##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT

TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934


|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no.: 000-50171

TRAVELZOO INC.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                                    |  |                                         
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|DELAWARE                                                                                            |  | 36-4415727                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                                  |  | (I.R.S. Employer
    Identification No.)
|                                                                                                   
|590 Madison Avenue, 21st Floor,
     New York, New York(Address of Principal Executive
    Offices) |  | 10022(Zip Code)                         

Registrants telephone number, including
area code:

(212) 521-4200


SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT:

NONE


SECURITIES REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT:

Common Stock, $0.01 Par Value


(Title of Class)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

As of June 30, 2003, the aggregate market
value of voting and non-voting common stock held by
non-affiliates of the Registrant, based upon the average of the
bid and ask prices of such stock on the OTC Bulletin Board, was
$5,503,880.

The number of shares outstanding of the
Registrants Common Stock as of March 26, 2004 was
19,425,147.



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TRAVELZOO INC.

Table of Contents

|                          |  |                                                                                                        |    |      |    |  |  | 
|------------------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- |  |  | 
|                          |  |                                                                                                        |    | Page |   
|                          |  |                                                                                                        |    |      |   
|PART I                   
|Item 1.                   |  | Business                                                                                               |    |      | 2  | 
|Item 2.                   |  | Properties                                                                                             |    |      | 15 | 
|Item 3.                   |  | Legal Proceedings                                                                                      |    |      | 15 | 
|Item 4.                   |  | Submission of Matters to a
    Vote of Security Holders                                                |    |      | 16 | 
|PART II                  
|Item 5.                   |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |    |      | 16 | 
|Item 6.                   |  | Selected Consolidated
    Financial Data                                                               |    |      | 16 | 
|Item 7.                   |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |    |      | 17 | 
|Item 7A.                  |  | Quantitative and Qualitative
    Disclosures about Market Risk                                         |    |      | 23 | 
|Item 8.                   |  | Consolidated Financial
    Statements                                                                  |    |      | 24 | 
|Item 9.                   |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |    |      | 40 | 
|Item 9A.                  |  | Controls and Procedures                                                                                |    |      | 40 | 
|PART III                 
|Item 10.                  |  | Directors and Executive
    Officers of the Registrant                                                 |    |      | 40 | 
|Item 11.                  |  | Executive Compensation                                                                                 |    |      | 40 | 
|Item 12.                  |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |    |      | 41 | 
|Item 13.                  |  | Certain Relationships and
    Related Transactions                                                     |    |      | 41 | 
|Item 14.                  |  | Principal Accounting Fees
    and Services                                                             |    |      | 41 | 
|PART IV                  
|Item 15.                  |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |    |      | 41 | 
|Signatures                |  |                                                                                                        | 42 |     
|List of Subsidiaries     
|Section 302 Certification
|Section 906 Certification



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PART I

The information in this Report contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are based upon current expectations,
assumptions, estimates and projections about Travelzoo Inc. and
our industry. These forward-looking statements are subject to
the many risks and uncertainties that exist in our operations
and business environment that may cause actual results,
performance or achievements of Travelzoo to be different from
those expected or anticipated in the forward-looking statements.
Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements.
For example, words such as may, will,
should, estimates, predicts,
potential, continue,
strategy, believes,
anticipates, plans, expects,
intends, and similar expressions are intended to
identify forward-looking statements. Travelzoos actual
results and the timing of certain events could differ
significantly from those anticipated in such forward-looking
statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed
elsewhere in this Report in the section entitled Risk
Factors and the risks discussed in our other Securities
and Exchange Commission (SEC) filings. The
forward-looking statements included in this report reflect the
beliefs of our management on the date of this report. We
undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes
available or other events or circumstances occur in the future.






|        |         
|------- | --------
|Item 1. | Business

Overview

Travelzoo Inc. is an Internet media company that
publishes sales and specials for hundreds of travel companies.
As the Internet is becoming consumers preferred medium to
search for travel offers, we provide airlines, hotels, cruise
lines, vacation packagers, and other travel companies with a
fast, flexible, and cost-effective way to reach millions of
users. While our products provide advertising opportunities for
travel companies, they also provide Internet users with a free
source of information on current sales and specials from
hundreds of travel companies.

Our products include the Travelzoowebsite, the Travelzoo Top 20 newsletter,
Newsflash, and the Weekend.comnewsletter.

More than 300 companies purchase our advertising
services, including American Airlines, American Express, Alamo
Rent-A-Car, ATA, Avis Rent-A-Car, British Airways, Carnival
Cruise Lines, Liberty Travel, Delta Air Lines, Expedia, Fairmont
Hotels & Resorts, JetBlue Airways, Kimpton Hotels,
Marriott Hotels, Caesars Entertainment, Spirit Airlines,
Starwood Hotels & Resorts Worldwide, Royal Caribbean,
United Airlines, and US Airways.

Our revenues are generated from advertising
sales. Our revenues have grown rapidly since we began operations
in 1998, primarily driven by an increasing number of travel
companies listing their sales and specials on the
Travelzoo website and in the Travelzoo Top 20newsletter. Our revenues increased from approximately
$84,000 for the period from May 21, 1998
(inception) to December 31, 1998, to approximately
$18.0 million for the year ended December 31, 2003.

Our principal business office is located at 590
Madison Avenue, 21st Floor, New York, New York
10022.

Travelzoo was originally incorporated as
Travelzoo.com Corporation (Travelzoo Bahamas) in the
Commonwealth of The Bahamas. In a Netsurfer
Stockholder offering, Travelzoo Bahamas issued
approximately 2.6 million shares of its common stock to
approximately 700,000 visitors who registered on the
Travelzoowebsite. No cash payments were required or
received for any of the stock issued pursuant to the Netsurfer
Stockholder offering. The number of shares issued was increased
as a result of a subsequent two-for-one stock split.

In a series of transactions completed in 2002,
Travelzoo Bahamas was merged into Travelzoo Inc., a Delaware
corporation, and each share of Travelzoo Bahamas was converted
into the right to receive one share

2



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of common stock of Travelzoo Inc. As of
December 31, 2003, 130,497 former stockholders of Travelzoo
Bahamas have taken the steps necessary to receive their shares
in Travelzoo Inc., and 15,294,033 shares of common stock
have been issued. If all former stockholders of Travelzoo
Bahamas accept their shares in Travelzoo Inc., an additional
4,131,114 shares of common stock will be issued. These
shares are reported as outstanding shares in our financial
statements.


In October 2003, the Company completed an
underwritten secondary offering of 402,500 shares of common
stock sold by the Companys Chief Executive Officer and
principal stockholder. The offering was intended primarily to
allow the Company to satisfy the requirement for listing on the
NASDAQ SmallCap Market that the Company have 300 round lot
holders.

On December 30, 2003, Travelzoo became
listed on the NASDAQ SmallCap Market under the symbol
TZOO.

Our Industry

According to the Newspaper Association of
America, travel companies spent $1.3 billion in 2003 on
national advertising in newspapers (source: Market and Business
Analysis, NAA, 2004). We believe that newspapers are currently
the main medium for travel companies to advertise their sales
and specials.

We believe that several factors are causing and
will continue to cause travel companies to increase their
spending on Internet advertising of sales and specials:

The Internet Is Consumers Preferred
Information Source.Market research
shows that the Internet has become consumers preferred
information source for travel (source: Forrester Research, 2002).

Benefits of Internet Advertising vs. Print
Advertising.Internet advertising
provides travel companies advantages compared to print
advertising. These advantages include real-time listings,
real-time updates, and performance tracking. See
 Benefits to Travel Companies.

New Advertising
Opportunities.The Internet allows
travel companies to advertise their sales and specials in a
fast, flexible, and cost-effective manner that has not been
possible before.

Suppliers Selling
Directly.We believe that many travel
suppliers prefer to sell directly to consumers through
suppliers websites versus selling through travel agents.
Internet advertising attracts consumers to suppliers
websites.

Problems Travel Companies Face and Limitations
of Newspaper Advertising

We believe that travel companies often face the
challenge of being able to effectively market and sell excess
inventory (i.e. airline seats, hotel rooms, or cruise cabins
that are likely to be unfilled). The success of marketing excess
inventory can have a substantial impact on a travel
companys net income. Almost all costs of travel services
are fixed. That is, the costs do not vary with sales. A
relatively small amount of unsold inventory can have a
significant impact on the profitability of a travel company.

Our management believes that travel companies
need a fast, flexible, and cost-effective solution for marketing
excess inventory. The solution must be fast, because travel
services are a quickly expiring commodity. The period between
the time when a company realizes that there is excess inventory
and the time when the value of the travel service has become
worthless is very short. The solution must be flexible, because
the travel industry is dynamic and the demand for excess
inventory is difficult to forecast. It is difficult for travel
companies to price excess inventory. It is difficult for travel
companies to forecast the marketing effort needed to sell excess
inventory. The marketing must be cost-effective because excess
inventory is often sold at highly discounted prices, which
lowers margins.

Our management believes that newspaper
advertising, with respect to advertising excess inventory,
suffers from a number of limitations which do not apply to the
Internet:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | typically, ads must be submitted 2 to 5 days
    prior to the publication date, which makes it difficult to
    advertise last-minute inventory;

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| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | once an ad is published, it cannot be updated or
    deleted when an offer is sold out;                                                                  
|
| |  | once an ad is published, the travel company
    cannot change a price;                                                                                   
|
| |  | in many markets, the small number of newspapers
    and other print media reduces competition, resulting in high
    rates for newspaper advertising; and
|
| |  | newspaper advertising does not allow for detailed
    performance tracking.                                                                              

Our Products and Services

We provide airlines, hotels, cruise lines,
vacation packagers, and other travel suppliers with a fast,
flexible, and cost-effective way to advertise their sales and
specials to millions of users. Our products include the
Travelzoowebsite, the Travelzoo Top 20newsletter, Newsflash,and the Weekend.comnewsletter. While our products provide advertising
opportunities for travel companies, they also provide Internet
users with a free source of information on current sales and
specials from hundreds of travel companies.

As travel companies increasingly utilize the
Internet to promote their special offers, we believe that our
products will enable them to take advantage of the lower cost
and real-time communication enabled by the Internet. Our listing
management software allows travel companies to add, update, and
delete special offer listings on a real-time basis. Our software
also provides travel companies with real-time performance
tracking, enabling them to optimize their marketing campaigns.

The following table presents an overview of our
products:

|                 |  |                                                                                                         |  |                                             |  |                                       |  |                                                                                               |  |                                                                                  
|---------------- |  | ------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|                
|                
|                 |  | Publication                                                                                             |  |                                            
|Publication      |  | Content                                                                                                 |  | Schedule                                    |  | Reach*                                |  | Advertiser Benefits                                                                           |  | Consumer Benefits                                                                
|                
|                
|Travelzoowebsite |  | Website listing thousands of outstanding sales
    and specials from approximately 300 travel companies |  | 24/7                                        |  | 5.1 million unique visitors per month |  | Broad reach, sustained exposure, targeted
    placements by destination and travel segment    |  | 24/7 access to deals, ability to search and
    browse by destination or keyword 
|                
|Travelzoo Top 20 |  | E-mail newsletter listing 20 of the weeks
    most outstanding deals from selected travel companies    |  | Weekly                                      |  | 6.1 million subscribers               |  | Mass push advertising vehicle to
    quickly stimulate incremental travel                   |  | Weekly access to 20 outstanding, handpicked deals
    chosen from among thousands
|                
|Newsflash        |  | Regionally-targeted e-mail with a single
    time-sensitive and newsworthy travel offer                 |  | Within 2 hours of an offer being identified |  | 2.7 million subscribers               |  | Regional targeting, 100% share of voice for
    advertiser, flexible publication schedule     |  | Breaking news offers delivered just-in- time                                     
|                
|Weekend.com      |  | E-mail listing inspirational ideas for upcoming
    weekends, from getaways to local events and movies  |  | Weekly                                      |  | 2.0 million subscribers               |  | Upscale editorial and visual content in HTML
    format, strong share of voice for advertiser |  | Great ideas to make the weekend count                                            
|                



|  |                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For Travelzoowebsite, reach is from
    comScore Media Metrix, 3/2003. For Top 20,
    Newsflash, and Weekend.com, reach is based on
    internal Travelzoo statistics as of 12/31/2003.

Benefits to Travel Companies

Key features of our solution for travel companies
include:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | Real-Time Listings of Special
    Offers.Our technology allows travel
    companies to advertise new special offers on a real-time basis.

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| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Real-Time Updates.Our technology allows travel companies to update their listings
    on a real-time basis.                                                                                                                                                                                                      
|
| |  | Real-Time Performance
    Reports.We provide travel companies
    with real-time tracking of the performance of their advertising
    campaigns. Our solution enables travel companies to optimize
    their campaigns by removing or updating unsuccessful listings
    and further promote successful listings.
|
| |  | Access to Millions of
    Consumers.We provide travel companies
    fast access to millions of travel shoppers.                                                                                                                                                                                                  
|
| |  | National Reach.We
    offer travel companies access to Internet users across the U.S.                                                                                                                                                                                                                            

Benefits to Consumers

Our Travelzoowebsite, our Travelzoo
Top 20newsletter, Newsflash, and our Weekend.comnewsletter provide consumers information on current special
offers at no cost to the consumer. Key features of our products
include:



| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Aggregation of Offers From Many
    Companies.Our Travelzoowebsite and our Travelzoo Top 20e-mail newsletter
    aggregate information on current special offers from
    approximately 300 travel companies. This saves the consumer time
    when searching for travel sales and specials.
|
| |  | Current Information.Compared to newspaper ads, we provide consumers more current
    information, since our technology enables travel companies to
    update their listings on a real-time basis.                                                                                          
|
| |  | Search tools.We
    provide consumers with the ability to search for specific
    special offers.                                                                                                                                                                                           

Growth Strategy

Key elements of our strategy include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Build Strong Brand
    Awareness.We believe that it is
    essential to establish a strong brand with Internet users and
    within the travel industry. We currently utilize an online
    marketing program to promote our brands to Internet users. In
    addition, we believe that we build brand awareness by product
    excellence that is promoted by word-of-mouth. We utilize
    sponsorships at industry conferences and public relations to
    promote our brands within the travel industry.
|
| |  | Increase Reach.In
    order to attract more users to our products, we intend to expand
    our advertising campaigns as our business grows. We believe that
    we also can attract more users by product excellence that is
    promoted by word-of-mouth.                                                                                                                                                                                                                                                 
|
| |  | Quality User Base.We believe that, in addition to increasing our reach, we need to
    maintain the quality of our user base. We believe that high
    quality content attracts a quality user base.                                                                                                                                                                                                                                                                                                        
|
| |  | Increase Number of Advertising
    Clients.We intend to continue to grow
    our advertising client base by expanding the size of our sales
    force. See  Sales and Marketing.                                                                                                                                                                                                                                                                                                                         
|
| |  | Excellent Service.We believe that it is important to provide our advertising
    clients with excellent service.                                                                                                                                                                                                                                                                                                                                                                                            

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Clients

As of December 31, 2003, our client base
included approximately 300 travel companies, including airlines,
hotels, cruise lines, vacations packagers, tour operators, car
rental companies, and travel agents. Some of our clients are:

|                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|American Airlines
    Apple Vacations
    ATA
    Avis Rent A Car
    British Airways
    Budget Rent A Car
    Caesars Entertainment
    Dollar Rent A Car
    Expedia
    Fairmont Hotels and Resorts
    Funjet Vacations
    Hawaiian Airlines
    Hilton Hotels |  | JetBlue Airways
    Kimpton Hotels
    Liberty Travel
    Lufthansa
    Marriott Hotels
    Pleasant Holidays
    Royal Caribbean
    Spirit Airlines
    Starwood Hotels & Resorts Worldwide
    Travelocity.com
    United Airlines
    US Airways
    Virgin Atlantic

For the year ended December 31, 2003, our
two largest clients accounted for 11% and 10% of our revenues,
respectively. For the year ended December 31, 2002, our two
largest clients accounted for 15% and 14% of our revenues,
respectively. For the year ended December 31, 2001, our two
largest clients accounted for 15% and 13% of our revenues,
respectively. No other clients accounted for 10% or more of
revenues in 2003, 2002, or 2001.

Sales and Marketing

As of December 31, 2003, our direct sales
force consisted of a Senior Vice President of Sales, a Vice
President of Business Development and five advertising sales
managers.

We currently utilize an online marketing program
to promote our brands to Internet users. In addition, we believe
that we build brand awareness by product excellence that is
promoted by word-of-mouth. We utilize sponsorships at industry
conferences and public relations to promote our brands within
the travel industry.

Technology

We have designed our technology to serve a large
volume of web traffic in an efficient and scaleable manner.

We co-locate our production servers with SAVVIS,
a global provider of hosting, network, and application services.
SAVVISs facility includes features such as power
redundancy, multiple egress and peering to other ISPs, fire
suppression and access to our own separate physical space. We
believe our arrangements with SAVVIS will allow us to grow
without being limited by our own physical and technological
capacity, and will also provide us with sufficient bandwidth for
our anticipated needs. Because of the design of our website, our
users are not required to download or upload large files from or
to our website, which allows us to continue increasing the
number of our visitors and page views without adversely
affecting our performance or requiring us to make significant
additional capital expenditures.

Our software is written using open standards,
such as Visual Basic Script, and HTML, and interfaces with
products from Microsoft. We have standardized our hardware
platform on Compaq servers and Cisco switches.

Competition

We compete with large Internet portal sites, such
as About.com, America Online, Lycos, MSN and Yahoo!, that offer
listings or other advertising opportunities for travel
companies. We also compete with search engines like Google or
Overture that offer pay-per-click listings. In addition, we
compete with newspapers,

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magazines and other traditional media companies
that operate websites which provide advertising opportunities.
We expect to face additional competition as other established
and emerging companies, including print media companies, enter
our market.


Many of our current and potential competitors
have longer operating histories, significantly greater
financial, technical, marketing and other resources and larger
client bases than we do. In addition, current and potential
competitors may make strategic acquisitions or establish
cooperative relationships to expand their businesses or to offer
more comprehensive solutions.

New technologies could increase the competitive
pressures that we face. The development of competing
technologies by market participants or the emergence of new
industry standards may adversely affect our competitive
position. Competition could result in reduced margins on our
services, loss of market share or less use of our products by
travel companies and consumers. If we are not able to compete
effectively with current or future competitors as a result of
these and other factors, our business could be materially
adversely affected.

Government Regulation and Legal
Uncertainties

There are increasing numbers of laws and
regulations pertaining to the Internet, including laws and
regulations relating to user privacy, liability for information
retrieved from or transmitted over the Internet, online content
regulation, user privacy and domain name registration. Moreover,
the applicability to the Internet of existing laws governing
issues such as intellectual property ownership and infringement,
copyright, patent, trademark, trade secret, obscenity, libel and
personal privacy is uncertain and developing.

Privacy Concerns.Government agencies are considering adopting regulations
regarding the collection and use of personal identifying
information obtained from individuals when using Internet sites
or e-mail services. While we have implemented and intend to
implement additional programs designed to enhance the protection
of the privacy of our users, these programs may not conform to
any regulations which may be adopted by these agencies. In
addition, these regulatory and enforcement efforts may adversely
affect our ability to collect demographic and personal
information from users, which could have an adverse effect on
our ability to provide advertisers with demographic information.
The European Union (the EU) has adopted a directive
that imposes restrictions on the collection and use of personal
data. The directive could impose restrictions that are more
stringent than current Internet privacy standards in the United
States. The directive may adversely affect our activities to the
extent that we may seek to collect data from users in EU member
countries.

Domain Names.Domain
names are the users Internet addresses. The
current system for registering, allocating and managing domain
names has been the subject of litigation and of proposed
regulatory reform. We own the domain names for travelzoo.com,
travelzoo.net, travelzoo.org, travelzoo.ca, travelzoo.co.uk,
weekend.com, and weekends.com, and have registered
Travelzoo and Weekend.com as trademarks
in the United States. Because of these protections, it is
unlikely, yet possible, that third parties may bring claims for
infringement against us for the use of our domain name and
trademark. In the event such claims are successful, we could
lose the ability to use our domain names. There can be no
assurance that our domain name will not lose its value, or that
we will not have to obtain entirely new domain names in addition
to or in lieu of our current domain name if changes in overall
Internet domain name rules result in a restructuring in the
current system of using domain names which include
.com, .net, .gov,
.edu and other extensions.

Jurisdictions.Due
to the global nature of the Internet, it is possible that,
although our transmissions over the Internet originate primarily
in California, the governments of other states and foreign
countries might attempt to regulate our business activities. In
addition, because our service is available over the Internet in
multiple states and foreign countries, these jurisdictions may
require us to qualify to do business as a foreign corporation in
each of these states or foreign countries, which could subject
us to taxes and other regulations.

Intellectual Property

Our success depends to a significant degree upon
the protection of our brand names, including Travelzoo,
Travelzoo Top 20, and Weekend.com.If we were unable
to protect the Travelzooand Travelzoo Top 20brand

7



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names, our business could be materially adversely
affected. We rely upon a combination of copyright, trade secret
and trademark laws to protect our intellectual property rights.
The steps we have taken to protect our proprietary rights,
however, may not be adequate to deter misappropriation of
proprietary information.


We may not be able to detect unauthorized use of
our proprietary information or take appropriate steps to enforce
our intellectual property rights. In addition, the validity,
enforceability and scope of protection of intellectual property
in Internet-related industries is uncertain and still evolving.
The laws of other countries in which we may market our services
in the future are uncertain and may afford little or no
effective protection of our intellectual property.

On June 21, 1999, Mr. Bartel, our
founder, filed with the United States Patent and Trademark
Office (PTO) to register the trademark
Travelzoo for providing information and news
in the field of travel via an on-line global communications
network and travel agency services, namely making reservations
and booking for transportation, providing
information and news in the field of travel via an on-line
global communications network and travel agency services, namely
making reservations and booking for temporary lodging, and
promoting the goods and services of others through the
offer of travel goods and services and shopping club services,
namely providing information on travel goods and services to
members. The PTO published that mark for opposition on
October 31, 2000. On January 22, 2001,
Mr. Bartel, who filed the trademark application as an
individual, transferred the ownership of the pending trademark
Travelzoo to Travelzoo Inc. The mark was registered
by the PTO on January 23, 2001.

On November 2, 2000, we filed with the
United States Patent and Trademark Office to register the
trademark Weekend.com for providing
information via websites on global computer networks in the
field travel, providing information via websites on
global computer networks in the fields of entertainment,
recreation, and sports, and providing information
via websites on global computer networks in the fields of
fashion, fitness, health and exercise. The mark was
registered by the PTO on November 5, 2002.

On March 18, 2002, we filed with the United
States Patent and Trademark Office to register the trademark
Top 20 for promoting the goods and services of
others through the offer of travel goods and services and
shopping club services, namely providing information on travel
goods and services to members, providing information
and news in the field of travel via an on-line global
communications network and travel agency services namely making
reservations and booking for transportation, and
providing information and news in the field of travel via
an on-line global communications network and travel agency
services, namely, making reservations and booking for temporary
travel lodging. The mark was registered by the PTO on
May 13, 2003.

Employees

As of December 31, 2003, we had 39
employees, of whom 11 worked in sales, business development, and
marketing, 17 in production, 3 in network operations and 8 were
involved in finance, administration, and corporate operations.
None of our employees is represented under collective bargaining
agreements. We consider our relations with our employees to be
good. Because of our anticipated further growth, we expect that
the number of our employees will continue to increase for the
foreseeable future.

RISK FACTORS

Investing in our common stock involves a high
degree of risk. Any or all of the risks listed below as well as
other variables affecting our operating results could have a
material adverse effect on our business, our quarterly and
annual operating results or financial condition, which could
cause the market price of our stock to decline or cause
substantial volatility in our stock price, in which event the
value of your common stock could decline. You should also keep
these risk factors in mind when you read forward-looking
statements.

8



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##### Table of Contents



Risks Related to Our Financial Condition and
Business Model



| |                                                                            
| | ---------------------------------------------------------------------------
| | Our limited operating history makes our
    business difficult to evaluate.

We have only a limited operating history for you
to consider in evaluating our business. As a young company, we
face risks and uncertainties relating to our ability to
successfully implement our business plan. You must consider the
risks, expenses and uncertainties which can materially affect
the business of a young company like ours. These risks include
uncertainty whether we will be able to:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | increase awareness of the Travelzoobrand;                                               
|
| |  | attract and retain additional travel companies to
    list their special offers with us;
|
| |  | attract additional Internet users to the
    Travelzoowebsite;                          
|
| |  | increase the functionality of our products and
    services;                            
|
| |  | maintain our current, and develop new, business
    relationships;                      
|
| |  | respond effectively to competitive
    pressures; and                                   
|
| |  | continue to develop and upgrade our technology.                                         



| |                                                             
| | ------------------------------------------------------------
| | We cannot assure you that we will sustain
    profitability.

Although we have been profitable in the past,
there is no assurance that we will continue to be profitable. We
forecast our future expense levels based on our operating plans
and our estimates of future revenues. We may find it necessary
to accelerate expenditures relating to our sales and marketing
efforts or otherwise increase our financial commitment to
creating and maintaining brand awareness among travel companies
and Internet users. If our revenues grow at a slower rate than
we anticipate, or if our spending levels exceed our expectations
or cannot be adjusted to reflect slower revenue growth, we may
not generate sufficient revenues to sustain profitability. In
this case, the value of the shares of Travelzoo could be reduced.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Fluctuations in our operating results may
    negatively impact our stock price.

Our quarterly operating results may fluctuate
significantly in the future due to a variety of factors that
could affect our revenues or our expenses in any particular
quarter. You should not rely on quarter-to-quarter comparisons
of our results of operations as an indication of future
performance. Factors that may affect our quarterly results
include:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | mismatches between resource allocation and client
    demand due to difficulties in predicting client demand in a new
    market;                  
|
| |  | changes in general economic conditions that could
    affect marketing efforts generally and online marketing efforts
    in particular;           
|
| |  | the magnitude and timing of marketing initiatives;                                                                                                 
|
| |  | the maintenance and development of our strategic
    relationships;                                                                                
|
| |  | the introduction, development, timing,
    competitive pricing and market acceptance of our products and
    services and those of our competitors;
|
| |  | our ability to attract and retain key personnel;                                                                                                   
|
| |  | our ability to manage our anticipated growth and
    expansion;                                                                                    
|
| |  | our ability to attract traffic to our
    website; and                                                                                             
|
| |  | technical difficulties or system downtime
    affecting the Internet generally or the operation of our
    products and services specifically.     

9



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##### Table of Contents



In addition, we plan to significantly increase
our operating expenses to expand our sales and production
departments. If revenues fall below our expectations in any
quarter and we are unable to quickly reduce our spending in
response, our operating results would be lower than expected and
our stock price may fall.

In addition, we are required under Generally
Accepted Accounting Principles to review our intangible assets
for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable. We may be required to
record a significant expense or charge to earnings in our
financial statements in the period any impairment of intangible
assets is determined.



| |                                                                     
| | --------------------------------------------------------------------
| | We depend on two clients for a substantial
    part of our revenues.

In the fiscal year ended December 31, 2003,
two clients accounted for 11% and 10% of our revenues,
respectively. The loss of one client or both clients may result
in a significant decrease in our revenues and results of
operations, which could have a material adverse effect on our
business.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our business model is unproven and may not
    be adaptable to a changing market.

Our current revenue model depends on advertising
fees paid by travel companies. If current clients decide not to
continue advertising their sales and specials with us and we are
unable to replace them with new clients, our business may be
adversely affected. To be successful, we must provide online
marketing solutions that achieve broad market acceptance by
travel companies. In addition, we must attract sufficient
Internet users with attractive demographic characteristics to
our products. It is possible that we will be required to further
adapt our business model in response to changes in the online
advertising market or if our current business model is not
successful. If we are not able to anticipate changes in the
online advertising market or if our business model is not
successful, our business could be materially adversely affected.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to obtain sufficient
    funds to grow our business and any additional financing may be
    on terms adverse to your interests.

We intend to continue to grow our business, and
intend to fund our current operations and our anticipated growth
from the cash flow generated from our operations and our
retained earnings. However, these sources may not be sufficient
to meet our needs. We may not be able to obtain additional
financing on commercially reasonable terms, or at all.

If additional financing is not available when
required or is not available on acceptable terms, we may be
unable to fund our expansion, successfully promote our brand
name, develop or enhance our products and services, take
advantage of business opportunities, or respond to competitive
pressures, any of which could have a material adverse effect on
our business.

If we choose to raise additional funds through
the issuance of equity securities, you may experience
significant dilution of your ownership interest, and holders of
the additional equity securities may have rights senior to those
of the holders of our common stock.

If we obtain additional financing by issuing debt
securities, the terms of these securities could restrict or
prevent us from paying dividends and could limit our flexibility
in making business decisions.



| |                                                 
| | ------------------------------------------------
| | Our business may be sensitive to
    recessions.

The demand for online advertising may be linked
to the level of economic activity and employment in the U.S. and
abroad. Specifically, our business is dependent on the spending
of travel companies. The last recession decreased consumer
travel and caused travel companies to reduce or postpone their
marketing spending generally, and their online marketing
spending in particular. If the current economic recovery does
not continue, our business and financial condition could be
materially adversely affected.

10



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##### Table of Contents





| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Our operations could be significantly
    hindered by the occurrence of a natural disaster or other
    catastrophic event.

Our operations are susceptible to outages due to
fire, floods, power loss, telecommunications failures, break-ins
and similar events. In addition, a significant portion of our
network infrastructure is located in Northern California, an
area susceptible to earthquakes. We do not have multiple site
capacity in the event of any such occurrence. Outages could
cause significant interruptions of our service. In addition,
despite our implementation of network security measures, our
servers are vulnerable to computer viruses, physical and
electronic break-ins, and similar disruptions from unauthorized
tampering with our computer systems. We do not carry business
interruption insurance to compensate us for losses that may
occur as a result of any of these events.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Technological or other assaults on our
    service could harm our business.

We are vulnerable to coordinated attempts to
overload our systems with data, resulting in denial or reduction
of service to some or all of our users for a period of time. We
have experienced denial of service attacks in the past, and may
experience such attempts in the future. We do not carry business
interruption insurance to compensate us for losses that may
occur as a result of any of these events. Any such event could
reduce our revenue and harm our operating results and financial
condition.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We may face significant costs with respect
    to the delivery of paper copies of reports to our
    stockholders.

The Securities Exchange Act of 1934 requires us
to provide paper copies of certain reports to our stockholders
who do not consent to receiving electronic delivery. If a
significant number of our stockholders do not consent to
electronic delivery of stockholder communications or revoke such
consent, we may face significant costs related to the printing
and mailing of such reports.

Risks Related to Our Markets and
Strategy



| |                                                   
| | --------------------------------------------------
| | The Internet is not a proven marketing
    medium.

The future of our business is dependent on the
continuing acceptance by travel companies of the Internet as an
effective marketing tool, and on the ongoing acceptance by
consumers of the Internet as a source for information on offers
from travel companies. The adoption of online marketing by
travel companies, particularly among those that have
historically relied upon traditional advertising methods,
requires the acceptance of a new way of conducting business,
marketing and advertising. Many of our potential clients have
little or no experience using the Internet as a marketing tool,
and not all Internet users have experience using the Internet to
book travel. As a result, we cannot be sure that we will be able
to effectively compete with traditional advertising methods. If
we are unable to compete with traditional advertising methods,
our business and results of operations could be materially
adversely affected.



| |                                                               
| | --------------------------------------------------------------
| | We may not be able to develop awareness of
    our brand name.

We believe that continuing to build awareness of
the Travelzoobrand name is critical to achieving
widespread acceptance of our business. Brand recognition is a
key differentiating factor among providers of online advertising
opportunities, and we believe it could become more important as
competition in our industry increases. In order to maintain and
build brand awareness, we must succeed in our marketing efforts.
If we fail to successfully promote and maintain our brand, incur
significant expenses in promoting our brand and fail to generate
a corresponding increase in revenue as a result of our branding
efforts, or encounter legal obstacles which prevent our
continued use of our brand name, our business could be
materially adversely affected.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Our business may be sensitive to events
    affecting the travel industry in general.

Events like the war with Iraq in 2003 or the
terrorist attacks on the United States in 2001 have a negative
impact on the travel industry. We are not in a position to
evaluate the net effect of these circumstances on our business.
In the longer term, our business might be negatively affected by
financial pressures on the travel

11



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##### Table of Contents



industry. However, our business may also benefit
if travel companies increase their efforts to promote special
offers or other marketing programs. If the events result in a
long-term negative impact on the travel industry, such impact
could have a material adverse effect on our business.




| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will not be able to attract travel
    companies or Internet users if we do not continually enhance and
    develop the content and features of our products and
    services.

To remain competitive, we must continually
improve the responsiveness, functionality and features of our
products and services. We may not succeed in developing
features, functions, products or services that travel companies
and Internet users find attractive. This could reduce the number
of travel companies and Internet users using our products and
materially adversely affect our business.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | We may lose business if we fail to keep
    pace with rapidly changing technologies and clients
    needs.

Our success is dependent on our ability to
develop new and enhanced software, services and related products
to meet rapidly evolving technological requirements for online
advertising. Our current technology may not meet the future
technical requirements of travel companies. Trends that could
have a critical impact on our success include:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | rapidly changing technology in online advertising;                                                              
|
| |  | evolving industry standards, including both
    formal and de factostandards relating to online
    advertising;
|
| |  | developments and changes relating to the Internet;                                                              
|
| |  | competing products and services that offer
    increased functionality; and                                     
|
| |  | changes in travel company and Internet user
    requirements.                                                   

If we are unable to timely and successfully
develop and introduce new products and enhancements to existing
products in response to our industrys changing
technological requirements, our business could be materially
adversely affected.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Our business and growth will suffer if we
    are unable to hire and retain highly skilled
    personnel.

Our future success depends on our ability to
attract, train, motivate and retain highly skilled employees. We
may be unable to retain our skilled employees or attract,
assimilate and retain other highly skilled employees in the
future. We have from time to time in the past experienced, and
we expect to continue to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate
qualifications. If we are unable to hire and retain skilled
personnel, our growth may be restricted, which could adversely
affect our future success.



| |                                                                       
| | ----------------------------------------------------------------------
| | We may not be able to effectively manage
    our expanding operations.

We have recently experienced a period of rapid
growth. In order to execute our business plan, we must continue
to grow significantly. As of December 31, 2003, we had 39
employees. We expect that the number of our employees will
continue to increase for the foreseeable future. This growth has
placed, and our anticipated future growth will continue to
place, a significant strain on our management, systems and
resources. We expect that we will need to continue to improve
our financial and managerial controls and reporting systems and
procedures. We will also need to continue to expand and maintain
close coordination among our sales, production,
marketing, IT, and finance departments. We may not succeed
in these efforts. Our inability to expand our operations in an
efficient manner could cause our expenses to grow
disproportionately to revenues, our revenues to decline or grow
more slowly than expected and otherwise have a material adverse
effect on our business.

12



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##### Table of Contents





| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Intense competition may adversely affect
    our ability to achieve or maintain market share and operate
    profitably.

We compete with large Internet portal sites, such
as About.com, America Online, Lycos, MSN and Yahoo!, that offer
listings or other advertising opportunities for travel
companies. These companies have significantly greater financial,
technical, marketing and other resources and larger client
bases. We also compete we search engines like Google or Overture
that offer pay-per-click listings. In addition, we compete with
newspapers, magazines and other traditional media companies that
provide online advertising opportunities. We expect to face
additional competition as other established and emerging
companies, including print media companies, enter the online
advertising market. Competition could result in reduced margins
on our services, loss of market share or less use of
Travelzooby travel companies and consumers. If we are
not able to compete effectively with current or future
competitors as a result of these and other factors, our business
could be materially adversely affected.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Loss of any of our key management personnel
    could negatively impact our business.

Our future success depends to a significant
extent on the continued service and coordination of our
management team, particularly Ralph Bartel, our Chairman,
President, Chief Executive Officer, Chief Financial Officer and
Secretary. The loss or departure of any of our officers or key
employees could materially adversely affect our ability to
implement our business plan. We do not maintain key person life
insurance for any member of our management team. In addition, we
expect new members to join our management team in the future.
These individuals will not previously have worked together and
will be required to become integrated into our management team.
If our key management personnel are not able to work together
effectively or successfully, our business could be materially
adversely affected.



| |                                                                              
| | -----------------------------------------------------------------------------
| | We may not be able to access third party
    technology upon which we depend.

We use technology and software products from
third parties including Microsoft. Technology from our current
or other vendors may not continue to be available to us on
commercially reasonable terms, or at all. Our business will
suffer if we are unable to access this technology, to gain
access to additional products or to integrate new technology
with our existing systems. This could cause delays in our
development and introduction of new services and related
products or enhancements of existing products until equivalent
or replacement technology can be accessed, if available, or
developed internally, if feasible. If we experience these
delays, our business could be materially adversely affected.

Risks Related to the Market for our
Shares



| |                                                  
| | -------------------------------------------------
| | We are controlled by a principal
    stockholder.

Ralph Bartel, who founded Travelzoo and who is
our Chairman of the Board, President, Chief Executive Officer,
Chief Financial Officer and Secretary, is our largest
stockholder, holding approximately 70% of our outstanding shares
with options to increase his percentage ownership to 73% on a
fully-diluted basis, assuming all former stockholders of
Travelzoo Bahamas receive shares of Travelzoo Inc. Through his
share ownership, he is in a position to control Travelzoo and to
elect our entire board of directors.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Investors may face significant restrictions
    on the resale of our stock due to federal penny stock
    regulations.

If our shares trade at less than five dollars per
share, since the shares are not listed on a recognized national
exchange or on the NASDAQ National Market, our common stock may
be deemed to be a penny stock under Rule 3a51-1
under the Securities Exchange Act of 1934. Compliance with the
requirements governing penny stocks may make it more difficult
for investors in our common stock to resell their shares to
third parties or to otherwise dispose of them.

Section 15(g) of the Exchange Act, and
Rule 15g-2 under the Exchange Act, require broker-dealers
dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and

13



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##### Table of Contents



to obtain a manually signed and dated written
receipt of the document before effecting any transaction in a
penny stock for the investors account. Moreover,
Rule 15g-9 promulgated under the Securities Exchange Act of
1934 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before
selling any penny stock to that investor. These requirements
significantly increase the time necessary for a broker-dealer to
sell a stock and limit the available purchasers for a stock.




| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Our stock price has been volatile
    historically and may continue to be volatile.

The trading price of our common stock has been
and may continue to be subject to wide fluctuations. During
2003, the sale prices of our common stock on the OTC Bulletin
Board and on the NASDAQ SmallCap Market ranged from $3.50 to
$11.00 per share. Our stock price may fluctuate in response
to a number of events and factors, such as quarterly variations
in operating results; announcements of technological innovations
or new products by us or our competitors; changes in financial
estimates and recommendations by securities analysts; the
operating and stock price performance of other companies that
investors may deem comparable to us; and news reports relating
to trends in our markets or general economic conditions.

In addition, the stock market in general, and the
market prices for Internet-related companies in particular, have
experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and
industry fluctuations may adversely affect the price of our
stock, regardless of our operating performance.

Risks Related to Legal Uncertainty



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may become subject to burdensome
    government regulations and legal uncertainties affecting the
    Internet which could adversely affect our
    business.

To date, governmental regulations have not
materially restricted use of the Internet in our markets.
However, the legal and regulatory environment that pertains to
the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business, prevent
us from delivering our products and services over the Internet
or slow the growth of the Internet. In addition to new laws and
regulations being adopted, existing laws may be applied to the
Internet. New and existing laws may cover issues which include:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | user privacy;                                                          
|
| |  | consumer protection;                                                   
|
| |  | copyright, trademark and patent infringement;                          
|
| |  | pricing controls;                                                      
|
| |  | characteristics and quality of products and
    services;              
|
| |  | sales and other taxes; and                                             
|
| |  | other claims based on the nature and content of
    Internet materials.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We may be unable to protect our registered
    trademark or other proprietary intellectual property
    rights.

Our success depends to a significant degree upon
the protection of the Travelzoobrand name. We rely upon
a combination of copyright, trade secret and trademark laws and
non-disclosure and other contractual arrangements to protect our
intellectual property rights. The steps we have taken to protect
our proprietary rights, however, may not be adequate to deter
misappropriation of proprietary information.

The U.S. Patent and Trademark Office
registered the trademark for Travelzoo on
January 23, 2001. If we are unable to protect our rights in
the mark, a key element of our strategy of promoting
Travelzooas a brand could be disrupted and our business
could be adversely affected. We may not be able to detect
unauthorized use of our proprietary information or take
appropriate steps to enforce our intellectual property rights.
In addition, the validity, enforceability and scope of
protection of intellectual property in Internet-

14



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##### Table of Contents



related industries is uncertain and still
evolving. The laws of other countries in which we may market our
services in the future are uncertain and may afford little or no
effective protection of our intellectual property. The
unauthorized reproduction or other misappropriation of our
proprietary technology could enable third parties to benefit
from our technology and brand name without paying us for them.
If this were to occur, our business could be materially
adversely affected.




| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may face liability from intellectual
    property litigation that could be costly to prosecute or defend
    and distract managements attention with no assurance of
    success.

We cannot be certain that our products, content
and brand names do not or will not infringe valid patents,
copyrights or other intellectual property rights held by third
parties. While we have a trademark for Travelzoo,
many companies in the industry have similar names including the
word travel. We expect that infringement claims in
our markets will increase in number as more participants enter
the markets. We may be subject to legal proceedings and claims
from time to time relating to the intellectual property of
others in the ordinary course of our business. We may incur
substantial expenses in defending against these third party
infringement claims, regardless of their merit, and such claims
could result in a significant diversion of the efforts of our
management personnel. Successful infringement claims against us
may result in monetary liability or a material disruption in the
conduct of our business.



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | We may be liable as a result of information
    retrieved from or transmitted over the Internet.

We may be sued for defamation, negligence,
copyright or trademark infringement or other legal claims
relating to information that is published or made available in
our products. These types of claims have been brought, sometimes
successfully, against online services in the past. The fact that
we distribute information via e-mail may subject us to potential
risks, such as liabilities or claims resulting from unsolicited
e-mail or spamming, lost or misdirected messages, security
breaches, illegal or fraudulent use of e-mail or interruptions
or delays in e-mail service. In addition, we could incur
significant costs in investigating and defending such claims,
even if we ultimately are not liable. If any of these events
occur, our business could be materially adversely affected.






|        |           
|------- | ----------
|Item 2. | Properties

Our principal offices are located in
approximately 3,000 square feet of office space in
New York, New York under an operating lease with HQ
Global Workplaces, Inc. that expires on December 31, 2005.
Our West Coast offices are located in approximately
3,000 square feet of office space in Mountain View,
California under an operating lease with HQ Global Workplaces,
Inc. that expires on December 31, 2005. Our Chicago offices
are located in approximately 2,000 square feet of office
space under an operating lease with Regus Business Centre that
expires on June 30, 2005. Our Miami offices are located in
approximately 1,000 square feet of office space under an
operating lease with Regus Business Centre that expires on
May 31, 2005. We believe that our leased facilities are
adequate to meet our current needs; however, we intend to expand
our operations and therefore may require additional facilities
in the future. We believe that such additional facilities are
available.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From time to time, we are subject to legal
proceedings and claims in the ordinary course of business,
including claims of alleged infringement of trademarks,
copyrights and other intellectual property rights, as well as
claims by former employees. We are not currently aware of any
legal proceedings or claims pending or threatened that we
believe will have, individually or in the aggregate, a material
adverse effect on Travelzoos financial condition or
results of operations.

15



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##### Table of Contents








|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Since December 30, 2003, our common stock
has been quoted on the NASDAQ SmallCap Market under the symbol
TZOO. From August 28, 2002 to December 29,
2003, our common stock was quoted on the OTC Bulletin Board. The
following table sets forth, for the periods indicated, the high
and low sales prices per share of our common stock as reported
by the OTC Bulletin Board and NASDAQ.

|               |  |      |       |  |     |   |      | 
|-------------- |  | ---- | ----- |  | --- | - | ---- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2003:          |  |      |       |  |     |   |      | 
|Fourth Quarter |  | $    | 10.25 |  |     | $ | 4.75 | 
|Third Quarter  |  | $    | 11.00 |  |     | $ | 3.50 | 
|Second Quarter |  | $    | 6.50  |  |     | $ | 3.55 | 
|First Quarter  |  | $    | 5.00  |  |     | $ | 4.00 | 
|2002:          |  |      |       |  |     |   |      | 
|Fourth Quarter |  | $    | 6.50  |  |     | $ | 0.25 | 

On March 26, 2004, the last reported sales
price of the common stock on the NASDAQ SmallCap Market was
$7.93 per share.

Holders

As of December 31, 2003, there were
approximately 129,600 holders of record of the common stock.

Dividend Policy

Travelzoo has not declared or paid any cash
dividends since inception and does not expect to pay cash
dividends for the foreseeable future. We currently intend to
retain future earnings to finance the expansion of our business.
The payment of dividends will be at the discretion of our board
of directors and will depend upon factors such as future
earnings, capital requirements, our financial condition and
general business conditions.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated financial data set
forth below are derived from audited consolidated financial
statements. The following selected consolidated financial data
is qualified in its entirety by, and should be read

16



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##### Table of Contents



in conjunction with, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
the notes thereto included elsewhere herein.


Consolidated Statement of Operations
Data:

|                                                   |  |                                       |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|-------------------------------------------------- |  | ------------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                                   |  |                                      
|                                                   |  | Year Ended December 31,               |       
|                                                   |  |                                       |       
|                                                   |  | 2003                                  |        |  | 2002 |   |        | 2001 |  |   | 2000   |  |  | 1999 |       
|                                                   |  |                                       |        |  |      |   |        |      |  |   |        |  |  |      |       
|                                                   |  |                                      
|                                                   |  | (In thousands, except per share data) |       
|Revenues                                           |  | $                                     | 17,991 |  |      | $ | 9,848  |      |  | $ | 6,148  |  |  | $    | 3,950  |  |  | $ | 954    | 
|Net income                                         |  |                                       | 2,050  |  |      |   | 853    |      |  |   | 364    |  |  |      | 362    |  |  |   | 105    | 
|Net income per share  basic                       |  | $                                     | 0.11   |  |      | $ | 0.04   |      |  | $ | 0.02   |  |  | $    | 0.02   |  |  | $ | 0.01   | 
|Net income per share  diluted                     |  | $                                     | 0.10   |  |      | $ | 0.04   |      |  | $ | 0.02   |  |  | $    | 0.02   |  |  | $ | 0.01   | 
|Shares used in per share calculation 
    basic   |  |                                       | 19,425 |  |      |   | 19,425 |      |  |   | 19,425 |  |  |      | 19,373 |  |  |   | 19,323 | 
|Shares used in per share calculation 
    diluted |  |                                       | 20,527 |  |      |   | 19,896 |      |  |   | 19,425 |  |  |      | 19,467 |  |  |   | 19,355 | 

Consolidated Balance Sheet Data:

|                          |  |              |       |  |      |   |       |      |  |   |       |  |  |      |       |  |  |   |     | 
|------------------------- |  | ------------ | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  |  | - | --- | 
|                          |  |             
|                          |  | December 31, |      
|                          |  |              |      
|                          |  | 2003         |       |  | 2002 |   |       | 2001 |  |   | 2000  |  |  | 1999 |      
|                          |  |              |       |  |      |   |       |      |  |   |       |  |  |      |      
|Cash and cash equivalents |  | $            | 3,522 |  |      | $ | 1,258 |      |  | $ | 610   |  |  | $    | 46    |  |  | $ | 11  | 
|Working capital           |  |              | 3,460 |  |      |   | 1,340 |      |  |   | 425   |  |  |      | 186   |  |  |   | 171 | 
|Total assets              |  |              | 6,726 |  |      |   | 3,240 |      |  |   | 2,131 |  |  |      | 1,556 |  |  |   | 405 | 
|Long-term debt            |  |              |      |  |      |   |      |      |  |   |      |  |  |      |      |  |  |   |    | 
|Stockholders Equity      |  | $            | 3,841 |  |      | $ | 1,791 |      |  | $ | 938   |  |  | $    | 574   |  |  | $ | 194 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of
Travelzoos financial condition and results of operations
should be read in conjunction with, and is qualified in its
entirety by reference to, the consolidated financial statements
and the notes thereto appearing elsewhere in this report.

Overview

Travelzoo Inc. is an Internet media company that
publishes sales and specials for hundreds of travel companies.
As the Internet is becoming consumers preferred medium to
search for travel offers, we provide airlines, hotels, cruise
lines, vacation packagers, and other travel companies with a
fast, flexible, and cost-effective way to reach millions of
users. While our products provide advertising opportunities for
travel companies, they also provide Internet users with a free
source of information on current sales and specials from
hundreds of travel companies. Our products include the
Travelzoo website, the Travelzoo Top 20newsletter, Newsflash, and the Weekend.com
newsletter. More than 300 travel companies purchase our
advertising services.

Our revenues are advertising revenues, consisting
of listing fees paid by travel companies to advertise their
special offers on the Travelzoowebsite and in the
Travelzoo Top 20e-mail newsletter, the Newsflashe-mail product, the Weekend.come-mail newsletter,
and banner advertising sales. Revenues are principally generated
from the sale of advertising on our Travelzoowebsite and
in our Travelzoo Top 20newsletter. Listing fees are
based on placement, number of listings, number of impressions,
or number of clickthroughs. Banner advertising rates are based
on CPM rates (cost per thousand impressions). Smaller
advertising agreements  typically $2,000 or less per
month  typically renew automatically each month if
they are not terminated by the client. Larger agreements are
typically related to advertising campaigns and are not
automatically renewed.

17



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When evaluating the financial condition and
operating performance of the Company, management focuses on the
following financial and non-financial indicators:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | Growth of number of subscribers of the
    Companys newsletters and page views of selected sections
    of the Travelzoowebsite;
|
| |  | Growth in revenues in the absolute and relative
    to the growth in reach of the Companys products;                            
|
| |  | Pre-tax profitability;                                                                                                           
|
| |  | Revenue per employee as a measure of productivity.                                                                               

Critical Accounting Policies

We believe that there are a number of accounting
policies that are critical to understanding our historical and
future performance, as these policies affect the reported
amounts of revenue and the more significant areas involving
managements judgments and estimates. These significant
accounting policies relate to revenue recognition, the allowance
for doubtful accounts and recoverability of intangible assets.
These policies, and our procedures related to these policies,
are described in detail below.

Revenue Recognition

We recognize advertising revenues in the period
in which the advertisement is displayed, provided that evidence
of an arrangement exists, the fees are fixed or determinable, no
significant obligations remain at the end of the period, and
collection of the resulting receivable is deemed probable. If
fixed-fee advertising is displayed over a term greater than one
month, revenues are recognized ratably over the period. To the
extent that any minimum guaranteed impressions are not met
during the contract period, the Company defers recognition of
the corresponding revenues until the guaranteed impressions are
achieved. Fees for banner advertising and other variable-fee
advertising arrangements are recognized based on the number of
impressions displayed or clicks delivered during the period.

Under these policies, no revenue is recognized
unless persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collection
is deemed probable. The Company evaluates each of these criteria
as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an
    arrangement.We consider a
    non-cancelable insertion order signed by the client or its
    agency to be evidence of an arrangement.                                                                                                                                                                                                                                                                                                             
|
| |  | Delivery.Delivery
    is considered to occur when the advertising has been displayed
    and, if applicable, the clickthroughs have been delivered.                                                                                                                                                                                                                                                                                                                  
|
| |  | Fixed or determinable
    fee.We consider the fee to be fixed
    or determinable if the fee is not subject to refund or
    adjustment.                                                                                                                                                                                                                                                                                                                             
|
| |  | Collection is deemed
    probable.We conduct a credit review
    for all significant transactions at the time of the arrangement
    to determine the creditworthiness of the client. Collection is
    deemed probable if we expect that the client will be able to pay
    amounts under the arrangement as payments become due. If we
    determine that collection is not probable, then we defer the
    revenue and recognize the revenue upon cash collection.

Advertising sold to clients through agencies is
generally reported at the net amount billed to the agency.

Allowance for Doubtful Accounts

We initially record a provision for doubtful
accounts based on our historical experience of write-offs and
then adjust this provision at the end of each reporting period
based on a detailed assessment of our accounts receivable and
allowance for doubtful accounts. In estimating the provision for
doubtful accounts, management considers the age of the accounts
receivable, our historical write-offs, the creditworthiness of
the client, the economic conditions of the clients
industry, and general economic conditions, among other factors.

18



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##### Table of Contents



Should any of these factors change, the estimates
made by management will also change, which could impact the
level of our future provision for doubtful accounts.
Specifically, if the financial condition of our clients were to
deteriorate, affecting their ability to make payments,
additional provision for doubtful accounts may be required.


Intangible
Assets

As of December 31, 2003, our long-lived
assets include intangible assets of $147,000. The intangible
assets consist of two Internet domain names which we acquired in
2001: weekend.com and weekends.com. We evaluate the
recoverability of our intangible assets in accordance with
Statement of Financial Accounting Standards No. 144,
Impairment of Long-Lived Assets,when events
or circumstances indicate a potential impairment by estimating
the undiscounted cash flows to be generated from the use of
these assets. No impairment losses were recorded related to
intangible assets in 2003. Any impairment losses recorded in the
future could have a material adverse impact on our financial
conditions and results of operations.

Results of Operations

The following table sets forth, as a percentage
of total revenues, the results of our operations for the years
ended December 31, 2003, 2002 and 2001.

|                           |                            |                          |     |    |      |  |     |      |    |  |     |    |    | 
|-------------------------- | -------------------------- | ------------------------ | --- | -- | ---- |  | --- | ---- | -- |  | --- | -- | -- | 
|                           |                            |                         
|                           |                            | Year Ended               |    
|                           |                            | December 31,             |    
|                           |                            |                          |    
|                           |                            | 2003                     |     |    | 2002 |  |     | 2001 |   
|                           |                            |                          |     |    |      |  |     |      |   
|Revenues                   |                            |                          | 100 | %  |      |  | 100 | %    |    |  | 100 | % 
|Cost of revenues           |                            |                          | 2   |    |      |  | 4   |      |    |  | 5   |   
|                           |                            |                          |     |    |      |  |     |      |   
|                           |                            | Gross profit             |     |    | 98   |  |     |      | 96 |  |     |    | 95 | 
|                           |                            |                          |     |    |      |  |     |      |   
|Operating expenses:        |                            |                          |     |    |      |  |     |      |    |  |     |   
|                           | Sales and marketing        |                          |     | 53 |      |  |     | 58   |    |  |     | 53 |   
|                           | General and administrative |                          |     | 24 |      |  |     | 23   |    |  |     | 22 |   
|                           | Merger expenses            |                          |     |   |      |  |     | 1    |    |  |     | 6  |   
|                           |                            |                          |     |    |      |  |     |      |   
|                           |                            | Total operating expenses |     |    | 77   |  |     |      | 82 |  |     |    | 81 | 
|Income from operations     |                            |                          | 21  |    |      |  | 14  |      |    |  | 14  |   
|                          
|Interest income            |                            |                          |    |    |      |  |    |      |    |  |    |   
|                           |                            |                          |     |    |      |  |     |      |   
|                          
|Income before income taxes |                            |                          | 21  |    |      |  | 14  |      |    |  | 14  |   
|Income taxes               |                            |                          | 10  |    |      |  | 5   |      |    |  | 8   |   
|                           |                            |                          |     |    |      |  |     |      |   
|Net income                 |                            |                          | 11  | %  |      |  | 9   | %    |    |  | 6   | % 
|                           |                            |                          |     |    |      |  |     |      |   

For the year ended December 31, 2003, we
reported pre-tax income of approximately $3.8 million. As
of December 31, 2003, we had retained earnings of
approximately $3.8 million. Pre-tax profitability increased
to 20.9% for the year ended December 31, 2003 from 14.5% in
the previous year. Pre-tax profitability increased because
revenues grew faster than operating expenses.



| |      
| | -----
| | Reach

The following table sets forth the number of
subscribers of each of our e-mail publications as of
December 31, 2003 and 2002 and the total number of page
views for selected sections of the Travelzoowebsite for
the years ended December 31, 2003 and 2002. Management
considers the Travelzoohomepage and the front pages of
destination categories as indicators for the growth of site
traffic. Management reviews these non-

19



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financial metrics for two reasons: First, to
monitor the progress that the Company is making to increase the
reach of its products. Second, to evaluate if the Company is
able to convert higher reach into higher revenues.


|                                                     |                                       |                         |  |            |                |  |  |            |  |  |  |     |  
|---------------------------------------------------- | ------------------------------------- | ----------------------- |  | ---------- | -------------- |  |  | ---------- |  |  |  | --- | -
|                                                     |                                       |                         |  |           
|                                                     |                                       | Year Ended December 31, |  |            |               
|                                                     |                                       |                         |  |            | Year-over-Year | 
|                                                     |                                       | 2003                    |  |            | 2002           |  |  | Growth     | 
|                                                     |                                       |                         |  |            |                |  |  |            | 
|Subscribers:                                         |                                       |                         |  |            |                |  |  |            |  |  |  |    
|                                                     | Travelzoo Top 20                      |                         |  | 6,120,000  |                |  |  | 3,467,000  |  |  |  | 76  | %
|                                                     | Newsflash                             |                         |  | 2,667,000  |                |  |  | 0          |  |  |  | N/A |  
|                                                     | Weekend.com                           |                         |  | 2,220,000  |                |  |  | 726,000    |  |  |  | 305 | %
|Page views of selected sections of Travelzoowebsite: |                                       |                         |  |            |                |  |  |            |  |  |  |    
|                                                     | Homepage                              |                         |  | 21,532,000 |                |  |  | 12,814,000 |  |  |  | 68  | %
|                                                     | Front pages of destination categories |                         |  | 41,025,000 |                |  |  | 28,515,000 |  |  |  | 44  | %

Management believes that the increase in reach of
its products in the year ended December 31, 2003 was in
line with its strategy and goals.

The Companys revenues for the year ended
December 31, 2003 increased by 83% from the previous year.
Substantially all revenues were generated from the Travelzoowebsite and the Travelzoo Top 20newsletter. The
number of subscribers of the Travelzoo Top 20newsletter
increased by 76%. Page views of selected sections of the
Travelzoowebsite increased by 68% and 44%. Management
believes that the data for the years ended December 31,
2003 and 2002 indicate that the Company was able to generate
higher revenues as reach increased.



| |         
| | --------
| | Revenues

Our total revenues increased to
$18.0 million for the year ended December 31, 2003
from $9.8 million for the year ended December 31,
2002. This represents an increase of 83%. Total revenues for the
year ended December 31, 2002 increased to $9.8 million
from $6.1 million for the year ended December 31,
2001. This represents an increase of 60%. The increase in both
years was primarily due to an increase in the number of
advertisers. In addition, the increase was due to an increase in
our advertising rates.

Average revenue per employee increased to
$461,000 for the year ended December 31, 2003 and to
$379,000 for the year ended December 31, 2002 from $324,000
for the year ended December 31, 2001.



| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues consists of network expenses,
including fees we pay for co-location services, depreciation of
network equipment and salary expenses associated with network
operations staff. Our cost of revenues increased to $399,000 for
the year ended December 31, 2003 and to $351,000 for the
year ended December 31, 2002 from $304,000 for the year
ended December 31, 2001. As a percentage of revenue, cost
of revenues decreased to 2% for the year ended December 31,
2003 from 4% for the year ended December 31, 2002 and 5%
for the year ended December 31, 2001. The decreases
resulted primarily from an increase in revenues that was not
offset by an increase in our network operations costs.



| |                   
| | ------------------
| | Operating Expenses



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist primarily of
advertising and promotional expenses, public relations expenses,
conference expenses, and salary expenses associated with sales
and marketing staff. Sales and marketing expenses increased to
$9.6 million for the year ended December 31, 2003 and
to $5.7 million for the year ended December 31, 2002
from $3.3 million for the year ended December 31,
2001. The increase in sales and marketing expenses in both years
was primarily due to increases of our advertising campaigns. The
goal of our advertising was to acquire new subscribers for our
e-mail products and to increase brand awareness for
Travelzoo. For the years ended December 31, 2003,
2002, and 2001, advertising expenses accounted for 71%, 69%, and
69%, respectively, of sales and marketing expenses. Advertising
activities during these three year periods consisted primarily
of online advertising. The increase in sales and marketing
expenses in the years

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ended December 31, 2003 and 2002 was also
due to an increase of our sales force and our decision to hire
more experienced sales personnel.




| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist
primarily of compensation for administrative and executive
staff, fees for professional services, rent, bad debt expense,
amortization of intangible assets and general office expense.
General and administrative expenses increased to
$4.3 million for the year ended December 31, 2003 and
to $2.3 million for the year ended December 31, 2002
from $1.4 million for the year ended December 31,
2001. General and administrative expenses increased primarily
due to increases in expenses for office space and legal and
professional services which included non-recurring and non-tax
deductible expenses of $328,000 related to the secondary
offering that was completed in October 2003. General and
administrative expenses for the year ended December 31,
2001 include a credit of $128,000 for a reduction to the bad
debt reserve principally due to the collection of a doubtful
account.



| |                
| | ---------------
| | Merger Expenses

Merger expenses consist of expenses relating to
the registration statement and proxy statement filed with the
SEC relating to the merger of Travelzoo.com Corporation into
Travelzoo Inc. which was completed in 2002. As a result,
merger expenses decreased to $-0- for the year ended
December 31, 2003 from $55,000 for the year ended
December 31, 2002 and $333,000 for the year ended
December 31, 2001. The expenses consisted mostly of fees
for professional services, primarily legal and accounting.



| |             
| | ------------
| | Income Taxes

For the year ended December 31, 2003, we
recorded an income tax provision of $1.7 million. For the
years ended December 31, 2002 and 2001, we recorded income
tax provisions of $573,000 and $521,000, respectively. Our
income is generally taxed in the U.S. and our income tax
provisions reflect federal and state statutory rates applicable
to our levels of income and the effect of non-deductible
offering costs and merger expenses in 2003, 2002, and 2001. The
effective tax rates for 2003, 2002, and 2001 were 45%, 40%, and
59%, respectively.

Liquidity and Capital Resources

As of December 31, 2003, we had
$3.5 million in cash and cash equivalents. Cash and cash
equivalents increased from $1.3 million on
December 31, 2002 primarily as a result of cash provided by
operations explained below. Cash and cash equivalents increased
to $1.3 million on December 31, 2002 from $610,000 on
December 31, 2001 primarily as a result of cash provided by
operations explained below. We expect that cash flows generated
from operations will continue to be sufficient to provide for
working capital needs for at least the next 12 months.

Net cash provided by operating activities in the
year ended December 31, 2003 was $2.4 million. Net
cash provided by operating activities in the year ended
December 31, 2002 was $769,000. Net cash provided by
operating activities in the year ended December 31, 2001
was $771,000. In the year ended December 31, 2003, net cash
provided by operating activities resulted primarily from net
income and a net increase in income tax payable and accrued
expenses offset by an increase in accounts receivable. In the
year ended December 31, 2002, net cash provided by
operating activities resulted primarily from net income and an
increase in accounts payable and accrued expenses offset by
income tax payments and an increase in accounts receivable. In
the year ended December 31, 2001, net cash provided by
operating activities resulted primarily from our net income,
adjusted for certain non-cash items, and a decrease in prepaid
expenses offset by increase in deposits.

Net cash used in investing activities was
$120,000, $121,000 and $156,000 during the years ended
December 31, 2003, 2002 and 2001, respectively. In all
periods, net cash was used in investing activities for equipment
purchases, except for 2001, which included $125,000 for the
purchase of a domain name.

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There were no cash flows related to financing
activities in the years ended December 31, 2003 and 2002.
Net cash used in financing activities was $50,000 for the year
ended December 31, 2001. In the year ended
December 31, 2001, net cash was used in financing
activities for repayment of a loan made to Travelzoo by Ralph
Bartel, its principal stockholder.

Our capital requirements depend on a number of
factors, including market acceptance of our products and
services, the amount of our resources we devote to the
Travelzoowebsite, the Travelzoo Top 20newsletter, Newsflash, the Weekend.comnewsletter and expansion of our operations and the amount of
our resources we devote to promoting awareness of the
Travelzoobrand. Consistent with our growth, we have
experienced a substantial increase in our sales and marketing
expenses and capital expenditures since inception, and we
anticipate that these increases will continue for the
foreseeable future. We believe cash on hand and generated during
those periods will be sufficient to pay such costs. In addition,
we will continue to evaluate possible investments in businesses,
products and technologies, the consummation of any of which
would increase our capital requirements.

Although we currently believe that we have
sufficient capital resources to meet our anticipated working
capital and capital expenditure requirements beyond the next
12 months, unanticipated events and opportunities may
require us to sell additional equity or debt securities or
establish new credit facilities to raise capital in order to
meet our capital requirements. If we sell additional equity or
convertible debt securities, the sale could dilute the ownership
of our existing stockholders. If we issue debt securities or
establish a new credit facility, our fixed obligations could
increase, and we may be required to agree to operating covenants
that would restrict our operations. We cannot be sure that any
such financing will be available in amounts or on terms
acceptable to us.

The following summarizes our principal
contractual commitments as of December 31, 2003 (in
thousands):

|                     |  |      |     |  |      |   |     |      |  |  |      |  |  |      |   |  |            |  |   |       |  |  |   |  |  |   |     | 
|-------------------- |  | ---- | --- |  | ---- | - | --- | ---- |  |  | ---- |  |  | ---- | - |  | ---------- |  | - | ----- |  |  | - |  |  | - | --- | 
|                     |  | 2004 |     |  | 2005 |   |     | 2006 |  |  | 2007 |  |  | 2008 |   |  | Thereafter |  |   | Total | 
|                     |  |      |     |  |      |   |     |      |  |  |      |  |  |      |   |  |            |  |   |       | 
|Operating leases     |  | $    | 578 |  |      | $ | 249 |      |  |  |     |  |  |      |  |  |            |  |  |       |  |  |  |  |  | $ | 827 | 
|Purchase obligations |  |      | 52  |  |      |   |    |      |  |  |     |  |  |      |  |  |            |  |  |       |  |  |  |  |  |   | 52  | 
|                     |  |      |     |  |      |   |     |      |  |  |      |  |  |      |   |  |            |  |   |       | 
|Total commitments    |  | $    | 630 |  |      | $ | 249 |      |  |  |     |  |  |      |  |  |            |  |  |       |  |  |  |  |  | $ | 879 | 
|                     |  |      |     |  |      |   |     |      |  |  |      |  |  |      |   |  |            |  |   |       | 

Recent Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with
retirement of tangible long-lived assets and the associated
retirement costs. SFAS No. 143 became effective for
the Company beginning in 2003 and the adoption of this statement
did not have a material impact on our consolidated financial
statements.

In April 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.
SFAS No. 145 rescinds the requirement that all gains
and losses from extinguishment of debt be classified as an
extraordinary item. Additionally, SFAS No. 145
requires that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions.
SFAS No. 145 became effective for the Company
beginning in 2003 and the adoption did not have a material
impact on our consolidated financial statements.

In July 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This Statement requires recording costs
associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements
commitment to an exit plan, which is generally before an actual
liability has been incurred. The requirements of this Statement
became effective prospectively for exit or disposal activities
initiated after December 31, 2002; however, early
application of the Statement was encouraged. Our adoption of
this statement did not have a material impact on our
consolidated financial statements.

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In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of
Indebtedness of Others(FIN 45).
FIN 45 requires us to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in the issuance of the guarantee. The disclosure
requirements effective for the year ending December 31,
2002, expand the disclosures required by a guarantor about its
obligation under a guarantee. The accounting requirements for
the initial recognition of guarantees became applicable for
guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on our
consolidated financial statements.

In December 2002, the Emerging Issues Task Force
reached a consensus on Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables (EITF
Issue 00-21). ETTF Issue 00-21 mandates how to
identify whether goods or services, or both, that are to be
delivered separately in a bundled sales arrangement should be
accounted for as separate units of accounting. The consensus is
effective prospectively for our third quarter of 2003. We
evaluated the guidance in EITF Issue 00-21 and concluded
that our advertising arrangements should continue to be
accounted for as a single unit of accounting. As a result, the
adoption of EITF Issue 00-21 did not have a material impact
on our revenue recognition policies or consolidated financial
statements.

In December 2003, the FASB issued Interpretation
No. 46 (FIN 46R) (revised December 2003),
Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(ARB 51), which addresses how a business
enterprise should evaluate whether it has a controlling interest
in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46 (FIN 46) ,
which was issued in January 2003. Before concluding that it is
appropriate to apply ARB 51 voting interest consolidation model
to an entity, an enterprise must first determine that the entity
is not a variable interest entity (VIE). As of the effective
date of FIN 46R, an enterprise must evaluate its
involvement with all entities or legal structures created before
February 1, 2003, to determine whether consolidation
requirements of FIN 46R apply to those entities. There is
no grandfathering of existing entities. Public companies must
apply either FIN 46 or FIN 46R immediately to entities
created after December 15, 2003 and no later than the end
of the first reporting period that ends after March 15,
2004 for all other entities. The adoption of FIN 46R is not
expected to have an effect on our consolidated financial
statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity (SFAS 150) that establishes
standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first
interim period beginning after June 15, 2003. On
November 7, 2003, Financial Accounting Standards Board
Staff Position 150-3 was issued, which indefinitely deferred the
effective date of SFAS 150 for certain mandatory redeemable
non-controlling interests. The adoption of SFAS 150 had no
effect on our consolidated financial statements.

The Company adopted the new disclosure
requirements of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure, during the quarter ended March 31, 2003.
The adoption of the disclosure requirements of this statement
did not have an impact on the Companys financial position,
results of operations or cash flows.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company has no outstanding debt, is not a
party to any derivatives transactions, and does not have any
other material liabilities or assets which are subject to risks
relating to interest rates, currency exchange rates, commodity
price risks or other market risks.

23



---



##### Table of Contents






Item 8.Consolidated
Financial Statements

TRAVELZOO INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                    |  |      |    | 
|--------------------------------------------------- |  | ---- | -- | 
|                                                    |  | Page |   
|                                                    |  |      |   
|Independent Auditors Report                        |  |      | 25 | 
|Consolidated Balance Sheets                         |  |      | 26 | 
|Consolidated Statements of Operations               |  |      | 27 | 
|Consolidated Statements of Stockholders
    Equity |  |      | 28 | 
|Consolidated Statements of Cash Flows               |  |      | 29 | 
|Notes to Consolidated Financial Statements          |  |      | 30 | 

24



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders

Travelzoo Inc.


We have audited the accompanying consolidated
balance sheets of Travelzoo Inc. and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits 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 audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Travelzoo Inc. and
subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.



| |             
| | ------------
| | /s/ KPMG LLP

Mountain View, California


January 25, 2004


25



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##### Table of Contents



TRAVELZOO INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                      |                                            |         |           |           |  |         |           |           | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------- | --------- |  | ------- | --------- | --------- | 
|                                         |                                                                                                                                                      |                                           
|                                         |                                                                                                                                                      | December 31,                               |        
|                                         |                                                                                                                                                      |                                            |        
|                                         |                                                                                                                                                      | 2003                                       |         |           | 2002      | 
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|ASSETS                                  
|Current assets:                          |                                                                                                                                                      |                                            |         |           |           |  |         |          
|                                         | Cash and cash equivalents                                                                                                                            |                                            | $       | 3,521,637 |           |  | $       | 1,258,273 |          
|                                         | Accounts receivable, less allowance for doubtful
    accounts of $71,459 and $55,925 as of December 31, 2003 and
    December 31, 2002, respectively |                                            |         | 2,369,915 |           |  |         | 1,311,399 |          
|                                         | Deposits                                                                                                                                             |                                            |         | 97,086    |           |  |         | 22,339    |          
|                                         | Prepaid expenses and other current assets                                                                                                            |                                            |         | 131,618   |           |  |         | 114,909   |          
|                                         | Deferred income taxes                                                                                                                                |                                            |         | 225,270   |           |  |         | 81,313    |          
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                         |                                                                                                                                                      | Total current assets                       |         |           | 6,345,526 |  |         |           | 2,788,233 | 
|Deposits                                 |                                                                                                                                                      |                                            | 42,525  |           |           |  | 64,923  |          
|Deferred income taxes                    |                                                                                                                                                      |                                            | 27,552  |           |           |  | 32,054  |          
|Property and equipment, net              |                                                                                                                                                      |                                            | 164,034 |           |           |  | 142,091 |          
|Intangible assets, net                   |                                                                                                                                                      |                                            | 146,793 |           |           |  | 212,293 |          
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                         |                                                                                                                                                      | Total assets                               |         | $         | 6,726,430 |  |         | $         | 3,239,594 | 
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                      |                                            |         |           |           |  |         |          
|                                         | Accounts payable                                                                                                                                     |                                            | $       | 223,627   |           |  | $       | 442,349   |          
|                                         | Accrued expenses                                                                                                                                     |                                            |         | 1,328,537 |           |  |         | 547,680   |          
|                                         | Deferred revenue                                                                                                                                     |                                            |         | 22,312    |           |  |         | 19,179    |          
|                                         | Income tax payable                                                                                                                                   |                                            |         | 1,310,874 |           |  |         | 439,432   |          
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                         |                                                                                                                                                      | Total liabilities                          |         |           | 2,885,350 |  |         |           | 1,448,640 | 
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|Commitments                              |                                                                                                                                                      |                                            |         |           |           |  |         |          
|Stockholders equity:                    |                                                                                                                                                      |                                            |         |           |           |  |         |          
|                                         | Preferred stock, $0.01 par value;
    5,000,000 shares authorized                                                                                    |                                            |         |          |           |  |         |          |          
|                                         | Common stock, $0.01 par value;
    40,000,000 shares authorized, 19,425,147 shares
    reported as outstanding both years                            |                                            |         | 194,251   |           |  |         | 194,251   |          
|                                         | Additional paid-in capital                                                                                                                           |                                            |         | (116,078  | )         |  |         | (116,078  | )        
|                                         | Retained earnings                                                                                                                                    |                                            |         | 3,762,907 |           |  |         | 1,712,781 |          
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                         |                                                                                                                                                      | Total stockholders equity                 |         |           | 3,841,080 |  |         |           | 1,790,954 | 
|                                         |                                                                                                                                                      |                                            |         |           |           | 
|                                         |                                                                                                                                                      | Total liabilities and stockholders equity |         | $         | 6,726,430 |  |         | $         | 3,239,594 | 
|                                         |                                                                                                                                                      |                                            |         |           |           | 

See accompanying notes to consolidated financial
statements

26



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##### Table of Contents



TRAVELZOO INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                           |                                                           |                          |            |            |            |   |           |            |           |   |           |            |           | 
|-------------------------- | --------------------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | --------- | ---------- | --------- | - | --------- | ---------- | --------- | 
|                           |                                                           |                         
|                           |                                                           | Years Ended December 31, |           
|                           |                                                           |                          |           
|                           |                                                           | 2003                     |            |            | 2002       |   |           | 2001       |          
|                           |                                                           |                          |            |            |            |   |           |            |          
|Revenues                   |                                                           | $                        | 17,991,241 |            |            | $ | 9,847,820 |            |           | $ | 6,147,938 |           
|Cost of revenues           |                                                           |                          | 399,039    |            |            |   | 351,169   |            |           |   | 304,081   |           
|                           |                                                           |                          |            |            |            |   |           |            |          
|                           |                                                           | Gross profit             |            |            | 17,592,202 |   |           |            | 9,496,651 |   |           |            | 5,843,857 | 
|                           |                                                           |                          |            |            |            |   |           |            |          
|Operating expenses:        |                                                           |                          |            |            |            |   |           |            |           |   |           |           
|                           | Sales and marketing                                       |                          |            | 9,564,384  |            |   |           | 5,726,557  |           |   |           | 3,274,747  |          
|                           | General and administrative                                |                          |            | 4,288,985  |            |   |           | 2,293,846  |           |   |           | 1,354,088  |          
|                           | Merger expenses                                           |                          |            |           |            |   |           | 54,538     |           |   |           | 332,721    |          
|                           |                                                           |                          |            |            |            |   |           |            |          
|                           |                                                           | Total operating expenses |            |            | 13,853,369 |   |           |            | 8,074,941 |   |           |            | 4,961,556 | 
|                           |                                                           |                          |            |            |            |   |           |            |          
|Income from operations     |                                                           |                          | 3,738,833  |            |            |   | 1,421,710 |            |           |   | 882,301   |           
|Interest income            |                                                           |                          | 13,192     |            |            |   | 3,971     |            |           |   | 2,702     |           
|                           |                                                           |                          |            |            |            |   |           |            |          
|Income before income taxes |                                                           |                          | 3,752,025  |            |            |   | 1,425,681 |            |           |   | 885,003   |           
|Income taxes               |                                                           |                          | 1,701,899  |            |            |   | 572,610   |            |           |   | 521,268   |           
|                           |                                                           |                          |            |            |            |   |           |            |          
|Net income                 |                                                           | $                        | 2,050,126  |            |            | $ | 853,071   |            |           | $ | 363,735   |           
|                           |                                                           |                          |            |            |            |   |           |            |          
|Net income per share:      |                                                           |                          |            |            |            |   |           |            |           |   |           |           
|                           | Basic net income per share                                |                          | $          | 0.11       |            |   | $         | 0.04       |           |   | $         | 0.02       |          
|                           |                                                           |                          |            |            |            |   |           |            |          
|                           | Diluted net income per share                              |                          | $          | 0.10       |            |   | $         | 0.04       |           |   | $         | 0.02       |          
|                           |                                                           |                          |            |            |            |   |           |            |          
|                           | Shares used in computing basic net income per
    share   |                          |            | 19,425,147 |            |   |           | 19,425,147 |           |   |           | 19,425,147 |          
|                           |                                                           |                          |            |            |            |   |           |            |          
|                           | Shares used in computing diluted net income per
    share |                          |            | 20,526,951 |            |   |           | 19,896,353 |           |   |           | 19,425,147 |          
|                           |                                                           |                          |            |            |            |   |           |            |          

See accompanying notes to consolidated financial
statements

27



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##### Table of Contents



TRAVELZOO INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Years Ended December 31, 2003, 2002 and
2001


|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |           |  |  |   |           | 
|--------------------------- |  | ------------ | ---------- |  | ---------- | - | ------- | -------- |  | ----- | ------------- | - |  | ------ | --------- |  |  | - | --------- | 
|                            |  |              |            |  |            |   |         |         
|                            |  | Common Stock |            |  | Additional |   |         |          |  | Total |              
|                            |  |              |            |  | Paid-in    |   |         | Retained |  |       | Stockholders |  
|                            |  | Shares       |            |  | Amount     |   |         | Capital  |  |       | Earnings      |   |  | Equity |          
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Balances, December 31, 2000 |  |              | 19,425,147 |  |            |   | 194,251 |          |  |       | (116,078      | ) |  |        | 495,975   |  |  |   | 574,148   | 
|Net income                  |  |              |           |  |            |   |        |          |  |       |              |   |  |        | 363,735   |  |  |   | 363,735   | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Balances, December 31, 2001 |  |              | 19,425,147 |  |            |   | 194,251 |          |  |       | (116,078      | ) |  |        | 859,710   |  |  |   | 937,883   | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Net income                  |  |              |           |  |            |   |        |          |  |       |              |   |  |        | 853,071   |  |  |   | 853,071   | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Balances, December 31, 2002 |  |              | 19,425,147 |  |            |   | 194,251 |          |  |       | (116,078      | ) |  |        | 1,712,781 |  |  |   | 1,790,954 | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Net income                  |  |              |           |  |            |   |        |          |  |       |              |   |  |        | 2,050,126 |  |  |   | 2,050,126 | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          
|Balances, December 31, 2003 |  |              | 19,425,147 |  |            | $ | 194,251 |          |  | $     | (116,078      | ) |  | $      | 3,762,907 |  |  | $ | 3,841,080 | 
|                            |  |              |            |  |            |   |         |          |  |       |               |   |  |        |          

See accompanying notes to consolidated financial
statements

28



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##### Table of Contents



TRAVELZOO INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |          |         |          |  
|------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------- | --------- | -------- | ---------- | --------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | -
|                                                  |                                                                                       |                                             
|                                                  |                                                                                       | Years Ended December 31,                     |                                                
|                                                  |                                                                                       |                                              |                                                
|                                                  |                                                                                       | 2003                                         |                                                 |           | 2002     |            |           | 2001     |        
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Cash flows from operating
    activities:         |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |         
|                                                  | Net income                                                                            |                                              | $                                               | 2,050,126 |          |            | $         | 853,071  |         |          | $       | 363,735  |        
|                                                  | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |                                                 |           |          |            |           |          |         |          |         |          |        
|                                                  |                                                                                       | Depreciation and amortization                |                                                 |           | 163,284  |            |           |          | 194,373 |          |         |          | 138,628 |         
|                                                  |                                                                                       | Deferred income taxes                        |                                                 |           | (139,455 | )          |           |          | (33,018 | )        |         |          | 28,196  |         
|                                                  |                                                                                       | Provision for losses on accounts receivable  |                                                 |           | 15,534   |            |           |          | 14,571  |          |         |          | (88,507 | )       
|                                                  |                                                                                       | Loss on disposal of property and equipment   |                                                 |           | 415      |            |           |          |        |          |         |          | 567     |         
|                                                  |                                                                                       | Non-cash revenues                            |                                                 |           |         |            |           |          | (3,410  | )        |         |          | (16,449 | )       
|                                                  |                                                                                       | Changes in operating assets and liabilities: |                                                 |           |          |            |           |          |         |          |         |          |         |         
|                                                  |                                                                                       |                                              | Accounts receivable                             |           |          | (1,074,050 | )         |          |         | (433,633 | )       |          |         | (19,870  | )
|                                                  |                                                                                       |                                              | Deposits                                        |           |          | (52,349    | )         |          |         | (54,754  | )       |          |         | 78,244   |  
|                                                  |                                                                                       |                                              | Prepaid expenses and other current assets       |           |          | (16,709    | )         |          |         | (96,730  | )       |          |         | 92,819   |  
|                                                  |                                                                                       |                                              | Accounts payable                                |           |          | (218,722   | )         |          |         | 266,998  |         |          |         | (1,541   | )
|                                                  |                                                                                       |                                              | Accrued expenses                                |           |          | 780,857    |           |          |         | 263,362  |         |          |         | 60,839   |  
|                                                  |                                                                                       |                                              | Deferred revenue                                |           |          | 3,133      |           |          |         | 5,295    |         |          |         | 11,384   |  
|                                                  |                                                                                       |                                              | Income tax payable                              |           |          | 871,442    |           |          |         | (207,025 | )       |          |         | 122,653  |  
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|                                                  |                                                                                       |                                              | Net cash provided by operating activities       |           |          | 2,383,506  |           |          |         | 769,100  |         |          |         | 770,698  |  
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Cash flows from investing
    activities:         |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |         
|                                                  | Purchases of property and equipment                                                   |                                              |                                                 | (120,142  | )        |            |           | (120,746 | )       |          |         | (31,365  | )      
|                                                  | Purchases of intangible assets                                                        |                                              |                                                 |          |          |            |           |         |         |          |         | (125,000 | )      
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|                                                  |                                                                                       |                                              | Net cash used in investing activities           |           |          | (120,142   | )         |          |         | (120,746 | )       |          |         | (156,365 | )
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Cash flows from financing
    activities:         |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |         
|                                                  | Repayment of loans from principal stockholder                                         |                                              |                                                 |          |          |            |           |         |         |          |         | (50,000  | )      
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|                                                  |                                                                                       |                                              | Cash (used in) provided by financing activities |           |          |           |           |          |         |         |         |          |         | (50,000  | )
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Net increase in cash and cash equivalents         |                                                                                       |                                              | 2,263,364                                       |           |          |            | 648,354   |          |         |          | 564,333 |         
|Cash and cash equivalents at beginning of year    |                                                                                       |                                              | 1,258,273                                       |           |          |            | 609,919   |          |         |          | 45,586  |         
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Cash and cash equivalents at end of year          |                                                                                       | $                                            | 3,521,637                                       |           |          | $          | 1,258,273 |          |         | $        | 609,919 |         
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Supplemental disclosure of cash flow information: |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |         
|                                                  | Cash paid for income taxes net of refunds received                                    |                                              | $                                               | 969,912   |          |            | $         | 812,653  |         |          | $       | 385,102  |        
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|Non cash investing activities:                    |                                                                                       |                                              |                                                 |           |          |            |           |          |         |          |         |         
|                                                  | Intangible asset acquired for future advertising
    Services                         |                                              | $                                               |          |          |            | $         |         |         |          | $       | 89,286   |        
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        
|                                                  | Reduction in carry amounts of intangible asset
    and deferred revenue               |                                              | $                                               |          |          |            | $         | (69,427  | )       |          | $       |         |        
|                                                  |                                                                                       |                                              |                                                 |           |          |            |           |          |        

See accompanying notes to consolidated financial
statements

29



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##### Table of Contents



TRAVELZOO INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002, and
2001




|    |                                               
|--- | ----------------------------------------------
|(1) | Summary of Significant Accounting
    Policies



|    |                                          
|--- | -----------------------------------------
|(a) | The Company and Basis of
    Presentation

Travelzoo Inc. is an Internet media company that
publishes sales and specials for hundreds of travel companies.
The Companys products include the Travelzoowebsite, the Travelzoo Top 20e-mail newsletter, the
Newsflashe-mail product, and the Weekend.come-mail newsletter.

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.

The Company was formed as a result of a
combination and merger of entities founded by the Companys
majority stockholder, Mr. Ralph Bartel. In 1998,
Mr. Bartel founded Travelzoo.com Corporation, a Bahamas
corporation, which also issued 5,155,874 shares via the
Internet to approximately 700,000 stockholders (the
Netsurfer stockholders) for no cash consideration. In
1998, Mr. Bartel also founded Silicon Channels Corporation,
a California corporation, to operate the Travelzoowebsite. During 2001, Travelzoo Inc. was formed as a
subsidiary of Travelzoo.com Corporation, and Mr. Bartel
contributed all of the outstanding shares of Silicon Channels to
Travelzoo Inc. in exchange for 8,129,273 shares of
Travelzoo Inc. and options to acquire an additional
2,158,349 shares at $1.00. The merger was accounted for as
a combination of entities under common control using as-if
pooling-of-interests accounting. Under this method of
accounting, the assets and liabilities of Silicon Channels
Corporation and Travelzoo Inc. were carried forward to the
combined company at their historical costs. In addition, all
prior period financial statements of Travelzoo Inc. were
restated to include the combined results of operations,
financial position and cash flows of Silicon Channels
Corporation.

During January 2001, the Board of Directors of
Travelzoo.com Corporation proposed that Travelzoo.com
Corporation be merged with Travelzoo Inc. whereby Travelzoo Inc.
would be the surviving entity. On March 15, 2002, the
stockholders of Travelzoo.com Corporation approved the merger
with Travelzoo Inc. On April 25, 2002, the certificate of
merger was filed in Delaware upon which the merger became
effective and Travelzoo.com Corporation ceased to exist. Each
outstanding share of common stock of Travelzoo.com Corporation
was converted into the right to receive one share of common
stock of Travelzoo Inc. Stockholders have a period of two years
following the effective date of the merger, April 25, 2002,
to receive shares of Travelzoo Inc. Travelzoo.com Corporation
had 11,295,874 shares outstanding. As of December 31,
2003, 7,164,760 shares of Travelzoo.com Corporation had
been exchanged for shares of Travelzoo Inc. The remaining
4,131,114 shares of Travelzoo Inc. that may be exchanged
are included in the issued and outstanding common stock of
Travelzoo Inc. and earnings per share calculations. The merger
was accounted for as a combination of entities under common
control using as-if pooling-of-interests accounting.
Under this method of accounting, the assets and liabilities of
Travelzoo.com Corporation and Travelzoo Inc. were carried
forward at their historical costs. In addition, all prior period
financial statements of Travelzoo Inc. were restated to include
the combined results of operations, financial position and cash
flows of Travelzoo.com Corporation. The restated results of
operations and cash flows of Travelzoo Inc. are identical to the
combined results of Travelzoo.com Corporation and Travelzoo Inc.



|    |                    
|--- | -------------------
|(b) | Revenue Recognition

Substantially all revenue consists of advertising
sales. Advertising revenues are derived principally from the
sale of advertising on the Travelzoo website and in the
Travelzoo Top 20e-mail newsletter.

Advertising revenues are recognized in the period
in which the advertisement is displayed, provided that evidence
of an arrangement exists, the fees are fixed or determinable, no
significant obligations remain at the end of the period, and
collection of the resulting receivable is deemed probable. Where
collectibility is not probable, the revenue will be recognized
upon cash collection, provided that the other criteria for
revenue

30



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recognition have been met. If fixed-fee
advertising is displayed over a term greater than one month,
revenues are recognized ratably over the period. To the extent
that any minimum guaranteed impressions are not met during the
contract period, the Company defers recognition of the
corresponding revenues until the guaranteed impressions are
achieved. Fees for banner advertising and other variable-fee
advertising arrangements are recognized based on the number of
impressions displayed or clicks delivered during the period.

The Company had outsourced part of its
advertising sales and production activities to
DoubleClick, Inc. (DoubleClick). Under the
terms of the agreement with DoubleClick, the Company received a
portion of the revenue received by DoubleClick from customers
for the display of advertising on the Travelzoowebsite.
The Company recorded these revenues on a net basis. The gross
revenue received by DoubleClick from advertising on the
Travelzoowebsite was $-0-, $82,939 and $600,454 for the
years ended December 31, 2003, 2002, and 2001 respectively.
The Companys share of this income, which has been recorded
as revenue, was $-0-, $38,354 and $332,736 for the years ended
December 31, 2003, 2002, and 2001 respectively. The
agreement with DoubleClick was canceled as of August 23,
2002.

Advertising sold to clients through agencies is
generally reported at the net amount billed to the agency.



|    |                     
|--- | --------------------
|(c) | Net Income Per Share

Net income per share has been calculated in
accordance with SFAS No. 128, Earnings per
Share. Basic net income per share is computed using the
weighted-average number of common shares outstanding for the
period, including shares reserved for issuance to former
shareholders of Travelzoo.com Corporation reported as
outstanding. Diluted net income per share is computed by
adjusting the weighted-average number of common shares
outstanding for the effect of potential common shares
outstanding during the period. Potential common shares included
in the diluted calculation consist of incremental shares
issuable upon the exercise of outstanding stock options
calculated using the treasury stock method.

The following table sets forth the calculation of
basic and diluted income per share:

|                              |                                                         |                              |   |            |      |  |   |            |      |  |   |            |      | 
|----------------------------- | ------------------------------------------------------- | ---------------------------- | - | ---------- | ---- |  | - | ---------- | ---- |  | - | ---------- | ---- | 
|                              |                                                         |                             
|                              |                                                         | Year Ended December 31,      |  
|                              |                                                         |                              |  
|                              |                                                         | 2003                         |   |            | 2002 |  |   | 2001       |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|Basic net income per share:   |                                                         |                              |   |            |      |  |   |            |      |  |   |           
|                              | Net income                                              |                              | $ | 2,050,126  |      |  | $ | 853,071    |      |  | $ | 363,735    |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|                              | Weighted average common shares                          |                              |   | 19,425,147 |      |  |   | 19,425,147 |      |  |   | 19,425,147 |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|                              |                                                         | Basic net income per share   |   | $          | 0.11 |  |   | $          | 0.04 |  |   | $          | 0.02 | 
|                              |                                                         |                              |   |            |      |  |   |            |     
|Diluted net income per share: |                                                         |                              |   |            |      |  |   |            |      |  |   |           
|                              | Net income                                              |                              | $ | 2,050,126  |      |  | $ | 853,071    |      |  | $ | 363,735    |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|                              | Weighted average common shares                          |                              |   | 19,425,147 |      |  |   | 19,425,147 |      |  |   | 19,425,147 |     
|                              | Effect of potential common shares                       |                              |   | 1,101,804  |      |  |   | 471,206    |      |  |   |           |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|                              | Weighted average common and potential common
    shares |                              |   | 20,526,951 |      |  |   | 19,896,353 |      |  |   | 19,425,147 |     
|                              |                                                         |                              |   |            |      |  |   |            |     
|                              |                                                         | Diluted net income per share |   | $          | 0.10 |  |   | $          | 0.04 |  |   | $          | 0.02 | 
|                              |                                                         |                              |   |            |      |  |   |            |     

For the year ended December 31, 2001, all
outstanding stock options were excluded from the calculation of
diluted earnings per share because their effect was antidilutive.

31



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                 
|--- | ----------------
|(d) | Use of Estimates

Management of the Company have made a number of
estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial
statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could
differ from those estimates.



|    |                       
|--- | ----------------------
|(e) | Property and Equipment

Property and equipment consisted of the following:

|                               |  |              |         |  |      |   |         | 
|------------------------------ |  | ------------ | ------- |  | ---- | - | ------- | 
|                               |  |             
|                               |  | December 31, |        
|                               |  |              |        
|                               |  | 2003         |         |  | 2002 |  
|                               |  |              |         |  |      |  
|Computer hardware and software |  | $            | 316,837 |  |      | $ | 249,801 | 
|Office equipment               |  |              | 193,722 |  |      |   | 141,266 | 
|                               |  |              |         |  |      |  
|                               |  |              | 510,559 |  |      |   | 391,067 | 
|Less accumulated depreciation  |  |              | 346,525 |  |      |   | 248,976 | 
|                               |  |              |         |  |      |  
|Total                          |  | $            | 164,034 |  |      | $ | 142,091 | 
|                               |  |              |         |  |      |  

Property and equipment are stated at cost less
accumulated depreciation. Additions, improvements and major
renewals are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. Depreciation is provided
using the straight-line method over the estimated useful lives
of the assets. Estimated useful lives are 3 years for
property and equipment.



|    |                  
|--- | -----------------
|(f) | Intangible Assets

Intangible assets consist of the following:

|                                      |  |              |         |  |      |   |         | 
|------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                      |  |             
|                                      |  | December 31, |        
|                                      |  |              |        
|                                      |  | 2003         |         |  | 2002 |  
|                                      |  |              |         |  |      |  
|Acquired amortized intangible assets: |  |              |         |  |      |   |         | 
|Internet domain names                 |  | $            | 344,857 |  |      | $ | 344,857 | 
|Less accumulated amortization         |  |              | 198,064 |  |      |   | 132,564 | 
|                                      |  |              |         |  |      |  
|Total                                 |  | $            | 146,793 |  |      | $ | 212,293 | 
|                                      |  |              |         |  |      |  

Amortization expense was $65,500, $78,518 and
$50,714 for the years ended December 31, 2003, 2002 and
2001, respectively.

In October 2001, the Company completed the
acquisition of the weekends.com domain name. As consideration
for the purchase, the Company paid the seller $125,000 and
agreed to provide a minimum number of clicks to the
sellers other websites through advertising placed on the
Travelzoowebsite. The fair value of the advertising
services of $89,286 was determined based on the cash price of
similar advertising services and recorded as deferred revenue.
The revenue was recognized as the clicks were delivered. During
the years ended December 31, 2002 and 2001, $3,410 and
$16,449, respectively, of revenues related to this arrangement
were recognized. The agreement with the seller to provide
advertising services expired on September 30, 2002. As
such, $69,427 of advertising was not delivered and the carrying
amounts of the intangible asset and related deferred revenue
were reduced accordingly.

32



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Estimated future amortization expense related to
intangible assets at December 31, 2003 is as follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2004 |  |   | 65,500  | 
|2005 |  |   | 62,167  | 
|2006 |  |   | 19,126  | 
|     |  |   |        
|     |  | $ | 146,793 | 
|     |  |   |        

(g) Cash
and Cash Equivalents

Cash equivalents consist of highly liquid
investments with remaining maturities of less than three months
on the date of purchase. As of December 31, 2003 and 2002,
cash equivalents are comprised of $2,540,395 and $527,258,
respectively, held in money market accounts.

(h) Advertising
Costs

Advertising costs amounted to $6,745,769,
$3,960,464 and $2,264,488 for the years ended December 31,
2003, 2002, and 2001, respectively. During the years ended
December 31, 2003, 2002 and 2001, $429,296, $546,214 and
$492,672, respectively, of advertising services were purchased
from the Companys clients under non-barter arrangements.

(i) Income
Taxes

Income taxes are accounted for under the asset
and liability method. Deferred 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 bases.
Deferred tax assets are recognized for deductible temporary
differences, along with net operating loss carryforwards and
credit carryforwards, if it is more likely than not that the tax
benefits will be realized. To the extent a deferred tax asset
cannot be recognized under the preceding criteria, valuation
allowances must be established. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

(k) Impairment
of Long-Lived Assets

The Company accounts for long-lived assets in
accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, Impairment of
Long-Lived Assets. SFAS No. 144 requires an
impairment loss to be recognized on assets to be held and used
if the carrying amount of a long-lived asset group is not
recoverable from its undiscounted cash flows. The amount of the
impairment loss is measured as the difference between the
carrying amount and the fair value of the asset group. Assets to
be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.

(l) Stock-Based
Compensation

As allowed under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company has
elected to follow Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for fixed plan stock
awards to employees. Deferred stock-based compensation for
options granted to employees is determined as the excess of the
fair value of the common stock over the exercise price on the
date options were granted. Stock-based compensation is amortized
over the vesting period of the individual award.

33



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had all stock-based compensation awards granted
to employees and directors been accounted for using the fair
value based method, net income and net income per share would
have been adjusted to the amounts reported in the following
table.

|                                                                                                            |  |                         |           |  |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- |  | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                            |  |                        
|                                                                                                            |  | Year Ended December 31, |          
|                                                                                                            |  |                         |          
|                                                                                                            |  | 2003                    |           |  | 2002 |   |         | 2001 | 
|                                                                                                            |  |                         |           |  |      |   |         |      | 
|Net income as reported                                                                                      |  | $                       | 2,050,126 |  |      | $ | 853,071 |      |  | $ | 363,735 |  
|Stock-based compensation included in
    determination of net income                                        |  |                         |          |  |      |   |        |      |  |   |        |  
|Stock-based compensation determined under the
    fair-value based method                                   |  |                         |          |  |      |   | (1,908  | )    |  |   | (56,182 | )
|                                                                                                            |  |                         |           |  |      |   |         |      | 
|Pro-forma net income as if the fair value based
    method had been applied to all awards                   |  | $                       | 2,050,126 |  |      | $ | 851,163 |      |  | $ | 307,553 |  
|                                                                                                            |  |                         |           |  |      |   |         |      | 
|Pro-forma basic net income per share as if the
    fair value based method had been applied to all awards   |  | $                       | 0.11      |  |      | $ | 0.04    |      |  | $ | 0.02    |  
|                                                                                                            |  |                         |           |  |      |   |         |      | 
|Pro-forma diluted net income per share as if the
    fair value based method had been applied to all awards |  | $                       | 0.10      |  |      | $ | 0.04    |      |  | $ | 0.02    |  
|                                                                                                            |  |                         |           |  |      |   |         |      | 

The fair value of options granted was calculated
as of the grant date using the Black-Scholes method with the
following assumptions:

|                                          |  |      |   |  |      |   |        |      |  |   |         |  
|----------------------------------------- |  | ---- | - |  | ---- | - | ------ | ---- |  | - | ------- | -
|                                          |  | 2003 |   |  | 2002 |   |        | 2001 | 
|                                          |  |      |   |  |      |   |        |      | 
|Numbers of options granted                |  |      |  |  |      |   | 33,589 |      |  |   | 210,000 |  
|Grant date fair value of options          |  |      |  |  |      | $ | 0.06   |      |  | $ | 0.27    |  
|Grant date fair value of the common stock |  |      |  |  |      | $ | 0.56   |      |  | $ | 0.39    |  
|Expected life of the option (in years)    |  |      |  |  |      |   | 5      |      |  |   | 10      |  
|Annual volatility                         |  |      |  |  |      |   | 51     | %    |  |   | 85      | %
|Risk-free interest rates                  |  |      |  |  |      |   | 4.5    | %    |  |   | 4.5     | %
|Dividend Rate                             |  |      |  |  |      |   |       |      |  |   |        |  

(m) Website
Development Costs

The Company accounts for website development
costs in accordance with EITF Issue No. 00-02,
Accounting for Website Development Costs. No internal
website development costs that qualify for capitalization have
been incurred in the years ended December 31, 2003, 2002
and 2001.

(n) Recent
Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement
Obligations.SFAS No. 143 addresses financial
accounting and reporting for obligations associated with
retirement of tangible long-lived assets and the associated
retirement costs. SFAS No. 143 was effective for the
Company beginning in 2003 and the adoption of this statement did
not have a material impact on the consolidated financial
statements.

In April 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.
SFAS No. 145 rescinds the requirement that all gains
and losses from extinguishment of debt be classified as an
extraordinary item. Additionally, SFAS No. 145
requires that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback

34



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

transactions. SFAS No. 145 was effective for
the Company beginning in 2003, and the effect of adoption did
not have a material impact on the consolidated financial
statements.

In July 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This Statement requires recording costs
associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements
commitment to an exit plan, which is generally before an actual
liability has been incurred. The requirements of this Statement
are effective prospectively for exit or disposal activities
initiated after December 31, 2002; however, early
application of the Statement is encouraged. The Companys
adoption of Statement 146 did not have a material impact on
the consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of
Indebtedness of Others(FIN 45).
FIN 45 requires us to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in the issuance of the guarantee. The disclosure
requirements effective for the year ending December 31,
2002, expand the disclosures required by a guarantor about its
obligation under a guarantee. The accounting requirements for
the initial recognition of guarantees are applicable on a
prospective basis for guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have
a material impact on the consolidated financial statements.

In December 2002, the Emerging Issues Task Force
reached a consensus on Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables (EITF
Issue 00-21). ETTF Issue 00-21 mandates how to
identify whether goods or services, or both, that are to be
delivered separately in a bundled sales arrangement should be
accounted for as separate units of accounting. The consensus is
effective prospectively for our third quarter of 2003. The
Company evaluated the guidance in EITF Issue 00-21 and
concluded that our advertising arrangements should continue to
be accounted for as a single unit of accounting. As a result,
the adoption of EITF Issue 00-21 did not have a material
impact on the revenue recognition policies or consolidated
financial statements.

In December 2003, the FASB issued Interpretation
No. 46 (FIN 46R) (revised December 2003),
Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(ARB 51), which addresses how a business
enterprise should evaluate whether it has a controlling interest
in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46 (FIN 46) ,
which was issued in January 2003. Before concluding that it is
appropriate to apply ARB 51 voting interest consolidation model
to an entity, an enterprise must first determine that the entity
is not a variable interest entity (VIE). As of the effective
date of FIN 46R, an enterprise must evaluate its
involvement with all entities or legal structures created before
February 1, 2003, to determine whether consolidation
requirements of FIN 46R apply to those entities. There is
no grandfathering of existing entities. Public companies must
apply either FIN 46 or FIN 46R immediately to entities
created after December 15, 2003 and no later than the end
of the first reporting period that ends after March 15,
2004 for all other entities. The adoption of FIN 46R is not
expected to have an effect on the Companys consolidated
financial statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity (SFAS 150) that establishes
standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first
interim period beginning after June 15, 2003. On
November 7, 2003, Financial Accounting Standards Board
Staff Position 150-3 was issued, which indefinitely
deferred the effective date of SFAS 150 for certain
mandatory redeemable non-controlling interests. The adoption of
SFAS 150 had no effect on the Companys consolidated
financial statements.

35



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company adopted the new disclosure
requirements of Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, during
the quarter ended March 31, 2003. The adoption of the
disclosure requirements of this statement did not have an impact
on the Companys financial position, results of operations
or cash flows.

(2) Commitments

The Company leases office space in Chicago,
Miami, Mountain View (California), and New York, under
operating leases which expire on July 31, 2005,
May 31, 2005, December 31, 2005 and June 30, 2004
respectively. The future minimum rental payments under these
operating leases as of December 31, 2003, total $578,256
and $249,382 for 2004 and 2005, respectively. Rent expense was
$885,816, $471,766 and $302,355 for the years ended
December 31, 2003, 2002, and 2001, respectively.

(3) Allowance for Doubtful
Accounts

The details of changes to the allowance for
doubtful accounts are as follows:

|                             |                                                      |   |         |         |  
|---------------------------- | ---------------------------------------------------- | - | ------- | ------- | -
|Balance at December 31, 2000 |                                                      |   | 145,144 |        
|                             | Deductions  credited to costs and
    expenses, net |   |         | (88,507 | )
|                             | Deductions  write-offs                              |   |         | (1,409  | )
|                             |                                                      |   |        
|Balance at December 31, 2001 |                                                      |   | 55,228  |        
|                             | Additions  charged to costs and
    expenses, net   |   |         | 14,571  |  
|                             | Deductions  write-offs                              |   |         | (13,874 | )
|                             |                                                      |   |        
|Balance at December 31, 2002 |                                                      |   | 55,925  |        
|                             |                                                      |   |        
|                             | Additions  charged to costs and
    expenses, net   |   |         | 15,534  |  
|Balance at December 31, 2003 |                                                      | $ | 71,459  |        
|                             |                                                      |   |        

36



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Income Taxes

Income tax expense (benefit) for the years ended
December 31, 2003, 2002, and 2001 consisted of the
following:

|      |         |         |           |           |          |   |          |          |   |   |           |           | 
|----- | ------- | ------- | --------- | --------- | -------- | - | -------- | -------- | - | - | --------- | --------- | 
|      |         | Current |           |           | Deferred |   |          | Total    |  
|      |         |         |           |           |          |   |          |          |  
|2003: |         |         |           |           |          |   |          |          |   |   |           |          
|      | Federal |         | $         | 1,342,087 |          |   | $        | (127,594 | ) |   | $         | 1,214,493 | 
|      | State   |         |           | 499,267   |          |   |          | (11,861  | ) |   |           | 487,406   | 
|      |         |         |           |           |          |   |          |          |  
|      |         | $       | 1,841,354 |           |          | $ | (139,455 | )        |   | $ | 1,701,899 |          
|      |         |         |           |           |          |   |          |          |  
|2002: |         |         |           |           |          |   |          |          |   |   |           |          
|      | Federal |         | $         | 453,851   |          |   | $        | (26,836  | ) |   | $         | 427,015   | 
|      | State   |         |           | 151,777   |          |   |          | (6,182   | ) |   |           | 145,595   | 
|      |         |         |           |           |          |   |          |          |  
|      |         | $       | 605,628   |           |          | $ | (33,018  | )        |   | $ | 572,610   |          
|      |         |         |           |           |          |   |          |          |  
|2001: |         |         |           |           |          |   |          |          |   |   |           |          
|      | Federal |         | $         | 384,153   |          |   | $        | 21,846   |   |   | $         | 405,999   | 
|      | State   |         |           | 108,669   |          |   |          | 6,350    |   |   |           | 115,019   | 
|      | Foreign |         |           | 250       |          |   |          |         |   |   |           | 250       | 
|      |         |         |           |           |          |   |          |          |  
|      |         | $       | 493,072   |           |          | $ | 28,196   |          |   | $ | 521,268   |          
|      |         |         |           |           |          |   |          |          |  

Income tax expense for the years ended
December 31, 2003, 2002, and 2001, differed from the
amounts computed by applying the U.S. federal statutory tax
rate applicable to the Companys level of pretax income as
a result of the following:

|                                                          |  |      |           |  |      |   |         |      |  |   |         | 
|--------------------------------------------------------- |  | ---- | --------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                                          |  | 2003 |           |  | 2002 |   |         | 2001 | 
|                                                          |  |      |           |  |      |   |         |      | 
|Federal tax at statutory rates                            |  | $    | 1,275,097 |  |      | $ | 485,714 |      |  | $ | 307,423 | 
|State taxes, net of federal income tax benefit            |  |      | 321,688   |  |      |   | 96,093  |      |  |   | 99,146  | 
|Foreign taxes                                             |  |      |          |  |      |   |        |      |  |   | 250     | 
|Non-deductible merger and offering expenses and
    other |  |      | 105,114   |  |      |   | (9,197  | )    |  |   | 114,449 | 
|                                                          |  |      |           |  |      |   |         |      | 
|Total income tax expense                                  |  | $    | 1,701,899 |  |      | $ | 572,610 |      |  | $ | 521,268 | 
|                                                          |  |      |           |  |      |   |         |      | 

37



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the Companys deferred
tax assets and liabilities as of December 31, 2003, and
2002, are as follows:

|                          |                            |                                |         |         |         |   |         |        |         |  
|------------------------- | -------------------------- | ------------------------------ | ------- | ------- | ------- | - | ------- | ------ | ------- | -
|                          |                            | 2003                           |         |         | 2002    |  
|                          |                            |                                |         |         |         |  
|Deferred tax assets:      |                            |                                |         |         |         |   |         |       
|                          | Accruals and allowances    |                                | $       | 55,519  |         |   | $       | 39,204 |        
|                          | State income taxes         |                                |         | 169,751 |         |   |         | 36,733 |        
|                          | Capitalized start-up costs |                                |         |        |         |   |         | 760    |        
|                          | Intangible assets          |                                | $       | 57,674  |         |   | $       | 39,462 |        
|                          |                            |                                |         |         |         |  
|                          |                            | Gross deferred tax assets      |         |         | 282,944 |   |         |        | 116,159 |  
|Deferred tax liabilities: |                            |                                |         |         |         |   |         |       
|                          | State income taxes         |                                | $       | (9,409  | )       |   | $       |       |        
|                          | Property and equipment     |                                |         | (20,713 | )       |   |         | (2,792 | )      
|                          |                            |                                |         |         |         |  
|                          |                            | Gross deferred tax liabilities |         |         | (30,122 | ) |         |        | (2,792  | )
|                          |                            |                                |         |         |         |  
|Net deferred tax assets   |                            | $                              | 252,822 |         |         | $ | 113,367 |       
|                          |                            |                                |         |         |         |  

No valuation allowance has been recorded for the
deferred tax assets because management believes that the Company
is more likely than not to generate sufficient future taxable
income to realize the related tax benefits.

(5) Stockholders Equity

As of December 31, 2003 the authorized
capital stock of Travelzoo Inc. comprised 40,000,000 shares
of $.01 par value common stock and 5,000,000 shares of
$.01 par value preferred stock. As of December 31,
2003 15,294,033 shares of common stock and no shares of
preferred stock were issued and 19,425,147 shares of common
stock were reported as outstanding. If all former stockholders
of Travelzoo Bahamas accept their shares in Travelzoo Inc., an
additional 4,131,114 shares of common stock will be issued.
These shares are included in the reported number of shares
outstanding in our financial statements. The former stockholders
of Travelzoo Bahamas have until April 25, 2002 to receive
shares in Travelzoo Inc.

As described in note 1(a), as part of the
consideration exchanged for the outstanding shares of Silicon
Channels Corporation, the Company also issued to the majority
stockholder in January 2001 fully vested and exercisable options
to acquire 2,158,349 shares of common stock. The options
have an exercise price of $1.00 and expire in January 2011.

In October 2001, the Company granted to each
director fully vested and exercisable options to purchase
30,000 shares of common stock with an exercise price of
$2.00 for their services as a director in 2000 and 2001. A total
of 210,000 options were granted. The options expire in October
2011.

In March 2002, Travelzoo Inc. granted to each
director options to purchase 5,000 shares of common stock
with an exercise price of $3.00 that vested in connection with
their services as a director in 2002. A total of 35,000 options
were granted. In October 2002, 1,411 options were forfeited upon
the resignation of a director. All other options are vested as
of December 31, 2003. The options expire in March 2012.

In October 2003, the Company completed an
underwritten secondary offering of 402,500 shares of common
stock sold by the Companys Chief Executive Officer and
principal stockholder. The offering was intended primarily to
allow the Company to satisfy the requirement for listing on the
NASDAQ SmallCap Market that the Company have 300 round lot
holders. The costs of the offering of $328,000 were paid for by
the Company and were included in general and administrative
expenses.

38



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Significant Customer Information and
Segment Reporting

SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information,
establishes standards for the reporting by business enterprises
of information about operating segments, products and services,
geographic areas, and major customers. The method for
determining what information to report is based on the way that
management organizes the operating segments within a company for
making operational decisions and assessing performance. As of
December 31, 2003, the Company had one operating segment:
online advertising.

Significant customer information is as follows:

|         |  |                         |    |            |              |  |    |      |  |  |      |   |  |      |    |   |  |  |    |  
|-------- |  | ----------------------- | -- | ---------- | ------------ |  | -- | ---- |  |  | ---- | - |  | ---- | -- | - |  |  | -- | -
|         |  |                         |    |            |              |  |    |     
|         |  |                         |    | Percent of |             
|         |  | Percentage of           |    |            | Accounts     | 
|         |  | Total Revenue           |    |            | Receivable   | 
|         |  |                         |    |            |              | 
|         |  |                         |    |           
|         |  | Year Ended December 31, |    |            | December 31, | 
|         |  |                         |    |            |              | 
|Customer |  | 2003                    |    |            | 2002         |  |    | 2001 |  |  | 2003 |   |  | 2002 |   
|         |  |                         |    |            |              |  |    |      |  |  |      |   |  |      |   
|A        |  |                         | *  |            |              |  | *  |      |  |  | *    |   |  |      | *  |   |  |  | 12 | %
|B        |  |                         | 10 | %          |              |  | 15 | %    |  |  | 15   | % |  |      | 14 | % |  |  | *  |  
|C        |  |                         | 11 | %          |              |  | 14 | %    |  |  | *    |   |  |      | *  |   |  |  | 21 | %
|D        |  |                         |   |            |              |  | *  |      |  |  | 13   | % |  |      |   |   |  |  |   |  

|                                                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|All of the above customers are located in the
    United States of America.



---



|  |              
|- | -------------
|* | Less than 10%



|    |                                
|--- | -------------------------------
|(7) | Unaudited Quarterly Information

The following represents unaudited quarterly
financial data for 2003 and 2002.

|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |       |       |   |       |       |       |   |       |     |       | 
|---------------------------- | -------------------------- | ------------------------ | ----- | ----- | -------- | - | ----- | -------- | ----- | - | ------- | ----- | ----- | ------- | ----- | ----- | -------- | - | ----- | -------- | ----- | - | ------- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | --- | ----- | 
|                             |                            |                         
|                             |                            | Quarters Ended           |      
|                             |                            |                          |      
|                             |                            | Dec 31,                  |       |       | Sept 30, |   |       | June 30, |       |   | Mar 31, |       |       | Dec 31, |       |       | Sept 30, |   |       | June 30, |       |   | Mar 31, |      
|                             |                            | 2003                     |       |       | 2003     |   |       | 2003     |       |   | 2003    |       |       | 2002    |       |       | 2002     |   |       | 2002     |       |   | 2002    |      
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|                             |                            |                         
|                             |                            | (In thousands)           |      
|Revenues:                    |                            | $                        | 5,201 |       |          | $ | 4,785 |          |       | $ | 4,291   |       |       | $       | 3,714 |       |          | $ | 3,132 |          |       | $ | 2,538   |       |       | $ | 2,211 |       |       | $ | 1,966 |    
|Cost of revenues             |                            |                          | 141   |       |          |   | 93    |          |       |   | 81      |       |       |         | 83    |       |          |   | 89    |          |       |   | 90      |       |       |   | 86    |       |       |   | 86    |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|                             |                            | Gross profit             |       |       | 5,060    |   |       |          | 4,692 |   |         |       | 4,210 |         |       |       | 3,631    |   |       |          | 3,043 |   |         |       | 2,448 |   |       |       | 2,125 |   |       |     | 1,880 | 
|Operating expenses:          |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |       |       |   |       |       |       |   |       |    
|                             | Sales and marketing        |                          |       | 2,821 |          |   |       | 2,526    |       |   |         | 2,295 |       |         |       | 1,924 |          |   |       | 1,904    |       |   |         | 1,510 |       |   |       | 1,316 |       |   |       | 996 |      
|                             | General and administrative |                          |       | 1,214 |          |   |       | 1,115    |       |   |         | 903   |       |         |       | 1,057 |          |   |       | 647      |       |   |         | 522   |       |   |       | 562   |       |   |       | 562 |      
|                             | Merger expenses            |                          |       |      |          |   |       |         |       |   |         |      |       |         |       |      |          |   |       |         |       |   |         |      |       |   |       |      |       |   |       | 55  |      
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|                             |                            | Total operating expenses |       |       | 4,035    |   |       |          | 3,641 |   |         |       | 3,198 |         |       |       | 2,981    |   |       |          | 2,551 |   |         |       | 2,032 |   |       |       | 1,878 |   |       |     | 1,613 | 
|Income from operations       |                            |                          | 1,025 |       |          |   | 1,051 |          |       |   | 1,012   |       |       |         | 650   |       |          |   | 492   |          |       |   | 416     |       |       |   | 247   |       |       |   | 267   |    
|Interest income              |                            |                          | 5     |       |          |   | 3     |          |       |   | 3       |       |       |         | 2     |       |          |   | 2     |          |       |   | 1       |       |       |   |      |       |       |   | 1     |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|Income before income taxes   |                            |                          | 1,030 |       |          |   | 1,054 |          |       |   | 1,015   |       |       |         | 652   |       |          |   | 494   |          |       |   | 417     |       |       |   | 247   |       |       |   | 268   |    
|Income taxes                 |                            |                          | 577   |       |          |   | 437   |          |       |   | 419     |       |       |         | 267   |       |          |   | 168   |          |       |   | 171     |       |       |   | 101   |       |       |   | 133   |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|Net income                   |                            | $                        | 453   |       |          | $ | 617   |          |       | $ | 596     |       |       | $       | 385   |       |          | $ | 326   |          |       | $ | 246     |       |       | $ | 146   |       |       | $ | 135   |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|Basic net income per share   |                            | $                        | .03   |       |          | $ | .03   |          |       | $ | .03     |       |       | $       | .02   |       |          | $ | .02   |          |       | $ | .01     |       |       | $ | .01   |       |       | $ |      |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      
|Diluted net income per share |                            | $                        | .02   |       |          | $ | .03   |          |       | $ | .03     |       |       | $       | .02   |       |          | $ | .02   |          |       | $ | .01     |       |       | $ | .01   |       |       | $ |      |    
|                             |                            |                          |       |       |          |   |       |          |       |   |         |       |       |         |       |       |          |   |       |          |       |   |         |      

39



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of December 31, 2003, we carried out an
evaluation, under the supervision and with the participation of
the Companys management, including the Companys
President, Chief Executive Officer and Chief Financial Officer
along with the Companys Controller (Chief Accounting
Officer), of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(e). Based upon that evaluation, the
Companys President, Chief Executive Officer and Chief
Financial Officer along with the Companys Controller
(Chief Accounting Officer) concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in our
periodic SEC filings as of December 21, 2003.

During the quarter ended December 31, 2003,
there was no change in our internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) that
materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information regarding our directors is
incorporated by reference to the sections entitled
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance appearing in
Travelzoos Definitive Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission (the Commission) within
120 days after the end of Travelzoos fiscal year
ended December 31, 2003.

The following table sets forth certain
information with respect to the executive officers of Travelzoo
as of March 29, 2004.

|                    |  |     |    |  |          |                                                                    
|------------------- |  | --- | -- |  | -------- | -------------------------------------------------------------------
|Name                |  | Age |    |  | Position
|                    |  |     |    |  |         
|Ralph Bartel, Ph.D. |  |     | 38 |  |          | President, Chief Executive Officer, and Chief
    Financial Officer
|Lisa Su             |  |     | 28 |  |          | Controller (Chief Accounting Officer)                              

Ralph Bartel founded Travelzoo in May 1998 and
has served as President, Chief Executive Officer, Chief
Financial Officer and Chairman of the Board of Directors since
inception. Prior to his founding of Travelzoo, from 1996 to
1997, Mr. Bartel served as Managing Assistant at Gruner +
Jahr AG, the magazine division of Bertelsmann AG.
Mr. Bartel holds a Ph.D. in Communications from the
University of Mainz, Germany, an MBA in Finance and Accounting
from University of St. Gallen, Switzerland, and a Masters
degree in Journalism from University of Eichstaett, Germany.

Lisa Su has served as Controller (Chief
Accounting Officer) since October 1, 2000. From April 1999
to September 2000, Ms. Su was a Treasury Accountant for
Webvan Group, Inc. Ms. Su holds a bachelors
degree in economics/accounting from Claremont McKenna College
and an MBA in Finance from California State University, Hayward.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information regarding executive compensation is
incorporated by reference to the information set forth under
Compensation of Executive Officers and Other Matters
in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within
120 days after the end of Travelzoos fiscal year
ended December 31, 2003.

40



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##### Table of Contents








|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Information regarding security ownership of
certain beneficial owners and management is incorporated by
reference to the information set forth under the caption
Principal Ownership of Travelzoo Common Stock in
Travelzoos Definitive Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Commission within
120 days after the end of Travelzoos fiscal year
ended December 31, 2003.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information regarding certain relationships and
related transactions is incorporated by reference to the
information set forth under the caption Certain
Transactions in our Definitive Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of Travelzoos fiscal
year ended December 31, 2003.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

Information regarding principal auditor fees and
services is set forth under Principal Accounting Fees and
Services in the Proxy Statement relating to our 2004
Annual Meeting of Stockholders and is incorporated herein by
reference.




PART IV





|         |                                                           
|-------- | ----------------------------------------------------------
|Item 15. | Exhibits, Financial Schedules, and Reports
    on Form 8-K

(a) The following documents are filed as
part of this report:



| |                                                                               
| | ------------------------------------------------------------------------------
| | (1) Our Consolidated Financial Statements
    are included in Part II, Item 8:



| |                                                    
| | ---------------------------------------------------
| | Independent Auditors Report                       
|
| | Consolidated Balance Sheets                        
|
| | Consolidated Statements of Operations              
|
| | Consolidated Statements of Stockholders
    Equity
|
| | Consolidated Statements of Cash Flows              
|
| | Notes to Consolidated Financial Statements         



| |                                                                  
| | -----------------------------------------------------------------
| | (2) Supplementary Consolidated Financial
    Statement Schedules:



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules are omitted because of the absence
    of conditions under which they are required or because the
    required information is included in the consolidated financial
    statements or notes thereto.



| |              
| | -------------
| | (3) Exhibits:



| |                            
| | ---------------------------
| | See attached Exhibit Index.

(b) Reports on Form 8-K



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 6, 2003, the Company filed a
    current report on Form 8-K dated October 6, 2003 which
    announced the Companys financial results for the quarter
    ended September 30, 2003.
|
| | On December 24, 2003, the Company filed a
    current report on Form 8-K dated December 23, 2003
    which announced the Companys approval for listing on the
    NASDAQ SmallCap Market.    

41



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
New York, State of New York, on March 29, 2004.



| |               
| | --------------
| | TRAVELZOO INC.
| | (Registrant)  



| |     |                 
| | --- | ----------------
| | By: | /s/ RALPH BARTEL

| |                             
| | ----------------------------
| |                             
| | Ralph Bartel                
| | Chairman of the Board,      
| | Chief Executive Officer, and
| | Chief Financial Officer     

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below hereby constitutes and appoints
Ralph Bartel as his or her attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign
any and all amendments to this Form 10-K, with all exhibits
and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any
regulatory authority, granting unto such attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done in order to
effectuate the same as fully to all intents and purposes as he
or she might or could do if personally present, hereby ratifying
and confirming all that such attorney-in-fact and agent or his
substitute or substitutes, may lawfully do or cause to be done.

|                                       |  |                                                                                 |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  |                                                                                 |  |               
|Signature                              |  | Title                                                                           |  | Date          
|                                       |  |                                                                                 |  |               
|                                      
|/s/ RALPH BARTELRalph Bartel           |  | Chairman of the Board, Chief Executive Officer,
    and Chief Financial Officer |  | March 29, 2004
|                                      
|/s/ LISA SULisa Su                     |  | Controller (Chief Accounting Officer)                                           |  | March 29, 2004
|                                      
|/s/ DAVID J. EHRLICHDavid J. Ehrlich   |  | Director                                                                        |  | March 29, 2004
|                                      
|/s/ SUZANNA MAKSuzanna Mak             |  | Director                                                                        |  | March 29, 2004
|                                      
|/s/ DONOVAN NEALE-MAYDonovan Neale-May |  | Director                                                                        |  | March 29, 2004
|                                      
|/s/ KELLY M. URSOKelly M. Urso         |  | Director                                                                        |  | March 29, 2004

42



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##### Table of Contents



EXHIBIT INDEX

|        |      |   |  |   |             |                                                                                                                                                                                                                                                                                
|------- | ---- | - |  | - | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |   |  |   |            
|Number  |      |   |  |   | Description
|        |      |   |  |   |            
|        | 3.1  |   |  |  |             | Certificate of Incorporation of Travelzoo Inc.
    (Incorporated by reference to our Pre-Effective Amendment
    No. 6 to our Registration Statement on Form S-4 (File
    No. 333-55026), filed February 14, 2002)                                                            
|        | 3.2  |   |  |  |             | By-laws of Travelzoo Inc. (Incorporated by
    reference to our Pre-Effective Amendment No. 6 to our
    Registration Statement on Form S-4 (File
    No. 333-55026), filed February 14, 2002)                                                                                 
|        | 10.1 |   |  |  |             | Employment Agreement, dated as of April 1,
    2000, between Silicon Channels Corporation and Ralph Bartel
    (Incorporated by reference to our Pre-Effective Amendment
    No. 6 to our Registration Statement on Form S-4 (File
    No. 333-55026), filed February 14, 2002)
|        | 10.2 |   |  |  |             | Stock Option Agreement dated January 22,
    2001, between Ralph Bartel and Travelzoo Inc. (Incorporated by
    reference to our Pre-Effective Amendment No. 6 to our
    Registration Statement on Form S-4 (File
    No. 333-55026), filed February 14, 2002)                
|        | 10.5 |   |  |  |             | Form of Director and Officer Indemnification
    Agreement (Incorporated by reference to our Pre-Effective
    Amendment No. 6 to our Registration Statement on Form S-4
    (File No. 333-55026), filed February 14, 2002)                                                    
|        | 21.1 | * |  |  |             | List of Subsidiaries of Travelzoo Inc.                                                                                                                                                                                                                                         
|        | 24.1 |   |  |  |             | Power of Attorney (included on signature page)                                                                                                                                                                                                                                 
|        | 31.1 | * |  |  |             | Certification pursuant to Rule 13a-14(a) and Rule
    15d-14(a), under the Securities Exchange Act of 1934, as amended                                                                                                                                                         
|        | 32.1 | * |  |  |             | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                    



---



|  |                
|- | ---------------
|* | Filed herewith.