )Operating (loss) income
    
    
    (9,517,910
    )
    
    
    (8,859,970
    )
    
    
    (9,872,125
    )Other income
    
    
    111,445
    
    
    
    111,445
    
    
    
    111,445Other expense
    
    
    (11,725,323
    )
    
    
    (11,725,323
    )
    
    
    (11,725,323
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (Loss) income before taxes
    
    
    (21,131,788
    )
    
    
    (20,473,848
    )
    
    
    (21,486,003
    )Provision for taxes
    
    
    
    
    
    
    
    
    
    
    NET (LOSS) INCOME
    
    $
    (21,131,788
    )
    
    $
    (20,473,848
    )
    
    $
    (21,486,003
    )Net (loss) income per common share
    
    $
    (3.85
    )
    
    $
    (3.73
    )
    
    $
    (3.91
    )Weighted average common shares outstanding
    
    
    5,494,930
    
    
    
    5,494,930
    
    
    
    5,494,930
  Share-Based Compensation
  17




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New Accounting Standards
  
 Item 7. Financial Statements
   Report of Independent Registered Public Accounting Firm
    
    
    23Consolidated Balance Sheets
    
    
    24Consolidated Statements of Operations
    
    
    25Consolidated Statements of Cash Flows
    
    
    26Consolidated Statements of Stockholders Equity
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
 
 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 8A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
   18




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Changes in Internal Controls
  
 Item 8B. Other Information
  19




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Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(A) of the Exchange Act
  
 Item 10. Executive Compensation
  
 Item 11. Security Ownership of Certain Beneficial Owners and Management
  
 Item 12. Certain Relationships and Related Transactions, and Director Independence
  
 Item 13. Exhibits
 Exhibit No.
    
    Identification of Exhibits
    
    Method of Filing3.1
    
    Amended and Restated Articles of Incorporation
    
    Incorporated by reference to
Exhibit 3.1 to the 10-KSB filed
April 2, 2007.3.2
    
    Amended and Restated Bylaws of Hartville Group, Inc.
    
    Incorporated by reference to
Exhibit 3.2 to the SB-2 filed
October 25, 2000.4.1
    
    Form of Common Stock Certificate
    
    Incorporated by reference to
Exhibit 4.1 to the SB-2 filed
October 25, 2000.4.2
    
    Securities Purchase Agreement, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
August 4, 2006.4.3
    
    Securities Purchase Agreement,
dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
February 20, 2007.4.4
    
    Form of Secured Convertible
Debenture, dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
February 20, 2007.4.5
    
    Form of Warrant Agreement, dated
February 14, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
February 20, 2007.4.6
    
    Registrations Rights Agreement,
dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K filed
February 20, 2007.4.7
    
    Securities Purchase Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
May 14, 20074.8
    
    Form of Secured Debenture, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
May 14, 20074.9
    
    Form of Warrant Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
May 14, 20074.10
    
    Registration Rights Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K filed
May 14, 2007
 20




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Exhibit No.
    
    Identification of Exhibits
    
    Method of Filing4.11
    
    Securities Purchase Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
September 21, 20074.12
    
    Form of Secured Debenture, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
September 21, 20074.13
    
    Form of Warrant Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
September 21, 20074.14
    
    Registration Rights Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K, filed
September 21, 20074.15
    
    Securities Purchase Agreement, dated Feb. 29, 2008
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K, filed
March 3, 20084.16
    
    Common Stock Purchase Warrant, dated Feb. 29, 2008
    
    Incorporated by reference to
Exhibit 4.2, to the 8-K, filed
March 3, 200810.1
    
    Conversion Agreement and Release, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.1 to the 8-K filed
August 4, 2006.10.2
    
    Security Agreement, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.2 to the 8-K filed
August 4, 2006.10.3
    
    Form of Subsidiary Guarantee, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.3 to the 8-K filed
August 4, 2006.10.4
    
    Employment Agreement for Dennis C. Rushovich *
    
    Incorporated by reference to
Exhibit 10.4 to the 10-KSB filed
April 2, 2007.10.5
    
    Employment Agreement for Christopher R. Sachs *
    
    Incorporated by reference to
Exhibit 10.5 to the 10-KSB filed
April 2, 2007.10.6
    
    Employment Agreement for Christopher Edgar *
    
    Incorporated by reference to
Exhibit 10.6 to the 10-KSB filed
April 2, 2007.10.7
    
    Employment Agreement for Hirsch Ribakow *
    
    Incorporated by reference to
Exhibit 10.9 to the SB-2 filed
June 2, 2005.10.8
    
    Restricted Stock Agreement between Hartville Group, Inc. and
Christopher Edgar *
    
    Incorporated by reference to
Exhibit 10.4 to the 8-K filed
February 15, 2006.10.9
    
    2006 Stock Option Plan *
    
    Incorporated by reference to
Exhibit 10.1 to the 8-K filed
February 15, 2006.10.10
    
    Form of Stock Option Agreement under the 2006 Stock Option
Plan *
    
    Incorporated by reference to
Exhibit 10.2 to the 8-K filed
February 15, 2006.14.
    
    Code of Ethics
    
    Incorporated by reference to
Exhibit 14 to the 10-KSB filed
April 13, 2004.21.
    
    List of Subsidiaries
    
    Incorporated by reference to
Exhibit 21 to the 10-KSB filed
April 2, 2007.31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
    
    Filed with this report.31.2
    
    Certification of Principal Financial and Account Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
    
    Filed with this report.32.1
    
    Certification of the Chief Executive Officer and Chief
Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act.
    
    Filed with this report.
 
 *
    
    Management contract or compensatory plan or arrangement. 
 Item 14. Principal Accountant Fees and Services
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Hartville Group, Inc.
RegistrantBy:
    /s/ Dennis C. RushovichDennis C. RushovichPresident (Principal Executive Officer )By:
    /s/ Christopher R. SachsChristopher R. SachsPrincipal Financial and Accounting Officer  Signature and Capacity/s/ Dennis C. Rushovich

Dennis C. Rushovich
    
    Dated March 31, 2008Director/s/ Nicholas J. Leighton

Nicholas J. Leighton 

Director /Chairman of the Board/ Chairman of Audit Committee
    
    Dated March 31, 2008/s/ Christopher R. Sachs

Christopher R. Sachs
    
    Dated March 31, 2008Director/s/ Michel A. Amsalem

Michel A. Amsalem
    
    Dated March 31, 2008Director/s/ Alan J. Kaufman, MD

Alan J. Kaufman, MD
    
    Dated March 31, 2008Director
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Report of Independent Registered Public Accounting Firm
 
     
 23




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December 31,
    
    
    December 31,2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    2,441,203
    
    
    $
    2,387,852Other receivables
    
    
    3,184,727
    
    
    
    523,592Prepaid expenses
    
    
    122,559
    
    
    
    1,023,156Property and equipment  net
    
    
    615,069
    
    
    
    862,587Deferred policy acquisition costs  net
    
    
    426,507
    
    
    
    1,236,007Other assets
    
    
    68,298
    
    
    
    171,027Total Assets
    
    $
    6,858,363
    
    
    $
    6,204,221
 December 31,
    
    
    December 31,2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accrued expenses
    
    $
    1,236,424
    
    
    $
    581,468Reserve for claims
    
    
    1,491,204
    
    
    
    405,551Premium deposits
    
    
    1,268,048
    
    
    
    351,321Return premium payable
    
    
    36,364
    
    
    
    Payable to reinsurer
    
    
    18,116
    
    
    
    18,600Unearned commissions
    
    
    616,391
    
    
    
    253,800Unearned premium
    
    
    1,254,434
    
    
    
    564,239Debt (December 31, 2006 was offset by discount of $4,028,091 on convertible
securities issued on July 31, 2006)
    
    
    53,672
    
    
    
    1,048,544Total Liabilities
    
    
    5,974,653
    
    
    
    3,223,523Stockholders EquityPreferred stock, 5,000,000 shares authorized at December 31, 2007 and
December 31, 2006. $0.001 par value; 0 issued and outstanding at December 31,
2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, 400,000,000 and 200,000,000 shares authorized at December 31,
2007 and December 31, 2006, respectively: $.001 par value; 10,748,909 issued
and 10,742,642 outstanding at December 31, 2007 and 3,659,639 issued and
3,653,372 outstanding at December 31, 2006
    
    
    10,749
    
    
    
    3,660Additional paid in capital
    
    
    50,519,209
    
    
    
    31,491,498Retained deficit
    
    
    (49,575,748
    )
    
    
    (28,443,960
    )Less: treasury stock at cost, 6,267 shares
    
    
    (70,500
    )
    
    
    (70,500
    )883,710
    
    
    
    2,980,698Total Liabilities and Stockholders Equity
    
    $
    6,858,363
    
    
    $
    6,204,221
  24




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December 31,
    
    
    December 31,2007
    
    
    2006Premiums
    
    $
    6,779,682
    
    
    $
    3,372,310Losses
    
    
    (3,860,955
    )
    
    
    (2,024,804
    )Ceded costs
    
    
    (2,261,845
    )
    
    
    (1,116,042
    )Reinsurance income
    
    
    656,882
    
    
    
    231,464Commission income
    
    
    3,785,855
    
    
    
    3,346,753General and administrative expenses
    
    
    (13,960,647
    )
    
    
    (8,667,539
    )Operating loss
    
    
    (9,517,910
    )
    
    
    (5,089,322
    )Other income
    
    
    111,445
    
    
    
    87,260Other expenses
    
    
    (11,725,323
    )
    
    
    (2,991,869
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (3,169,032
    )Loss before taxes
    
    
    (21,131,788
    )
    
    
    (11,162,963
    )Provision for taxes
    
    
    
    
    
    
    Net loss
    
    $
    (21,131,788
    )
    
    $
    (11,162,963
    )Net loss per common share
    
    $
    (3.85
    )
    
    $
    (4.94
    )Weighted average common shares outstanding
    
    
    5,494,930
    
    
    
    2,258,043
  25




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December 31,
    
    
    December 31,2007
    
    
    2006Cash flows from (for) operating activitiesNet loss
    
    $
    (21,131,788
    )
    
    $
    (11,162,963
    )Adjustments to derive cash flows:Depreciation
    
    
    562,088
    
    
    
    843,059Amortization
    
    
    792
    
    
    
    555,825Loss on disposal of equipment
    
    
    19,824
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    3,169,032Share-based compensation
    
    
    1,252,696
    
    
    
    1,120,958Amortization of discount on debt
    
    
    9,132,092
    
    
    
    1,424,888Amortization of prepaid interest on debt
    
    
    2,520,688
    
    
    
    1,185,106Amortization of debt issue costs
    
    
    50,136
    
    
    
    4,005Impairment of deferred acquisition costs
    
    
    1,044,086
    
    
    
    Changes in operating assets and liabilitiesOther receivables
    
    
    (2,661,135
    )
    
    
    (318,314
    )Prepaid expenses
    
    
    (25,155
    )
    
    
    482,182Accounts payable and accrued expenses
    
    
    654,956
    
    
    
    25,168Premium deposits
    
    
    916,727
    
    
    
    (1,340,422
    )Return premium payable
    
    
    36,364
    
    
    
    Payable to reinsurer
    
    
    (484
    )
    
    
    18,600Unearned commission
    
    
    362,591
    
    
    
    233,555Unearned premium
    
    
    690,195
    
    
    
    564,239Reserve for claims
    
    
    1,085,653
    
    
    
    27,978Net Cash for Operating Activities
    
    
    (5,489,674
    )
    
    
    (3,167,104
    )Cash Flows for Investing ActivitiesDeferred policy acquisition costs
    
    
    (234,586
    )
    
    
    (786,933
    )Additions to property and equipment
    
    
    (58,345
    )
    
    
    (65,079
    )Capitalized software development
    
    
    (151,477
    )
    
    
    (76,729
    )Net Cash for Investing Activities
    
    
    (444,408
    )
    
    
    (928,741
    )Cash Flows from (for) Financing ActivitiesProceeds from convertible debentures
    
    
    6,000,000
    
    
    
    4,000,000Payments on notes payable
    
    
    (7,138
    )
    
    
    (1,615,046
    )Debt issue cost
    
    
    (25,304
    )
    
    
    (28,836
    )Proceeds from issuance of common stock
    
    
    19,875
    
    
    
    2,000Net Cash from Financing Activities
    
    
    5,987,433
    
    
    
    2,358,118Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    53,351
    
    
    
    (1,737,727
    )Cash and Cash Equivalents  Beginning of period
    
    
    2,387,852
    
    
    
    4,125,579Cash and Cash Equivalents  End of period
    
    $
    2,441,203
    
    
    $
    2,387,852
 26




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##### Table of Contents



Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon
    
    
    Stock
    
    
    Paid in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance December 31, 2005
    
    
    998,961
    
    
    $
    999
    
    
    $
    22,825,718
    
    
    $
    (17,280,997
    )
    
    $
    (70,500
    )
    
    $
    5,475,220Issuance of stock to employee
for services
    
    
    133,333
    
    
    
    133
    
    
    
    361,867
    
    
    
    
    
    
    
    
    
    
    
    362,000Options issued to employees
for services
    
    
    
    
    
    
    
    
    
    
    731,725
    
    
    
    
    
    
    
    
    
    
    
    731,725Warrants issued to non-employees for services
    
    
    
    
    
    
    
    
    
    
    29,232
    
    
    
    
    
    
    
    
    
    
    
    29,232Stock issued for cashless
warrant exercised
    
    
    182,720
    
    
    
    183
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    Stock issued for
extinguishment of debt
    
    
    2,344,625
    
    
    
    2,345
    
    
    
    3,514,593
    
    
    
    
    
    
    
    
    
    
    
    3,516,938Relative fair value of warrants
and beneficial conversion
impact on July 31, 2006
convertible securities
    
    
    
    
    
    
    
    
    
    
    4,028,546
    
    
    
    
    
    
    
    
    
    
    
    4,028,546Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,162,963
    )
    
    
    
    
    
    
    (11,162,963
    )Balance December 31, 2006
    
    
    3,659,639
    
    
    
    3,660
    
    
    
    31,491,498
    
    
    
    (28,443,960
    )
    
    
    (70,500
    )
    
    
    2,980,698Issuance of stock to employee
for services
    
    
    66,667
    
    
    
    66
    
    
    
    140,934
    
    
    
    
    
    
    
    
    
    
    
    141,000Options issued to employees
for services
    
    
    
    
    
    
    
    
    
    
    1,112,696
    
    
    
    
    
    
    
    
    
    
    
    1,112,696Stock issued for cashless
warrant exercised
    
    
    145,714
    
    
    
    146
    
    
    
    (146
    )
    
    
    
    
    
    
    
    
    
    
    Stock issued for conversion of
convertible securities
    
    
    6,751,055
    
    
    
    6,751
    
    
    
    12,651,477
    
    
    
    
    
    
    
    
    
    
    
    12,658,228Stock issued for warrant
exercise
    
    
    125,834
    
    
    
    126
    
    
    
    18,749
    
    
    
    
    
    
    
    
    
    
    
    18,875Relative fair value of warrants
and beneficial conversion
impact on February 14, 2007
convertible securities
    
    
    
    
    
    
    
    
    
    
    2,531,646
    
    
    
    
    
    
    
    
    
    
    
    2,531,646Relative fair value of warrants
and beneficial conversion
impact on May 8, 2007
convertible securities
    
    
    
    
    
    
    
    
    
    
    1,636,955
    
    
    
    
    
    
    
    
    
    
    
    1,636,955Relative fair value of warrants
and beneficial conversion
impact on September 17, 2007
convertible securities
    
    
    
    
    
    
    
    
    
    
    935,400
    
    
    
    
    
    
    
    
    
    
    
    935,400Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,131,788
    )
    
    
    
    
    
    
    (21,131,788
    )Balance December 31, 2007
    
    
    10,748,909
    
    
    $
    10,749
    
    
    $
    50,519,209
    
    
    $
    (49,575,748
    )
    
    $
    (70,500
    )
    
    $
    883,710
  27




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##### Table of Contents



Hartville Group, Inc. and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2007
 (audited)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 The Company
  Basis of Presentation and Principles of Consolidation
  Reverse Stock Split
  Use of Estimates
   Revenue Recognition Policies
    28




---



##### Table of Contents



Financial Instruments and Concentration of Credit Risks
   Cash and Cash Equivalents
  Restricted Cash  Trust Funds
  Long-Lived Assets
  Leasehold improvements
    
    10 yearsFurniture and Fixtures
    
    7 yearsEquipment
    
    5 yearsSoftware
    
    3 years
    Deferred Acquisition Costs
  1.
    
    Acquisition costs, including commission, premium taxes and other costs, that are
directly assessed to the unearned premium retroceded to our reinsurance company. These
costs will be recognized over a twelve month period, as the associated annual premiums are
earned.2.
    
    Direct response advertising costs that qualify for capitalization under AICPA Statement
of Position 93-7 Reporting on Advertising Costs (SOP 93-7) and the compensation costs
attributable to the Companys sales department. This pronouncement states that advertising
costs should be expensed as incurred, except for direct response advertising that meets the
following two pronged test:
 
    
    Primary purpose is to elicit sales to customers who could be shown to have responded
specifically to the advertising; and
    
    Results in probable future economic benefits. Future economic benefit is defined as
future gross revenues less future costs. This requires persuasive evidence, including
verifiable historical patterns, where results of previous direct marketing activities
resulted in future benefits.
 The costs capitalized under SOP 93-7 are amortized using the straight-line method 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 three-year period is managements estimate that such policies will remain in
force.
 29




---



##### Table of Contents



The Company determined on December 31, 2007 that the direct response advertising and
compensation costs capitalized could not be proven to have probable future economic benefits.
The inability to prove future economic benefits occurred for two reasons:
 
    
    The Company was unable to establish verifiable historic patterns because the
customers recently acquired have substantially different characteristics than the
Companys previous customers.
    
    The historic customer base has not generated operating profits to date.
 Accordingly, net direct response advertising costs of $2,200,744 and net compensation costs
of $222,189 initially capitalized during the fiscal year of 2007 under SOP 93-7 were charged
to advertising and compensation expense respectively and were included in general and
administrative expenses. Additionally, the net balance amount capitalized as of December 31,
2006 of $1,044,086 was charged to advertising and compensation expense accordingly and was
included in general and administrative expenses during fiscal year 2007. Direct response
advertising and compensation costs will be expensed as incurred in fiscal year 2008.
 Reserve for Claims
 .
 Net loss per share
  Share-Based Awards
  Convertible Debentures
  New Accounting Standards
  30




---



##### Table of Contents



NOTE 2  MANAGEMENTS PLANS
    NOTE 3  OTHER RECEIVABLES
  December 31,
    
    
    December 31,2007
    
    
    2006Insurance carriers
    
    $
    3,157,129
    
    
    $
    459,271Miscellaneous
    
    
    27,598
    
    
    
    64,321$
    3,184,727
    
    
    $
    523,592
 31




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##### Table of Contents



NOTE 4  PREPAID EXPENSES
  December 31,
    
    
    December 31,2007
    
    
    2006Interest on July 31, 2006 convertible debt
    
    $
    
    
    
    $
    925,753Miscellaneous
    
    
    122,559
    
    
    
    97,403$
    122,559
    
    
    $
    1,023,156
  NOTE 5  LONG-LIVED ASSETS
  December 31,
    
    
    December 31,2007
    
    
    2006Furniture and fixtures
    
    $
    166,554
    
    
    $
    166,554Equipment
    
    
    511,571
    
    
    
    465,111Software
    
    
    2,535,857
    
    
    
    2,299,535Leasehold improvements
    
    
    195,219
    
    
    
    195,2193,409,201
    
    
    
    3,126,419Less: accumulated depreciation
    
    
    (2,794,132
    )
    
    
    (2,263,832
    )$
    615,069
    
    
    $
    862,587
 NOTE 6  NET DEFERRED POLICY ACQUISITION COSTS
  December 31,
    
    
    December 31,2007
    
    
    2006Beginning balance, net
    
    $
    1,236,007
    
    
    $
    1,004,051Acquisition costs incurred
    
    
    234,586
    
    
    
    786,933Amortization of acquisition costs
    
    
    
    
    
    
    (554,977
    )Impairment of deferred acquisition costs
    
    
    (1,044,086
    )
    
    
    Ending balance, net
    
    $
    426,507
    
    
    $
    1,236,007
  NOTE 7  RESERVE FOR CLAIMS
  32




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##### Table of Contents



December 31,
    
    
    December 31,2007
    
    
    2006Beginning balance, net
    
    $
    405,551
    
    
    $
    377,573Incurred losses related to:Current year
    
    
    3,652,948
    
    
    
    2,141,205Prior year
    
    
    208,009
    
    
    
    (116,401
    )Total incurred
    
    
    3,860,957
    
    
    
    2,024,804Paid losses related to:Current year
    
    
    (2,287,330
    )
    
    
    (1,818,267
    )Prior year
    
    
    (584,236
    )
    
    
    (261,172
    )Total paid
    
    
    (2,871,566
    )
    
    
    (2,079,439
    )Plus Ceded Reserve
    
    
    96,262
    
    
    
    82,613Ending balance, net
    
    $
    1,491,204
    
    
    $
    405,551
 Reserve for Claims is represented by:
 December 31,
    
    
    December 31,2007
    
    
    2006Reported claims
    
    $
    230,448
    
    
    $
    8,644Incurred but not reported claims
    
    
    1,260,756
    
    
    
    396,907$
    1,491,204
    
    
    $
    405,551
 NOTE 8  DEBT
 Other Debt
  July 2006 Debenture Issuance
    33




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##### Table of Contents



February 2007 Debenture Issuance
     May 2007 Debenture Issuance
   34




---



##### Table of Contents



September 2007 Debenture Issuance
     Conversion of Convertible Debt
  NOTE
9  OTHER EXPENSES
  35




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##### Table of Contents



For the Years EndedDecember 31,
    
    
    December 31,2007
    
    
    2006Interest expense on March 23, 2005 note
    
    $
    
    
    
    $
    9,088Interest expense on capitalized leases
    
    
    2,581
    
    
    
    2,285Non Cash Expenses:Amortization of fees on November 2004
convertible debt
    
    
    
    
    
    
    366,497Amortization of direct issue costs on:July 31, 2006 convertible debt
    
    
    24,831
    
    
    
    4,005February 14, 2007 convertible debt
    
    
    15,588
    
    
    
    May 8, 2007 convertible debt
    
    
    9,718
    
    
    
    Amortization of debt discount on:November 2004 convertible debt
    
    
    
    
    
    
    1,408,210September 30, 2005 convertible
debt
    
    
    
    
    
    
    16,223July 31, 2006 convertible debt
    
    
    4,028,091
    
    
    
    455February 14, 2007 convertible debt
    
    
    2,531,646
    
    
    
    May 8, 2007 convertible debt
    
    
    1,636,956
    
    
    
    September 17, 2007 convertible
debt
    
    
    935,400
    
    
    
    Amortization of Prepaid Interest on:November 2004 convertible debt
    
    
    
    
    
    
    462,569September 30, 2005 convertible
debt
    
    
    
    
    
    
    584,999July 31, 2006 convertible debt
    
    
    925,753
    
    
    
    137,538February 14, 2007 convertible debt
    
    
    531,645
    
    
    
    May 8, 2007 convertible debt
    
    
    531,645
    
    
    
    September 17, 2007 convertible
debt
    
    
    531,645
    
    
    
    Loss on disposal of equipment
    
    
    19,824$
    11,725,323
    
    
    $
    2,991,869
 NOTE 10  LOSS ON EXTINGUISHMENT OF DEBT
   
    
    At issuance and modification
 o
    
    Because of the beneficial conversion feature of these two debentures,
additional paid-in capital of $11,147,652 was recorded ($11,038,780 for the November
2004 debenture and $108,872 for the September 2005 debenture)o
    
    Non-cash discounts of $11,147,652 were reflected as a reduction in the
outstanding balance of the Convertible Debentures, effectively making the initial
carrying value of the liability for these debentures to be $994,269o
    
    Prepaid interest and expense of $3,668,970 were reflected as an asset on
the Companys balance sheet (prepaid interest of $1,538,970 and prepaid expense of
$1,026,859 for the November 2004 debenture and prepaid interest of $1,103,141 for
the September 2005 debenture)
 
    
    Quarterly accounting
 o
    
    The non-cash discounts were being amortized over the life of the
debentures as an Other expense using the effective interest method, effectively
increasing the carrying value of the liability on the Companys balance sheet each
quarter (the cumulative amortization of the discounts at extinguishment was
$1,471,648)o
    
    Prepaid asset was being amortized over the life of the debentures as an
Other expense (the cumulative amortization at extinguishment was $2,924,262)
 
    
    At extinguishment
 o
    
    The carrying value for the liability on the Companys balance sheet for
these debentures was $2,465,917 ($994,269 initial carrying amount, plus $1,471,648
cumulative amortization of non-cash discounts)o
    
    The balance of the prepaid asset was $744,708 ($3,668,970 initial asset
less $2,924,262 cumulative amortization)
 36




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##### Table of Contents



NOTE 11  LEASES
 Capitalized lease obligation
   For the year ended December 31,2008
    
    $
    17,0982009
    
    
    17,0982010
    
    
    17,0982011
    
    
    17,0982012
    
    
    17,098Thereafter
    
    
    2,848Total minimum lease payments
    
    
    88,338Less: Amount respresenting estimated executory costs (such as
taxes, maintenance and insurance), including profit
thereon, included in total minimum lease payments
    
    
    (5,000
    )Net minimum lease payments
    
    
    83,338Less: Amount representing interest
    
    
    (29,666
    )Present value of net minimum lease payments
    
    $
    53,672
 Operating lease obligation
   37




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##### Table of Contents



For the year ended December 31,2008
    
    
    138,0002009
    
    
    138,0002010
    
    
    150,0002011
    
    
    150,0002012
    
    
    150,000Thereafter
    
    
    300,000$
    1,026,000
 NOTE 12  CEDED REINSURANCE
  December 31,
    
    
    December 31,2007
    
    
    2006Gross amounts reinsuredPremiums
    
    $
    7,480,084
    
    
    $
    3,541,404Losses
    
    
    (4,246,178
    )
    
    
    (2,117,806
    )Ceded costs
    
    
    (2,499,980
    )
    
    
    (1,173,534
    )Reinsurance income (gross)
    
    
    733,926
    
    
    
    250,064Ceded amountsPremiums
    
    
    700,402
    
    
    
    169,094Losses
    
    
    (385,223
    )
    
    
    (93,002
    )Ceded costs
    
    
    (238,135
    )
    
    
    (57,492
    )Ceded reinsurance income
    
    
    77,044
    
    
    
    18,600Net amounts reinsuredPremiums
    
    
    6,779,682
    
    
    
    3,372,310Losses
    
    
    (3,860,955
    )
    
    
    (2,024,804
    )Ceded costs
    
    
    (2,261,845
    )
    
    
    (1,116,042
    )Reinsurance income (net)
    
    $
    656,882
    
    
    $
    231,464
 NOTE 13  NET LOSS PER SHARE
  Years EndingDecember 31,2007
    
    2006Net loss
    
    $
    (21,131,788
    )
    
    $
    (11,162,963
    )Weighted average common shares outstanding
    
    
    5,494,930
    
    
    
    2,258,043Dilutive effect of outstanding warrants
and options
    
    
    
    
    
    
    Diluted common shares
    
    
    5,494,930
    
    
    
    2,258,043Basic net loss per share
    
    $
    (3.85
    )
    
    $
    (4.94
    )Diluted net loss per share
    
    $
    (3.85
    )
    
    $
    (4.94
    )
 38




---



##### Table of Contents



Outstanding and exercisable at December 31, 2007
    
    
    10,742,642
 Dollar
    
    Exerciseamount of
    
    price/Convertible
    
    Convertible
    
    Shares
    
    RemainingInstrument
    
    Description
    
    Debt
    
    price
    
    Exercisable
    
    life (years)Warrant
    
    August 31, 2004 Convertible debt
    
    N/A
    
    $
    2.70
    
    
    
    33,334
    
    
    
    1.7Warrant
    
    November 2004 Convertible debt
    
    N/A
    
    $
    0.15
    
    
    
    106,117
    
    
    
    1.9Warrant
    
    September 30, 2005 Convertible
debt
    
    N/A
    
    $
    0.15
    
    
    
    101,587
    
    
    
    2.7Warrant
    
    Consulting Services
    
    N/A
    
    $
    75.00
    
    
    
    16,667
    
    
    
    1.4Warrant
    
    Consulting Services
    
    N/A
    
    $
    90.00
    
    
    
    16,667
    
    
    
    1.4Warrant
    
    July 31, 2006 Convertible Debt
    
    N/A
    
    $
    1.50
    
    
    
    3,375,528
    
    
    
    2.6Warrant
    
    February 14, 2007 Convertible Debt
    
    N/A
    
    $
    2.25
    
    
    
    1,125,176
    
    
    
    3.1Warrant
    
    May 8, 2007 Convertible Debt
    
    N/A
    
    $
    2.25
    
    
    
    1,125,176
    
    
    
    3.3Warrant
    
    September 17, 2007 Convertible
Debt
    
    N/A
    
    $
    2.25
    
    
    
    1,125,176
    
    
    
    3.7Options
    
    Employee options
    
    N/A
    
    $
    4.95
    
    
    
    129,865
    
    
    
    8.1Options
    
    Employee options
    
    N/A
    
    $
    1.65
    
    
    
    931,738
    
    
    
    8.7Options
    
    Employee options
    
    N/A
    
    $
    2.10
    
    
    
    116,012
    
    
    
    9.0Options
    
    Employee options
    
    N/A
    
    $
    1.50
    
    
    
    1,232,682
    
    
    
    9.7Potential additional shares as of December 31, 2007
    
    
    9,435,725Total potential shares as of December 31, 2007
    
    
    20,178,367
  WeightedaverageExercise
    
    exerciseNumber of
    
    price
    
    price pershares
    
    range
    
    shareOutstanding at December
31, 2005
    
    
    812,255
    
    
    $
    0.15-$90.00
    
    
    $
    5.85Granted
    
    
    3,378,861
    
    
    $
    1.50-$10.35
    
    
    $
    1.50Exercised
    
    
    (182,720
    )
    
    $
    0.15
    
    
    $
    0.15Canceled
    
    
    (74,021
    )
    
    $
    0.15-$45.00
    
    
    $
    26.40Outstanding at December
31, 2006
    
    
    3,934,375
    
    
    $
    0.15-$90.00
    
    
    $
    1.95Granted
    
    
    3,375,528
    
    
    $
    2.25
    
    
    $
    2.25Exercised
    
    
    (271,548
    )
    
    $
    0.15
    
    
    $
    0.15Canceled
    
    
    (12,927
    )
    
    $
    0.15
    
    
    $
    0.15Outstanding at December
31, 2007
    
    
    7,025,428
    
    
    $
    0.15-$90.00
    
    
    $
    2.21
 39




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##### Table of Contents



NOTE 14  COMMITMENTS AND CONTINGENCIES
 Licensing Agreements
 ® ®
  Legal Proceedings
   NOTE 15  INCOME TAXES
  2007
    
    
    2006Federal statutory tax rate
    
    
    -34.0
    %
    
    
    -34.0
    %Change in net deferred income tax
assets, including effect of change
in valuation allowance
    
    
    34.0
    %
    
    
    34.0
    %Other
    
    
    
    
    
    
    Effective income tax rate
    
    
    0
    %
    
    
    0
    %
 40




---



##### Table of Contents



2007
    
    
    2006Deferred Income Tax Asset:Policy acquisition costs capitalized for tax
purposes
    
    $
    563,672
    
    
    $
    389,926Net operating loss carryforward
    
    
    9,452,341
    
    
    
    5,384,050Compensatory shares based options
    
    
    627,109
    
    
    
    Other
    
    
    146,143
    
    
    
    Total deferred income tax assets
    
    
    10,789,265
    
    
    
    5,773,976Valuation allowance
    
    
    (10,601,422
    )
    
    
    (4,798,882
    )Net deferred income tax assets
    
    
    187,843
    
    
    
    975,094Deferred Income Tax Liabilities:Deferred policy acquisition costs
    
    
    (145,013
    )
    
    
    (354,989
    )Debt discount for beneficial conversion feature
    
    
    
    
    
    
    (598,709
    )Depreciation
    
    
    (42,830
    )
    
    
    (21,396
    )Total deferred income tax liabilities
    
    
    (187,843
    )
    
    
    (975,094
    )Net deferred income taxes
    
    $
    
    
    
    $
    
   NOTE 16  SHARE-BASED COMPENSATION
 Employee Share-Based Compensation
  Employee Share-Based Options
  41




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##### Table of Contents



FAS No. 123RExpenseRisk-free interest rate
    
    4.69%-5.03%Expected life of options
    
    1-3 yearsExpected dividend yield of stock
    
    0%Expected volatility of stock
    
    152%-300%Forfeiture rate
    
    0%
  2006 Stock Option Plan
   2007Weighted-
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateOptioned
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (in years)
    
    
    ValueOptions outstanding at January 1, 2007
    
    
    1,177,615
    
    
    $
    2.06Granted
    
    
    1,232,682
    
    
    $
    1.50Exercised
    
    
    Forfeited
    
    
    Expired
    
    
    Options outstanding at December 31,
2007
    
    
    2,410,297
    
    
    $
    1.77
    
    
    
    9.2
    
    
    $
    Exercisable at December 31, 2007
    
    
    1,177,615
    
    
    $
    2.06
    
    
    
    8.7
    
    
    $
    
   Weighted-Average Grant-Date FairNonvested Options
    
    Shares
    
    
    ValueNonvested at January 1, 2007
    
    
    798,548
    
    
    $
    1.39Granted
    
    
    1,232,682
    
    
    $
    1.50Vested
    
    
    (798,548
    )
    
    $
    1.39Forfeited
    
    
    
    
    
    $
    Nonvested at December 31, 2007
    
    
    1,232,682
    
    
    $
    1.50
 42




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##### Table of Contents



2008
    
    
    Third Quarter
    
    
    410,8942009
    
    
    Third Quarter
    
    
    410,8942010
    
    
    Third Quarter
    
    
    410,8941,232,682
  2008
    
    
    Third Quarter
    
    $
    610,7942009
    
    
    Third Quarter
    
    $
    610,7942010
    
    
    Third Quarter
    
    $
    610,794Total Unrecoginized Compensation
Cost
    
    $
    1,832,382
 43




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##### Table of Contents



NOTE 17  SEGMENT INFORMATION
   Holding
    
    Insurance
    
    ReinsuranceCompany
    
    Agency
    
    company
    
    TotalYear Ended December 31, 2007Gross Revenue
    
    $
    
    
    
    $
    3,785,855
    
    
    $
    6,779,682
    
    
    $
    10,565,537Operating income (loss)
    
    $
    (679,601
    )
    
    $
    (9,381,234
    )
    
    $
    542,925
    
    
    $
    (9,517,910
    )Operating income (loss) %
    
    
    0.0
    %
    
    
    -247.8
    %
    
    
    8.0
    %
    
    
    -90.1
    %Total assets
    
    $
    180,005
    
    
    $
    2,779,417
    
    
    $
    3,862,577
    
    
    $
    6,821,999Year Ended December 31, 2006Gross Revenue
    
    $
    
    
    
    $
    3,346,753
    
    
    $
    3,372,310
    
    
    $
    6,719,063Operating income (loss)
    
    $
    (743,703
    )
    
    $
    (4,462,772
    )
    
    $
    117,153
    
    
    $
    (5,089,322
    )Operating income (loss) %
    
    
    0.0
    %
    
    
    -133.3
    %
    
    
    3.5
    %
    
    
    -75.7
    %Total assets
    
    $
    1,541,001
    
    
    $
    2,958,225
    
    
    $
    1,704,995
    
    
    $
    6,204,221
 NOTE 18  SUBSEQUENT EVENTS
    44




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Identification of Exhibits
    
    Method of Filing3.1
    
    Amended and Restated Articles of Incorporation
    
    Incorporated by reference to
Exhibit 3.1 to the 10-KSB filed
April 2, 2007.3.2
    
    Amended and Restated Bylaws of Hartville Group, Inc.
    
    Incorporated by reference to
Exhibit 3.2 to the SB-2 filed
October 25, 2000.4.1
    
    Form of Common Stock Certificate
    
    Incorporated by reference to
Exhibit 4.1 to the SB-2 filed
October 25, 2000.4.2
    
    Securities Purchase Agreement, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
August 4, 2006.4.3
    
    Securities Purchase Agreement,
dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
February 20, 2007.4.4
    
    Form of Secured Convertible
Debenture, dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
February 20, 2007.4.5
    
    Form of Warrant Agreement, dated
February 14, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
February 20, 2007.4.6
    
    Registrations Rights Agreement,
dated February 14, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K filed
February 20, 2007.4.7
    
    Securities Purchase Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
May 14, 20074.8
    
    Form of Secured Debenture, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
May 14, 20074.9
    
    Form of Warrant Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
May 14, 20074.10
    
    Registration Rights Agreement, dated May 8, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K filed
May 14, 20074.11
    
    Securities Purchase Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K filed
September 21, 20074.12
    
    Form of Secured Debenture, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.2 to the 8-K filed
September 21, 20074.13
    
    Form of Warrant Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.3 to the 8-K filed
September 21, 20074.14
    
    Registration Rights Agreement, dated Sept. 17, 2007
    
    Incorporated by reference to
Exhibit 4.4 to the 8-K, filed
September 21, 20074.15
    
    Securities Purchase Agreement, dated Feb. 29, 2008
    
    Incorporated by reference to
Exhibit 4.1 to the 8-K, filed
March 3, 20084.16
    
    Common Stock Purchase Warrant, dated Feb. 29, 2008
    
    Incorporated by reference to
Exhibit 4.2, to the 8-K, filed
March 3, 200810.1
    
    Conversion Agreement and Release, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.1 to the 8-K filed
August 4, 2006.
 45




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##### Table of Contents



Exhibit No.
    
    Identification of Exhibits
    
    Method of Filing10.2
    
    Security Agreement, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.2 to the 8-K filed
August 4, 2006.10.3
    
    Form of Subsidiary Guarantee, dated July 31, 2006
    
    Incorporated by reference to
Exhibit 10.3 to the 8-K filed
August 4, 2006.10.4
    
    Employment Agreement for Dennis C. Rushovich *
    
    Incorporated by reference to
Exhibit 10.4 to the 10-KSB filed
April 2, 2007.10.5
    
    Employment Agreement for Christopher R. Sachs *
    
    Incorporated by reference to
Exhibit 10.5 to the 10-KSB filed
April 2, 2007.10.6
    
    Employment Agreement for Christopher Edgar *
    
    Incorporated by reference to
Exhibit 10.6 to the 10-KSB filed
April 2, 2007.10.7
    
    Employment Agreement for Hirsch Ribakow *
    
    Incorporated by reference to
Exhibit 10.9 to the SB-2 filed
June 2, 2005.10.8
    
    Restricted Stock Agreement between Hartville Group, Inc. and
Christopher Edgar *
    
    Incorporated by reference to
Exhibit 10.4 to the 8-K filed
February 15, 2006.10.9
    
    2006 Stock Option Plan *
    
    Incorporated by reference to
Exhibit 10.1 to the 8-K filed
February 15, 2006.10.10
    
    Form of Stock Option Agreement under the 2006 Stock Option
Plan *
    
    Incorporated by reference to
Exhibit 10.2 to the 8-K filed
February 15, 2006.14.
    
    Code of Ethics
    
    Incorporated by reference to
Exhibit 14 to the 10-KSB filed
April 13, 2004.21.
    
    List of Subsidiaries
    
    Incorporated by reference to
Exhibit 21 to the 10-KSB filed
April 2, 2007.31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
    
    Filed with this report.31.2
    
    Certification of Principal Financial and Account Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
    
    Filed with this report.32.1
    
    Certification of the Chief Executive Officer and Chief
Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act.
    
    Filed with this report.
 
 *
    
    Management contract or compensatory plan or arrangement. 46