##### Table of Contents









UNITED STATES 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, 2005                                                 
|          
|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




o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2




|                           |                      |                          | 
|-------------------------- | -------------------- | ------------------------ | 
|Large accelerated filer  o | Accelerated filer  þ | Non-accelerated filer  o | 

12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K










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##### 










TRAVELZOO INC.


Table of Contents


|                                                         |  |                                                                                                                      |  |      |    |  |  | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|                                                         |  |                                                                                                                      |  | Page |   
|                                                         |  |                                                                                                                      |  |      |   
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                                             |  |      | 2  | 
|Item 1A.                                                 |  | Risk Factors                                                                                                         |  |      | 10 | 
|Item 1B.                                                 |  | Unresolved Staff Comments                                                                                            |  |      | 17 | 
|Item 2.                                                  |  | Properties                                                                                                           |  |      | 17 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                                    |  |      | 17 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 18 | 
|PART II                                                 
|Item 5.                                                  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 18 | 
|Item 6.                                                  |  | Selected Consolidated Financial Data                                                                                 |  |      | 18 | 
|Item 7.                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 19 | 
|Item 7A.                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 29 | 
|Item 8.                                                  |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 30 | 
|Item 9.                                                  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosures                            |  |      | 50 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                                              |  |      | 50 | 
|Item 9B.                                                 |  | Other Information                                                                                                    |  |      | 51 | 
|PART III                                                
|Item 10.                                                 |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 51 | 
|Item 11.                                                 |  | Executive Compensation                                                                                               |  |      | 52 | 
|Item 12.                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 52 | 
|Item 13.                                                 |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 52 | 
|Item 14.                                                 |  | Principal Accountant Fees and Services                                                                               |  |      | 52 | 
|PART IV                                                 
|Item 15.                                                 |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 52 | 
|Subsidiaries of Travelzoo Inc.                          
|Consent of Independent Registered Public Accounting Firm
|Certification Pursuant to Rule 13a-14(a)/15d-14(a)      
|Certification Pursuant to Section 906                   



1



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##### Table of Contents



Forward-Looking Statements







PART I







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

Overview




Travelzoo Travelzoo
Top 20 Newsflash SuperSearch,


Rent-A-Car.










2



---



##### Table of Contents



Travelzoo as-if pooling-of






as-if pooling-of






3



---



##### Table of Contents



Our Industry






The Internet Is Consumers Preferred Information
Source.


Benefits of Internet Advertising vs. Print Advertising.


New Advertising Opportunities.


Suppliers Selling Directly.


Problems Travel Companies Face and Limitations of Newspaper
Advertising










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


Travelzoo Travelzoo Top 20


4



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##### Table of Contents



Newsflash SuperSearch,






|                   |  |                                                                                                                                       |  |                                             |  |                                       |  |                                                                                            |  |                                                                                                           
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------
|                  
|                   |  | Publication                                                                                                                           |  |                                            
|Publication        |  | Content                                                                                                                               |  | Schedule                                    |  | Reach/Usage*                          |  | Advertiser Benefits                                                                        |  | Consumer Benefits                                                                                         
|                  
|TravelzooWeb sites |  | Web sites in the U.S. and in the U.K. listing thousands of
    outstanding sales and specials from more than 500 travel
    companies |  | 24/7                                        |  | 3.9 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   |  | Popular e-mail newsletter listing 20 of the weeks most
    outstanding deals from selected travel companies                          |  | Weekly                                      |  | 9.4 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 alert service with a single
    time-sensitive and newsworthy travel offer                                 |  | Within 2 hours of an offer being identified |  | 6.4 million subscribers               |  | Regional targeting, 100% share of voice for advertiser, flexible
    publication schedule  |  | Breaking news offers delivered just-in- time                                                              
|                  
|SuperSearch        |  | Travel search engine using a proprietary algorithm to recommend
    sites and enable one-click searching                              |  | On-demand                                   |  | 3.6 million monthly searches          |  | Drives qualified traffic directly to advertiser site on a
    pay-per-click basis          |  | Saves time and money by identifying the sites most likely to
    have great rates for a specific itinerary
|                  



|  |                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For TravelzooWeb sites, reach information is based on
    comScore Media Metrix, 12/2005. For Top 20,
    Newsflash, and SuperSearch, reach/usage
    information is based on internal Travelzoo statistics as of
    December 31, 2005.



Benefits to Travel Companies






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

5



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##### Table of Contents





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | Access to Millions of Consumers. We provide travel
    companies fast access to millions of travel shoppers.
|
| |  | National Reach. We offer access to Internet users across
    the U.S. and across the U.K.                   

Benefits to Consumers


Travelzoo Travelzoo Top 20 Newsflash, SuperSearch




| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Aggregation of Offers From Many Companies. Our
    TravelzooWeb sites (www.travelzoo.com and
    www.travelzoo.co.uk) and our Travelzoo Top 20
    e-mail newsletter
    aggregate information on current special offers from more than
    500 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.                                                                                                                                         
|
| |  | Reliable Information. We operate a Test Booking Center to
    check the availability of travel deals included in the
    Travelzoo Top 20before publishing.                                                                                                                                                                                     
|
| |  | Search tools. We provide consumers with the ability to
    search for specific special offers.                                                                                                                                                                                                                                                  

Growth Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 online
    marketing and direct marketing to promote our brand to
    consumers. 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 brand 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.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Replicate Business Model in Foreign Markets. We believe
    that there is an opportunity to replicate our business model in
    selected foreign markets. We believe that there will be an
    additional market opportunity for us. In addition, we believe
    that we would strengthen our strategic position if we offered
    global advertising solutions to existing and new clients.                                                                                                                    

6



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Clients




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

10-K


Sales and Marketing




e-mail word-of


Technology


e-mails




7



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Competition


pay-per






Government Regulation and Legal Uncertainties




Privacy Concerns. e-mail


Anti-Spam Legislation. CAN-SPAM e-mail


Domain Names.


8



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Jurisdictions.


Intellectual Property


Travelzoo Travelzoo
Top 20. Travelzoo Travelzoo Top 20




on-line on-line


on-line on-line


on-line on-line


9



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Employees




Internet Access to Other Information


10-K, 10-Q 8-K 10-K.





Item 1A.     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.


Risks Related to Our Financial Condition and Business
Model




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





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

quarter-to




| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, including our
    expansion efforts in Europe;                                                  
|
| |  | 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;                                                                                                   

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to manage our anticipated growth and expansion;                                                                                                                         
|
| |  | our ability to attract traffic to our Web sites;                                                                                                                                    
|
| |  | technical difficulties or system downtime affecting the Internet
    generally or the operation of our products and services
    specifically; and                                  
|
| |  | payments which we may make to previous stockholders of
    Travelzoo.com Corporation who failed to submit requests for
    shares in Travelzoo Inc. within the required time period.

Travelzoo






| |                                                                    
| | -------------------------------------------------------------------
| | We depend on one client for a substantial part of our
    revenues.

10-K




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





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







11



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





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

break-ins,




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



Risks Related to Our Markets and Strategy




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

Travelzoo




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





| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | 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.                                                   





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





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





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our international operations are subject to increased
    risks which could harm our business, operating results and
    financial condition.





| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | trade barriers and changes in trade regulations;                                                                                                       
|
| |  | difficulties in developing, staffing and simultaneously managing
    foreign operations as a result of distance, language and
    cultural differences;
|
| |  | stringent local labor laws and regulations;                                                                                                            
|
| |  | currency exchange rate fluctuations;                                                                                                                   

13



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| |   |                                            
| | - | -------------------------------------------
| |  | risks related to government regulation; and
|
| |  | potentially adverse tax consequences.      



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

Travelzoo




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





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



Risks Related to the Market for our Shares




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





14



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



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.





| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | user privacy;                                                          
|
| |  | anti-spam legislation;                                                 
|
| |  | 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 liable as a result of information retrieved from
    or transmitted over the Internet.

e-mail e-mail e-mail e-mail




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Claims may be asserted against us relating to shares not
    issued in our 2002 merger.

two-year


two-year


15



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| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our internal controls over financial reporting may not be
    effective, and our independent auditors may not be able to
    certify as to their effectiveness, which could have a
    significant and adverse effect on our business.





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

Travelzoo


16



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Travelzoo




| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.








|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








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








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



17



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






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|               |  |      |        |  |     |   |       | 
|-------------- |  | ---- | ------ |  | --- | - | ----- | 
|               |  | High |        |  | Low |  
|               |  |      |        |  |     |  
|2005:          |  |      |        |  |     |   |       | 
|Fourth Quarter |  | $    | 26.30  |  |     | $ | 16.61 | 
|Third Quarter  |  | $    | 34.27  |  |     | $ | 21.31 | 
|Second Quarter |  | $    | 56.70  |  |     | $ | 27.02 | 
|First Quarter  |  | $    | 99.75  |  |     | $ | 41.54 | 
|2004:          |  |      |        |  |     |   |       | 
|Fourth Quarter |  | $    | 110.62 |  |     | $ | 49.88 | 
|Third Quarter  |  | $    | 76.58  |  |     | $ | 21.09 | 
|Second Quarter |  | $    | 31.31  |  |     | $ | 7.61  | 
|First Quarter  |  | $    | 10.60  |  |     | $ | 7.10  | 





Dividend Policy











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



18



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Consolidated Statement of Operations Data:


|                                               |  |                                       |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|---------------------------------------------- |  | ------------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                               |  | Year Ended December 31,               |       
|                                               |  |                                       |       
|                                               |  | 2005                                  |        |  | 2004 |   |        | 2003 |  |   | 2002   |  |  | 2001 |       
|                                               |  |                                       |        |  |      |   |        |      |  |   |        |  |  |      |       
|                                               |  | (In thousands, except per share data) |       
|Revenues                                       |  | $                                     | 50,772 |  |      | $ | 33,679 |      |  | $ | 17,991 |  |  | $    | 9,848  |  |  | $ | 6,148  | 
|Income from operations                         |  |                                       | 14,870 |  |      |   | 11,033 |      |  |   | 3,739  |  |  |      | 1,422  |  |  |   | 885    | 
|Net income                                     |  |                                       | 7,963  |  |      |   | 6,037  |      |  |   | 2,050  |  |  |      | 853    |  |  |   | 364    | 
|Net income per share  basic                   |  | $                                     | 0.49   |  |      | $ | 0.36   |      |  | $ | 0.11   |  |  | $    | 0.04   |  |  | $ | 0.02   | 
|Net income per share  diluted                 |  | $                                     | 0.45   |  |      | $ | 0.33   |      |  | $ | 0.10   |  |  | $    | 0.04   |  |  | $ | 0.02   | 
|Shares used in per share calculation  basic   |  |                                       | 16,249 |  |      |   | 16,879 |      |  |   | 19,425 |  |  |      | 19,425 |  |  |   | 19,425 | 
|Shares used in per share calculation  diluted |  |                                       | 17,731 |  |      |   | 18,475 |      |  |   | 20,527 |  |  |      | 19,896 |  |  |   | 19,425 | 

Consolidated Balance Sheet Data:


|                          |  |                |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 
|------------------------- |  | -------------- | ------ |  | ---- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  |  | - | ----- | 
|                          |  | December 31,   |       
|                          |  |                |       
|                          |  | 2005           |        |  | 2004 |   |        | 2003 |  |   | 2002  |  |  | 2001 |      
|                          |  |                |        |  |      |   |        |      |  |   |       |  |  |      |      
|                          |  | (In thousands) |       
|Cash and cash equivalents |  | $              | 24,469 |  |      | $ | 26,435 |      |  | $ | 3,522 |  |  | $    | 1,258 |  |  | $ | 610   | 
|Working capital           |  |                | 48,137 |  |      |   | 40,027 |      |  |   | 3,460 |  |  |      | 1,340 |  |  |   | 425   | 
|Total assets              |  |                | 55,452 |  |      |   | 43,257 |      |  |   | 6,726 |  |  |      | 3,240 |  |  |   | 2,131 | 
|Stockholders equity      |  |                | 48,533 |  |      |   | 40,263 |      |  |   | 3,841 |  |  |      | 1,791 |  |  |   | 938   | 






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



Overview


Travelzoo Travelzoo Top 20 Newsflash SuperSearch,




Travelzoo Travelzoo Top 20 Newsflash SuperSearch, SuperSearch.


19



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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Growth of number of subscribers of the Companys
    newsletters and page views of the homepages of the TravelzooWeb sites;
|
| |  | Operating margin;                                                                                                          
|
| |  | Growth in revenues in the absolute and relative to the growth in
    reach of the Companys publications;                  
|
| |  | Revenue per employee as a measure of productivity.                                                                         

Critical Accounting Policies




Revenue Recognition


Revenue Recognition.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an arrangement. The Company considers an
    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
    click-throughs have been delivered.                                                                                                                                                                                                                                                                                        
|
| |  | Fixed or determinable fee. The Company considers the fee
    to be fixed or determinable if the fee is not subject to refund
    or adjustment and payment terms are standard.                                                                                                                                                                                                                                                               
|
| |  | Collection is deemed reasonably assured. The Company
    conducts a credit review for all transactions at the time of the
    arrangement to determine the creditworthiness of the client.
    Collection is deemed reasonably assured if it is expected that
    the client will be able to pay amounts under the arrangement as
    payments become due. If it is determined that collection is not
    reasonably assured, then revenue is

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| |  |                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deferred and recognized upon
    cash collection. Collection is deemed not reasonably assured
    when a client is perceived to be in financial distress, which may be
    evidenced by weak industry conditions, a bankruptcy filing, or
    previously billed amounts that are past due.



Allowance for Doubtful Accounts




Liability to Former Stockholders






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Results of Operations




|                           |                            |                          |     |    |      |  |     |      |    |  |     |    |    | 
|-------------------------- | -------------------------- | ------------------------ | --- | -- | ---- |  | --- | ---- | -- |  | --- | -- | -- | 
|                           |                            | Year Ended               |    
|                           |                            | December 31,             |    
|                           |                            |                          |    
|                           |                            | 2005                     |     |    | 2004 |  |     | 2003 |   
|                           |                            |                          |     |    |      |  |     |      |   
|Revenues                   |                            |                          | 100 | %  |      |  | 100 | %    |    |  | 100 | % 
|Cost of revenues           |                            |                          | 2   |    |      |  | 2   |      |    |  | 2   |   
|                           |                            |                          |     |    |      |  |     |      |   
|                           |                            | Gross profit             |     |    | 98   |  |     |      | 98 |  |     |    | 98 | 
|                           |                            |                          |     |    |      |  |     |      |   
|Operating expenses:        |                            |                          |     |    |      |  |     |      |    |  |     |   
|                           | Sales and marketing        |                          |     | 51 |      |  |     | 47   |    |  |     | 53 |   
|                           | General and administrative |                          |     | 18 |      |  |     | 18   |    |  |     | 24 |   
|                           |                            |                          |     |    |      |  |     |      |   
|                           |                            | Total operating expenses |     |    | 69   |  |     |      | 65 |  |     |    | 77 | 
|                           |                            |                          |     |    |      |  |     |      |   
|Income from operations     |                            |                          | 29  |    |      |  | 33  |      |    |  | 21  |   
|Interest income            |                            |                          | 2   |    |      |  |    |      |    |  |    |   
|                           |                            |                          |     |    |      |  |     |      |   
|Income before income taxes |                            |                          | 31  |    |      |  | 33  |      |    |  | 21  |   
|Income taxes               |                            |                          | 15  |    |      |  | 15  |      |    |  | 10  |   
|                           |                            |                          |     |    |      |  |     |      |   
|Net income                 |                            |                          | 16  | %  |      |  | 18  | %    |    |  | 11  | % 
|                           |                            |                          |     |    |      |  |     |      |   









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

e-mail Travelzoo Travelzoo Travelzoo


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|                                               |               |                         |  |            |                |  |  |            |           |  |  |     |     |  
|---------------------------------------------- | ------------- | ----------------------- |  | ---------- | -------------- |  |  | ---------- | --------- |  |  | --- | --- | -
|                                               |               | Year Ended December 31, |  |            |               
|                                               |               |                         |  |            | Year-over-Year | 
|                                               |               | 2005                    |  |            | 2004           |  |  | Growth     |          
|                                               |               |                         |  |            |                |  |  |            |          
|Subscribers:                                   |               |                         |  |            |                |  |  |            |           |  |  |    
|                                               | North America |                         |  |            |                |  |  |            |           |  |  |     |    
|                                               |               | Travelzoo Top 20        |  |            | 9,057,000      |  |  |            | 8,028,000 |  |  |     | +13 | %
|                                               |               | Newsflash               |  |            | 6,163,000      |  |  |            | 4,676,000 |  |  |     | +32 | %
|                                               | Europe        |                         |  |            |                |  |  |            |           |  |  |     |    
|                                               |               | Travelzoo Top 20        |  |            | 295,000        |  |  |            | N/A       |  |  |     | N/A |  
|                                               |               | Newsflash               |  |            | 206,000        |  |  |            | N/A       |  |  |     | N/A |  
|Page views of homepages of TravelzooWeb sites: |               |                         |  |            |                |  |  |            |           |  |  |    
|                                               | North America |                         |  | 38,170,000 |                |  |  | 31,835,000 |           |  |  | +20 | %  
|                                               | Europe*       |                         |  | 268,000    |                |  |  | N/A        |           |  |  | N/A |    






|  |                                                                                                       
|- | ------------------------------------------------------------------------------------------------------
|* | From November 9 to December 31, 2005. No information
    available for period before November 9, 2005.



Travelzoo Travelzoo Top 20 Travelzoo Top 20 Travelzoo




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





SuperSearch. Travelzoo Travelzoo Top 20 Newsflash




23



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SuperSearch SuperSearch






| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Growth of the online advertising market for travel in the U.S.
    and in other countries where we do business;
|
| |  | Our ability to increase our advertising rates;                                                                 
|
| |  | Our ability to sell more advertising to existing
    clients; and                                              
|
| |  | Our ability to increase the number of clients.                                                                 







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





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



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

e-mail SuperSearch Travelzoo.




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start-up




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













| |                       
| | ----------------------
| | Subscriber Acquisition

Travelzoo Top 20 Newsflash






| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Average Cost per Acquisition of a New Subscriber: This is
    the quarterly costs of consumer marketing programs whose purpose
    was primarily to acquire new subscribers, divided by total new
    subscribers added during the quarter.                                         
|
| |  | New Subscribers: Total new subscribers who signed up for
    at least one of our
    e-mail publications
    throughout the quarter. This is an unduplicated subscriber
    number, meaning a subscriber who signed up for two or more of
    our publications is only counted once.

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| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unsubscribes: Subscribers who were removed from our list
    throughout the quarter either as a result of their requesting
    removal, or based on periodic list maintenance after we
    determined that the
    e-mail address was
    likely no longer valid.
|
| |  | Balance: This is the number of subscribers at the end of
    the quarter, computed by taking the previous quarters
    subscriber balance, adding new subscribers during the current
    quarter, and subtracting unsubscribes during the current quarter.      



|        |  |                      |      |  |                 |  |           |              |  |  |          |   |  |  |           | 
|------- |  | -------------------- | ---- |  | --------------- |  | --------- | ------------ |  |  | -------- | - |  |  | --------- | 
|        |  | Average Cost per     |      |  |                 |  |           |              | 
|        |  | Acquisition of a New |      |  |                 |  |           |              | 
|Period  |  | Subscriber           |      |  | New Subscribers |  |           | Unsubscribes |  |  | Balance  |  
|        |  |                      |      |  |                 |  |           |              |  |  |          |  
|Q1 2003 |  | $                    | 1.62 |  |                 |  | 693,872   |              |  |  | (213,423 | ) |  |  | 3,962,625 | 
|Q2 2003 |  | $                    | 1.58 |  |                 |  | 924,902   |              |  |  | (172,403 | ) |  |  | 4,715,124 | 
|Q3 2003 |  | $                    | 1.52 |  |                 |  | 1,108,045 |              |  |  | (248,964 | ) |  |  | 5,574,205 | 
|Q4 2003 |  | $                    | 2.17 |  |                 |  | 869,286   |              |  |  | (240,907 | ) |  |  | 6,202,584 | 
|Q1 2004 |  | $                    | 2.23 |  |                 |  | 920,063   |              |  |  | (185,151 | ) |  |  | 6,937,496 | 
|Q2 2004 |  | $                    | 2.58 |  |                 |  | 858,899   |              |  |  | (634,702 | ) |  |  | 7,161,693 | 
|Q3 2004 |  | $                    | 1.26 |  |                 |  | 1,298,962 |              |  |  | (602,628 | ) |  |  | 7,858,027 | 
|Q4 2004 |  | $                    | 1.70 |  |                 |  | 694,026   |              |  |  | (406,316 | ) |  |  | 8,145,737 | 
|Q1 2005 |  | $                    | 2.59 |  |                 |  | 659,459   |              |  |  | (475,938 | ) |  |  | 8,329,258 | 
|Q2 2005 |  | $                    | 2.62 |  |                 |  | 806,734   |              |  |  | (533,109 | ) |  |  | 8,602,883 | 
|Q3 2005 |  | $                    | 3.19 |  |                 |  | 740,768   |              |  |  | (422,868 | ) |  |  | 8,920,783 | 
|Q4 2005 |  | $                    | 2.41 |  |                 |  | 729,460   |              |  |  | (273,389 | ) |  |  | 9,376,854 | 



|        |  |                      |      |  |                 |  |         |              |  |  |         |   |  |  |         | 
|------- |  | -------------------- | ---- |  | --------------- |  | ------- | ------------ |  |  | ------- | - |  |  | ------- | 
|        |  | Average Cost per     |      |  |                 |  |         |              | 
|        |  | Acquisition of a New |      |  |                 |  |         |              | 
|Period  |  | Subscriber           |      |  | New Subscribers |  |         | Unsubscribes |  |  | Balance |  
|        |  |                      |      |  |                 |  |         |              |  |  |         |  
|Q3 2005 |  | $                    | 1.65 |  |                 |  | 127,857 |              |  |  | (5,577  | ) |  |  | 140,153 | 
|Q4 2005 |  | $                    | 2.02 |  |                 |  | 174,514 |              |  |  | (16,898 | ) |  |  | 297,769 | 







| |                
| | ---------------
| | Interest Income



26



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







Liquidity and Capital Resources








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Travelzoo








|                     |  |      |       |  |      |   |       |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |       | 
|-------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | ---- | - | ---------- |  | ----- | - |  |  | - | - |  |  | - | ----- | 
|                     |  | 2006 |       |  | 2007 |   |       | 2008 |  | 2009 |   | Thereafter |  | Total |  
|                     |  |      |       |  |      |   |       |      |  |      |   |            |  |       |  
|Operating leases     |  | $    | 1,753 |  |      | $ | 1,448 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ | 3,201 | 
|Purchase obligations |  |      | 114   |  |      |   | 8     |      |  |      |  |            |  |       |  |  |  |   |  |  |  |   | 122   | 
|                     |  |      |       |  |      |   |       |      |  |      |   |            |  |       |   |  |  |  
|Total commitments    |  | $    | 1,867 |  |      | $ | 1,456 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ | 3,323 | 
|                     |  |      |       |  |      |   |       |      |  |      |   |            |  |       |   |  |  |  



Recent Accounting Pronouncements


Accounting
Changes and Error Corrections, Accounting Changes, Reporting Accounting Changes in
Interim Financial Statements.


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Share-Based
Payments,







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





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|        |                                  
|------- | ---------------------------------
|Item 8. | Consolidated Financial Statements

TRAVELZOO INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                             |  |      |    | 
|---------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                             |  | Page |   
|                                                                             |  |      |   
|Reports of Independent Registered Public
    Accounting Firm                 |  |      | 31 | 
|Consolidated Balance Sheets                                                  |  |      | 33 | 
|Consolidated Statements of Operations                                        |  |      | 34 | 
|Consolidated Statements of
    Stockholders Equity and Comprehensive Income |  |      | 35 | 
|Consolidated Statements of Cash Flows                                        |  |      | 36 | 
|Notes to Consolidated Financial
    Statements                               |  |      | 37 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control  Integrated Framework




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





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Internal Control 
Integrated Framework








Internal Control  Integrated
Framework Internal Control  Integrated Framework






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





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TRAVELZOO INC.





CONSOLIDATED BALANCE SHEETS


|                                          |                                                                                                                                                                                                      |                                            |         |            |            |  |         |            |            | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ---------- | ---------- |  | ------- | ---------- | ---------- | 
|                                          |                                                                                                                                                                                                      | December 31,                               |        
|                                          |                                                                                                                                                                                                      |                                            |        
|                                          |                                                                                                                                                                                                      | 2005                                       |         |            | 2004       | 
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|ASSETS                                   
|Current assets:                           |                                                                                                                                                                                                      |                                            |         |            |            |  |         |           
|                                          | Cash and cash equivalents                                                                                                                                                                            |                                            | $       | 24,468,732 |            |  | $       | 26,434,989 |           
|                                          | Short term investments                                                                                                                                                                               |                                            |         | 19,887,487 |            |  |         | 10,031,738 |           
|                                          | Accounts receivable, less allowance for doubtful accounts of
    $418,448 and $127,547 as of December 31, 2005 and
    December 31, 2004, respectively                                               |                                            |         | 9,020,363  |            |  |         | 5,327,279  |           
|                                          | Deposits                                                                                                                                                                                             |                                            |         | 27,816     |            |  |         | 163,130    |           
|                                          | Prepaid expenses and other current assets                                                                                                                                                            |                                            |         | 631,331    |            |  |         | 674,208    |           
|                                          | Deferred tax assets                                                                                                                                                                                  |                                            |         | 1,019,942  |            |  |         | 390,895    |           
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                          |                                                                                                                                                                                                      | Total current assets                       |         |            | 55,055,671 |  |         |            | 43,022,239 | 
|Deposits, less current portion            |                                                                                                                                                                                                      |                                            | 189,674 |            |            |  |        |           
|Deferred tax assets, less current portion |                                                                                                                                                                                                      |                                            | 28,232  |            |            |  | 43,237  |           
|Property and equipment, net               |                                                                                                                                                                                                      |                                            | 158,767 |            |            |  | 108,399 |           
|Intangible assets, net                    |                                                                                                                                                                                                      |                                            | 19,887  |            |            |  | 83,563  |           
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                          |                                                                                                                                                                                                      | Total assets                               |         | $          | 55,452,231 |  |         | $          | 43,257,438 | 
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                         
|LIABILITIES AND STOCKHOLDERS EQUITY     
|Current liabilities:                      |                                                                                                                                                                                                      |                                            |         |            |            |  |         |           
|                                          | Accounts payable                                                                                                                                                                                     |                                            | $       | 2,372,650  |            |  | $       | 439,425    |           
|                                          | Accrued expenses                                                                                                                                                                                     |                                            |         | 3,393,842  |            |  |         | 2,464,269  |           
|                                          | Deferred revenue                                                                                                                                                                                     |                                            |         | 295,878    |            |  |         | 91,137     |           
|                                          | Income tax payable                                                                                                                                                                                   |                                            |         | 856,362    |            |  |         |           |           
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                          |                                                                                                                                                                                                      | Total liabilities                          |         |            | 6,918,732  |  |         |            | 2,994,831  | 
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|Commitments and contingencies             |                                                                                                                                                                                                      |                                            |         |            |            |  |         |           
|Stockholders equity:                     |                                                                                                                                                                                                      |                                            |         |            |            |  |         |           
|                                          | Preferred stock, $0.01 par value; 5,000,000 shares
    authorized, none outstanding                                                                                                                  |                                            |         |           |            |  |         |           |           
|                                          | Common stock, $0.01 par value; 40,000,000 shares
    authorized, 16,250,479 shares outstanding as of
    December 31, 2005 and 16,233,204 shares reported as
    outstanding as of December 31, 2004 |                                            |         | 162,505    |            |  |         | 162,332    |           
|                                          | Accumulated other comprehensive loss                                                                                                                                                                 |                                            |         | (37,771    | )          |  |         |           |           
|                                          | Additional paid-in capital                                                                                                                                                                           |                                            |         | 30,645,464 |            |  |         | 30,299,991 |           
|                                          | Retained earnings                                                                                                                                                                                    |                                            |         | 17,763,301 |            |  |         | 9,800,284  |           
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                          |                                                                                                                                                                                                      | Total stockholders equity                 |         |            | 48,533,499 |  |         |            | 40,262,607 | 
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 
|                                          |                                                                                                                                                                                                      | Total liabilities and stockholders equity |         | $          | 55,452,231 |  |         | $          | 43,257,438 | 
|                                          |                                                                                                                                                                                                      |                                            |         |            |            | 



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TRAVELZOO INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                 |                                                       |                          |            |            |            |   |            |            |            |   |            |            |            | 
|-------------------------------- | ----------------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                 |                                                       | Years Ended December 31, |           
|                                 |                                                       |                          |           
|                                 |                                                       | 2005                     |            |            | 2004       |   |            | 2003       |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Revenues                         |                                                       | $                        | 50,772,141 |            |            | $ | 33,679,232 |            |            | $ | 17,991,241 |           
|Cost of revenues                 |                                                       |                          | 878,102    |            |            |   | 694,713    |            |            |   | 399,039    |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|                                 |                                                       | Gross profit             |            |            | 49,894,039 |   |            |            | 32,984,519 |   |            |            | 17,592,202 | 
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Operating expenses:              |                                                       |                          |            |            |            |   |            |            |            |   |            |           
|                                 | Sales and marketing                                   |                          |            | 25,914,652 |            |   |            | 15,730,623 |            |   |            | 9,564,384  |           
|                                 | General and administrative                            |                          |            | 9,109,332  |            |   |            | 6,220,573  |            |   |            | 4,288,985  |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|                                 |                                                       | Total operating expenses |            |            | 35,023,984 |   |            |            | 21,951,196 |   |            |            | 13,853,369 | 
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Income from operations           |                                                       |                          | 14,870,055 |            |            |   | 11,033,323 |            |            |   | 3,738,833  |           
|Interest income                  |                                                       |                          | 960,772    |            |            |   | 126,499    |            |            |   | 13,192     |           
|Loss on foreign currency         |                                                       |                          | (14,692    | )          |            |   |           |            |            |   |           |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Income before income tax expense |                                                       |                          | 15,816,135 |            |            |   | 11,159,822 |            |            |   | 3,752,025  |           
|Income tax expense               |                                                       |                          | 7,853,118  |            |            |   | 5,122,445  |            |            |   | 1,701,899  |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Net income                       |                                                       | $                        | 7,963,017  |            |            | $ | 6,037,377  |            |            | $ | 2,050,126  |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|Net income per share:            |                                                       |                          |            |            |            |   |            |            |            |   |            |           
|                                 | Basic net income per share                            |                          | $          | 0.49       |            |   | $          | 0.36       |            |   | $          | 0.11       |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|                                 | Diluted net income per share                          |                          | $          | 0.45       |            |   | $          | 0.33       |            |   | $          | 0.10       |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|                                 | Shares used in computing basic net income per share   |                          |            | 16,249,231 |            |   |            | 16,879,227 |            |   |            | 19,425,147 |           
|                                 |                                                       |                          |            |            |            |   |            |            |           
|                                 | Shares used in computing diluted net income per share |                          |            | 17,730,876 |            |   |            | 18,474,775 |            |   |            | 20,526,951 |           
|                                 |                                                       |                          |            |            |            |   |            |            |           



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TRAVELZOO INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


AND COMPREHENSIVE INCOME


Years Ended December 31, 2005, 2004, and 2003


|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |   |            |  |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---------- | - | ------- | ----------------- |  | - | ---------- | - | ----- | ------------ | ------- | - | ------ | - | ---------- |  |  | - | ---------- | -
|                                                                                       |  | Common Stock |            |   | Additional |   |         | Accumulated Other |  |   |            |   | Total |             
|                                                                                       |  |              |            |   | Paid-In    |   |         | Comprehensive     |  |   | Retained   |   |       | Stockholders |        
|                                                                                       |  | Shares       |            |   | Amount     |   |         | Capital           |  |   | Loss       |   |       | Earnings     |         |   | Equity |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  
|Balances, December 31, 2003                                                            |  |              | 19,425,147 |   |            | $ | 194,251 |                   |  | $ | (116,078   | ) |       | $            |        |   |        | $ | 3,762,907  |  |  | $ | 3,841,080  |  
|Reduction of reported shares outstanding upon expiration of
    merger exchange period |  |              | (4,115,532 | ) |            |   | (41,155 | )                 |  |   | 41,155     |   |       |              |        |   |        |   |           |  |  |   |           |  
|Proceeds from exercises of options                                                     |  |              | 173,589    |   |            |   | 1,736   |                   |  |   | 369,031    |   |       |              |        |   |        |   |           |  |  |   | 370,767    |  
|Tax benefit of non-qualified stock options exercise                                    |  |              |           |   |            |   |        |                   |  |   | 1,931,924  |   |       |              |        |   |        |   |           |  |  |   | 1,931,924  |  
|Recovery of profit from purchase and sale of stock by employees                        |  |              |           |   |            |   |        |                   |  |   | 34,390     |   |       |              |        |   |        |   |           |  |  |   | 34,390     |  
|Proceeds from issuance of common stock, net of related issuance
    costs              |  |              | 750,000    |   |            |   | 7,500   |                   |  |   | 28,039,569 |   |       |              |        |   |        |   |           |  |  |   | 28,047,069 |  
|Comprehensive income:                                                                  |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |   |            |  |  |   |            |  
|Net income                                                                             |  |              |           |   |            |   |        |                   |  |   |           |   |       |              |        |   |        |   | 6,037,377  |  |  |   | 6,037,377  |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  
|Total comprehensive income                                                             |  |              |           |   |            |   |        |                   |  |   |           |   |       |              |        |   |        |   |           |  |  |   | 6,037,377  |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  
|Balances, December 31, 2004                                                            |  |              | 16,233,204 |   |            |   | 162,332 |                   |  |   | 30,299,991 |   |       |              |        |   |        |   | 9,800,284  |  |  |   | 40,262,607 |  
|Proceeds from exercises of options                                                     |  |              | 17,275     |   |            |   | 173     |                   |  |   | 34,377     |   |       |              |        |   |        |   |           |  |  |   | 34,550     |  
|Tax benefit of non-qualified stock options exercise                                    |  |              |           |   |            |   |        |                   |  |   | 434,825    |   |       |              |        |   |        |   |           |  |  |   | 434,825    |  
|Additional issuance costs related to Q4 2005                                           |  |              |           |   |            |   |        |                   |  |   | (123,729   | ) |       |              |        |   |        |   |           |  |  |   | (123,729   | )
|Comprehensive income:                                                                  |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |   |            |  |  |   |            |  
|Foreign currency translation adjustment                                                |  |              |           |   |            |   |        |                   |  |   |           |   |       |              | (37,771 | ) |        |   |           |  |  |   | (37,771    | )
|Net income                                                                             |  |              |           |   |            |   |        |                   |  |   |           |   |       |              |        |   |        |   | 7,963,017  |  |  |   | 7,963,017  |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  
|Total comprehensive income                                                             |  |              |           |   |            |   |        |                   |  |   |           |   |       |              |        |   |        |   |           |  |  |   | 7,925,246  |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  
|Balances, December 31, 2005                                                            |  |              | 16,250,479 |   |            | $ | 162,505 |                   |  | $ | 30,645,464 |   |       | $            | (37,771 | ) |        | $ | 17,763,301 |  |  | $ | 48,533,499 |  
|                                                                                       |  |              |            |   |            |   |         |                   |  |   |            |   |       |              |         |   |        |  



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TRAVELZOO INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |           |            |             |           |          |            |           |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | -------- | ---------- | ---------- | ----------- | --------- | ---------- | ----------- | --------- | -------- | ---------- | --------- | -
|                                                                |                                                                                       | Year Ended December 31,                      |                                          
|                                                                |                                                                                       |                                              |                                          
|                                                                |                                                                                       | 2005                                         |                                           |                                                     | 2004     |            |            | 2003        |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Cash flows from operating activities:                           |                                                                                       |                                              |                                           |                                                     |          |            |            |             |           |            |             |          
|                                                                | Net income                                                                            |                                              | $                                         | 7,963,017                                           |          |            | $          | 6,037,377   |           |            | $           | 2,050,126 |         
|                                                                | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                              |                                           |                                                     |          |            |            |             |           |            |             |           |         
|                                                                |                                                                                       | Depreciation and amortization                |                                           |                                                     | 166,957  |            |            |             | 161,329   |            |             |           | 163,284  |           
|                                                                |                                                                                       | Deferred income taxes                        |                                           |                                                     | (676,440 | )          |            |             | (181,310  | )          |             |           | (139,455 | )         
|                                                                |                                                                                       | Provision for losses on accounts receivable  |                                           |                                                     | 317,301  |            |            |             | 121,088   |            |             |           | 15,534   |           
|                                                                |                                                                                       | Loss on disposal of property and equipment   |                                           |                                                     |         |            |            |             |          |            |             |           | 415      |           
|                                                                |                                                                                       | Tax benefit of stock option exercises        |                                           |                                                     | 434,825  |            |            |             | 1,931,924 |            |             |           |         |           
|                                                                |                                                                                       | Accrued income for short-term investments    |                                           |                                                     | (48,682  | )          |            |             |          |            |             |           |         |           
|                                                                |                                                                                       | Changes in operating assets and liabilities: |                                           |                                                     |          |            |            |             |           |            |             |           |          |           
|                                                                |                                                                                       |                                              | Accounts receivable                       |                                                     |          | (4,018,747 | )          |             |           | (3,078,452 | )           |           |          | (1,074,050 | )        
|                                                                |                                                                                       |                                              | Deposits                                  |                                                     |          | (55,106    | )          |             |           | (23,519    | )           |           |          | (52,349    | )        
|                                                                |                                                                                       |                                              | Prepaid expenses and other current assets |                                                     |          | 40,489     |            |             |           | (542,590   | )           |           |          | (16,709    | )        
|                                                                |                                                                                       |                                              | Accounts payable                          |                                                     |          | 1,940,172  |            |             |           | 215,798    |             |           |          | (218,722   | )        
|                                                                |                                                                                       |                                              | Accrued expenses                          |                                                     |          | 937,500    |            |             |           | 1,135,732  |             |           |          | 780,857    |          
|                                                                |                                                                                       |                                              | Deferred revenue                          |                                                     |          | 204,799    |            |             |           | 68,825     |             |           |          | 3,133      |          
|                                                                |                                                                                       |                                              | Income tax payable                        |                                                     |          | 918,760    |            |             |           | (1,310,874 | )           |           |          | 871,442    |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|                                                                |                                                                                       |                                              |                                           | Net cash provided by operating activities           |          |            | 8,124,845  |             |           |            | 4,535,328   |           |          |            | 2,383,506 |  
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Cash flows from investing activities:                           |                                                                                       |                                              |                                           |                                                     |          |            |            |             |           |            |             |          
|                                                                | Purchases of property and equipment                                                   |                                              |                                           | (155,707                                            | )        |            |            | (39,776     | )         |            |             | (120,142  | )       
|                                                                | Purchases of short-term investments                                                   |                                              |                                           | (49,500,165                                         | )        |            |            | (10,031,738 | )         |            |             |          |         
|                                                                | Sales of short-term investments                                                       |                                              |                                           | 39,693,099                                          |          |            |            |            |           |            |             |          |         
|                                                                | Purchases of intangible assets                                                        |                                              |                                           |                                                    |          |            |            | (2,688      | )         |            |             |          |         
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|                                                                |                                                                                       |                                              |                                           | Net cash used in investing activities               |          |            | (9,962,773 | )           |           |            | (10,074,202 | )         |          |            | (120,142  | )
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Cash flows from financing activities:                           |                                                                                       |                                              |                                           |                                                     |          |            |            |             |           |            |             |          
|Proceeds from issuance of common stock, net of related costs    |                                                                                       |                                              | (123,729                                  | )                                                   |          |            | 28,047,069 |             |           |            |            |          
|Proceeds from stock option exercises                            |                                                                                       |                                              | 34,550                                    |                                                     |          |            | 370,767    |             |           |            |            |          
|Recovery of profit from purchase and sale of stock by employees |                                                                                       |                                              |                                          |                                                     |          |            | 34,390     |             |           |            |            |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|                                                                |                                                                                       |                                              |                                           | Net cash provided by (used in) financing activities |          |            | (89,179    | )           |           |            | 28,452,226  |           |          |            |          |  
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Effect of exchange rate changes on cash                         |                                                                                       |                                              | (39,150                                   | )                                                   |          |            |           |             |           |            |            |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Net increase (decrease) in cash and cash equivalents            |                                                                                       |                                              | (1,966,257                                | )                                                   |          |            | 22,913,352 |             |           |            | 2,263,364   |          
|Cash and cash equivalents at beginning of year                  |                                                                                       |                                              | 26,434,989                                |                                                     |          |            | 3,521,637  |             |           |            | 1,258,273   |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Cash and cash equivalents at end of year                        |                                                                                       | $                                            | 24,468,732                                |                                                     |          | $          | 26,434,989 |             |           | $          | 3,521,637   |          
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          
|Supplemental disclosure of cash flow information:               |                                                                                       |                                              |                                           |                                                     |          |            |            |             |           |            |             |          
|                                                                | Cash paid for income taxes, net of refunds received                                   |                                              | $                                         | 7,175,972                                           |          |            | $          | 4,682,705   |           |            | $           | 969,912   |         
|                                                                |                                                                                       |                                              |                                           |                                                     |          |            |            |             |          



36



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TRAVELZOO INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005, 2004, and 2003




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



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

Travelzoo Travelzoo
Top 20 Newsflash SuperSearch






Travelzoo as-if pooling-of




37



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






as-if pooling-of


38



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Travelzoo Travelzoo
Top 20 Newsflash SuperSearch.


Revenue Recognition.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an arrangement. The Company considers an
    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
    click-throughs have been delivered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Fixed or determinable fee. The Company considers the fee
    to be fixed or determinable if the fee is not subject to refund
    or adjustment and payment terms are standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Collection is deemed reasonably assured. The Company
    conducts a credit review for all transactions at the time of the
    arrangement to determine the creditworthiness of the client.
    Collection is deemed reasonably assured if it is expected that
    the client will be able to pay amounts under the arrangement as
    payments become due. If it is determined that collection is not
    reasonably assured, then revenue is deferred and recognized upon
    cash collection. Collection is deemed not reasonably assured
    when a client is perceived to be in financial distress, which
    may be evidenced by weak industry condition, bankruptcy filing,
    or previously billed amounts that are past due.

fixed-fee Travelzoo Top 20 Newsflash variable-fee


39



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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

Earnings per Share.




|                              |                                                     |                              |   |            |      |  |   |            |      |  |   |            |      | 
|----------------------------- | --------------------------------------------------- | ---------------------------- | - | ---------- | ---- |  | - | ---------- | ---- |  | - | ---------- | ---- | 
|                              |                                                     | Year Ended December 31,      |  
|                              |                                                     |                              |  
|                              |                                                     | 2005                         |   |            | 2004 |  |   | 2003       |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|Basic net income per share:   |                                                     |                              |   |            |      |  |   |            |      |  |   |           
|                              | Net income                                          |                              | $ | 7,963,017  |      |  | $ | 6,037,377  |      |  | $ | 2,050,126  |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|                              | Weighted average common shares                      |                              |   | 16,249,231 |      |  |   | 16,879,227 |      |  |   | 19,425,147 |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|                              |                                                     | Basic net income per share   |   | $          | 0.49 |  |   | $          | 0.36 |  |   | $          | 0.11 | 
|                              |                                                     |                              |   |            |      |  |   |            |     
|Diluted net income per share: |                                                     |                              |   |            |      |  |   |            |      |  |   |           
|                              | Net income                                          |                              | $ | 7,963,017  |      |  | $ | 6,037,377  |      |  | $ | 2,050,126  |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|                              | Weighted average common shares                      |                              |   | 16,249,231 |      |  |   | 16,879,227 |      |  |   | 19,425,147 |     
|                              | Effect of dilutive securities  stock options       |                              |   | 1,481,645  |      |  |   | 1,595,548  |      |  |   | 1,101,804  |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|                              | Weighted average common and potential common shares |                              |   | 17,730,876 |      |  |   | 18,474,775 |      |  |   | 20,526,951 |     
|                              |                                                     |                              |   |            |      |  |   |            |     
|                              |                                                     | Diluted net income per share |   | $          | 0.45 |  |   | $          | 0.33 |  |   | $          | 0.10 | 
|                              |                                                     |                              |   |            |      |  |   |            |     



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





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



|                               |  |              |         |  |      |   |         | 
|------------------------------ |  | ------------ | ------- |  | ---- | - | ------- | 
|                               |  | December 31, |        
|                               |  |              |        
|                               |  | 2005         |         |  | 2004 |  
|                               |  |              |         |  |      |  
|Computer hardware and software |  | $            | 351,564 |  |      | $ | 323,746 | 
|Office equipment               |  |              | 351,859 |  |      |   | 226,587 | 
|                               |  |              |         |  |      |  
|                               |  |              | 703,423 |  |      |   | 550,333 | 
|Less accumulated depreciation  |  |              | 544,656 |  |      |   | 441,934 | 
|                               |  |              |         |  |      |  
|Total                          |  | $            | 158,767 |  |      | $ | 108,399 | 
|                               |  |              |         |  |      |  

40



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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



|                                      |  |              |         |  |      |   |         | 
|------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                      |  | December 31, |        
|                                      |  |              |        
|                                      |  | 2005         |         |  | 2004 |  
|                                      |  |              |         |  |      |  
|Acquired amortized intangible assets: |  |              |         |  |      |   |         | 
|Internet domain names                 |  | $            | 347,904 |  |      | $ | 347,547 | 
|Less accumulated amortization         |  |              | 328,017 |  |      |   | 263,984 | 
|                                      |  |              |         |  |      |  
|Total                                 |  | $            | 19,887  |  |      | $ | 83,563  | 
|                                      |  |              |         |  |      |  







|                        |  |   |        | 
|----------------------- |  | - | ------ | 
|Year ended December 31, |  |   |        | 
|2006                    |  | $ | 18,632 | 
|2007                    |  |   | 538    | 
|2008                    |  |   | 538    | 
|2009                    |  |   | 179    | 
|                        |  |   |       
|                        |  | $ | 19,887 | 
|                        |  |   |       



|    |                                            
|--- | -------------------------------------------
|(g) | Cash Equivalents and Short-Term Investments



held-to




|    |                  
|--- | -----------------
|(h) | Advertising Costs



41



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|(i) | Income Taxes





|    |                     
|--- | --------------------
|(j) | Comprehensive Income





|    |                                
|--- | -------------------------------
|(k) | Impairment of Long-Lived Assets

Impairment of Long-Lived
Assets.




|    |                         
|--- | ------------------------
|(l) | Stock-Based Compensation

Accounting for
Stock-Based Compensation, Accounting for Stock Issued to Employees,






|    |                           
|--- | --------------------------
|(m) | Web Site Development Costs

00-02, Accounting for Website Development Costs.




|    |                 
|--- | ----------------
|(n) | Foreign Currency





42



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                 
|--- | --------------------------------
|(o) | Recent Accounting Pronouncements

Accounting Changes and Error Corrections, Accounting Changes, Reporting Accounting Changes in Interim Financial
Statements.


Share-Based
Payments,




|    |                              
|--- | -----------------------------
|(2) | Commitments and Contingencies





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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                                                     
|--- | ----------------------------------------------------
|(3) | Allowance for Doubtful Accounts and Accrued Expenses



|                             |                                                |   |         |         |  
|---------------------------- | ---------------------------------------------- | - | ------- | ------- | -
|Balance at December 31, 2002 |                                                | $ | 55,925  |        
|                             | Additions  charged to costs and expenses, net |   |         | 15,534  |  
|                             |                                                |   |        
|Balance at December 31, 2003 |                                                |   | 71,459  |        
|                             | Additions  charged to costs and expenses, net |   |         | 121,088 |  
|                             | Deductions  write-offs                        |   |         | (65,000 | )
|                             |                                                |   |        
|Balance at December 31, 2004 |                                                |   | 127,547 |        
|                             | Additions  charged to costs and expenses, net |   |         | 317,301 |  
|                             | Deductions  write-offs                        |   |         | (26,400 | )
|                             |                                                |   |        
|Balance at December 31, 2005 |                                                | $ | 418,448 |        
|                             |                                                |   |        



|                                      |  |              |           |  |      |   |           | 
|------------------------------------- |  | ------------ | --------- |  | ---- | - | --------- | 
|                                      |  | December 31, |          
|                                      |  |              |          
|                                      |  | 2005         |           |  | 2004 |  
|                                      |  |              |           |  |      |  
|Liability to former stockholders      |  | $            |          |  |      | $ | 525,467   | 
|Accrued compensation expense          |  |              | 199,486   |  |      |   | 104,592   | 
|Accrued advertising expense           |  |              | 2,846,799 |  |      |   | 1,460,127 | 
|Accrued professional services expense |  |              | 148,687   |  |      |   | 146,904   | 
|Other accrued expenses                |  |              | 198,870   |  |      |   | 227,179   | 
|                                      |  |              |           |  |      |  
|Total accrued expenses                |  | $            | 3,393,842 |  |      | $ | 2,464,269 | 
|                                      |  |              |           |  |      |  

44



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|(4) | Income Taxes



|      |         |         |           |           |          |   |          |          |   |   |           |           | 
|----- | ------- | ------- | --------- | --------- | -------- | - | -------- | -------- | - | - | --------- | --------- | 
|      |         | Current |           |           | Deferred |   |          | Total    |  
|      |         |         |           |           |          |   |          |          |  
|2005: |         |         |           |           |          |   |          |          |   |   |           |          
|      | Federal |         | $         | 6,535,844 |          |   | $        | (595,284 | ) |   | $         | 5,940,560 | 
|      | State   |         |           | 1,993,714 |          |   |          | (81,156  | ) |   |           | 1,912,558 | 
|      |         |         |           |           |          |   |          |          |  
|      |         | $       | 8,529,558 |           |          | $ | (676,440 | )        |   | $ | 7,853,118 |          
|      |         |         |           |           |          |   |          |          |  
|2004: |         |         |           |           |          |   |          |          |   |   |           |          
|      | Federal |         | $         | 4,116,617 |          |   | $        | (348,285 | ) |   | $         | 3,768,332 | 
|      | State   |         |           | 1,367,429 |          |   |          | (13,316  | ) |   |           | 1,354,113 | 
|      |         |         |           |           |          |   |          |          |  
|      |         | $       | 5,484,046 |           |          | $ | (361,601 | )        |   | $ | 5,122,445 |          
|      |         |         |           |           |          |   |          |          |  
|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 |          
|      |         |         |           |           |          |   |          |          |  





|                                               |  |      |           |  |      |   |           |      |  |   |           | 
|---------------------------------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                               |  | 2005 |           |  | 2004 |   |           | 2003 | 
|                                               |  |      |           |  |      |   |           |      | 
|Federal tax at statutory rates                 |  | $    | 5,535,647 |  |      | $ | 3,794,340 |      |  | $ | 1,275,097 | 
|State taxes, net of federal income tax benefit |  |      | 1,243,163 |  |      |   | 893,714   |      |  |   | 321,688   | 
|Foreign loss                                   |  |      | 397,052   |  |      |   |          |      |  |   |          | 
|Non-deductible expenses and other              |  |      | 677,256   |  |      |   | 434,391   |      |  |   | 105,114   | 
|                                               |  |      |           |  |      |   |           |      | 
|Total income tax expense                       |  | $    | 7,853,118 |  |      | $ | 5,122,445 |      |  | $ | 1,701,899 | 
|                                               |  |      |           |  |      |   |           |      | 



45



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                         |                                |           |         |           |   |         |         |         |  
|------------------------- | ----------------------- | ------------------------------ | --------- | ------- | --------- | - | ------- | ------- | ------- | -
|                          |                         | 2005                           |           |         | 2004      |  
|                          |                         |                                |           |         |           |  
|Deferred tax assets:      |                         |                                |           |         |           |   |         |        
|                          | Accruals and allowances |                                | $         | 360,997 |           |   | $       | 126,597 |        
|                          | State income taxes      |                                |           | 618,574 |           |   |         | 250,362 |        
|                          | Intangible assets       |                                |           | 100,265 |           |   |         | 75,987  |        
|                          |                         |                                |           |         |           |  
|                          |                         | Gross deferred tax assets      |           | $       | 1,079,836 |   |         | $       | 452,946 |  
|                          |                         |                                |           |         |           |  
|Deferred tax liabilities: |                         |                                |           |         |           |   |         |        
|                          | Property and equipment  |                                | $         | (31,662 | )         |   | $       | (18,814 | )      
|                          |                         |                                |           |         |           |  
|                          |                         | Gross deferred tax liabilities |           |         | (31,662   | ) |         |         | (18,814 | )
|                          |                         |                                |           |         |           |  
|Net deferred tax assets   |                         | $                              | 1,048,174 |         |           | $ | 434,132 |        
|                          |                         |                                |           |         |           |  





|    |                     
|--- | --------------------
|(5) | Stockholders Equity







46



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                                                               |  |                         |           |  |      |  |           |      |  |  |           | 
|-------------------------------------------------------------- |  | ----------------------- | --------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                                                               |  | Year Ended December 31, |          
|                                                               |  |                         |          
|                                                               |  | 2005                    |           |  | 2004 |  |           | 2003 | 
|                                                               |  |                         |           |  |      |  |           |      | 
|Outstanding at beginning of year                               |  |                         | 2,228,349 |  |      |  | 2,401,938 |      |  |  | 2,401,938 | 
|Granted                                                        |  |                         |          |  |      |  |          |      |  |  |          | 
|Exercised                                                      |  |                         | 17,275    |  |      |  | 173,589   |      |  |  |          | 
|Cancelled                                                      |  |                         |          |  |      |  |          |      |  |  |          | 
|                                                               |  |                         |           |  |      |  |           |      | 
|Outstanding at end of year                                     |  |                         | 2,211,074 |  |      |  | 2,228,349 |      |  |  | 2,401,938 | 
|                                                               |  |                         |           |  |      |  |           |      | 
|Exercisable at end of year                                     |  |                         | 2,211,074 |  |      |  | 2,228,349 |      |  |  | 2,401,938 | 
|Weighted-average fair value of options granted during the year |  |                         |          |  |      |  |          |      |  |  |          | 



|               |  |                 |           |  |                  |  |            |                  |  |   |      | 
|-------------- |  | --------------- | --------- |  | ---------------- |  | ---------- | ---------------- |  | - | ---- | 
|               |  | Shares          |           |  | Weighted-Average |  |            |                 
|               |  | Outstanding and |           |  | Remaining        |  |            | Weighted-Average | 
|Exercise Price |  | Exercisable     |           |  | Contractual Life |  |            | Exercise Price   | 
|               |  |                 |           |  |                  |  |            |                  | 
|$1.00          |  |                 | 2,158,349 |  |                  |  | 6.08 years |                  |  | $ | 1.00 | 
|$2.00          |  |                 | 42,725    |  |                  |  | 6.83 years |                  |  |   | 2.00 | 
|$3.00          |  |                 | 10,000    |  |                  |  | 7.25 years |                  |  |   | 3.00 | 
|               |  |                 |           |  |                  |  |            |                  | 
|               |  |                 | 2,211,074 |  |                  |  | 6.30 years |                  |  | $ | 1.03 | 

(6) Significant Customer Information and Segment
Reporting


Disclosure about Segments of an
Enterprise and Related Information,


47



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##### Table of Contents



TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |  |                         |    |            |              |  |    |      |  |  |      |   |  |      |    |   |  |  |    |  
|-------- |  | ----------------------- | -- | ---------- | ------------ |  | -- | ---- |  |  | ---- | - |  | ---- | -- | - |  |  | -- | -
|         |  |                         |    | Percent of |             
|         |  | Percentage of           |    |            | Accounts     | 
|         |  | Total Revenue           |    |            | Receivable   | 
|         |  |                         |    |            |              | 
|         |  | Year Ended December 31, |    |            | December 31, | 
|         |  |                         |    |            |              | 
|Customer |  | 2005                    |    |            | 2004         |  |    | 2003 |  |  | 2005 |   |  | 2004 |   
|         |  |                         |    |            |              |  |    |      |  |  |      |   |  |      |   
|A        |  |                         | 15 | %          |              |  | 12 | %    |  |  | *    |   |  |      | 13 | % |  |  | 19 | %
|B        |  |                         | *  |            |              |  | *  |      |  |  | 10   | % |  |      | *  |   |  |  | 13 | %
|C        |  |                         | *  |            |              |  | *  |      |  |  | 11   | % |  |      | *  |   |  |  | 11 | %

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






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



48



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TRAVELZOO INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |       |       |   |       |       |       |   |       |       |       | 
|---------------------------- | -------------------------- | ------------------------ | ------ | ----- | -------- | - | ------ | -------- | ------ | - | ------- | ----- | ------ | ------- | ------ | ----- | -------- | - | ------ | -------- | ------ | - | ------- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                             |                            | Quarters Ended           |       
|                             |                            |                          |       
|                             |                            | Dec 31,                  |        |       | Sept 30, |   |        | June 30, |        |   | Mar 31, |       |        | Dec 31, |        |       | Sept 30, |   |        | June 30, |        |   | Mar 31, |      
|                             |                            | 2005                     |        |       | 2005     |   |        | 2005     |        |   | 2005    |       |        | 2004    |        |       | 2004     |   |        | 2004     |        |   | 2004    |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|                             |                            | (In thousands)           |       
|Revenues                     |                            | $                        | 13,901 |       |          | $ | 13,384 |          |        | $ | 12,258  |       |        | $       | 11,228 |       |          | $ | 10,509 |          |        | $ | 9,507   |       |       | $ | 7,201 |       |       | $ | 6,462 |      
|Cost of revenues             |                            |                          | 249    |       |          |   | 225    |          |        |   | 224     |       |        |         | 179    |       |          |   | 166    |          |        |   | 183     |       |       |   | 166   |       |       |   | 179   |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|                             |                            | Gross profit             |        |       | 13,652   |   |        |          | 13,159 |   |         |       | 12,034 |         |        |       | 11,049   |   |        |          | 10,343 |   |         |       | 9,324 |   |       |       | 7,035 |   |       |       | 6,283 | 
|Operating expenses:          |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |       |       |   |       |       |       |   |       |      
|                             | Sales and marketing        |                          |        | 7,632 |          |   |        | 7,101    |        |   |         | 6,152 |        |         |        | 5,030 |          |   |        | 4,268    |        |   |         | 4,339 |       |   |       | 3,667 |       |   |       | 3,457 |      
|                             | General and administrative |                          |        | 2,496 |          |   |        | 1,878    |        |   |         | 2,127 |        |         |        | 2,608 |          |   |        | 2,348    |        |   |         | 1,657 |       |   |       | 1,101 |       |   |       | 1,115 |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|                             |                            | Total operating expenses |        |       | 10,128   |   |        |          | 8,979  |   |         |       | 8,279  |         |        |       | 7,638    |   |        |          | 6,616  |   |         |       | 5,996 |   |       |       | 4,768 |   |       |       | 4,572 | 
|Income from operations       |                            |                          | 3,524  |       |          |   | 4,180  |          |        |   | 3,755   |       |        |         | 3,411  |       |          |   | 3,727  |          |        |   | 3,328   |       |       |   | 2,267 |       |       |   | 1,711 |      
|Interest income              |                            |                          | 304    |       |          |   | 279    |          |        |   | 218     |       |        |         | 160    |       |          |   | 106    |          |        |   | 9       |       |       |   | 6     |       |       |   | 5     |      
|Foreign currency gain (loss) |                            |                          | (6     | )     |          |   | (4     | )        |        |   | (4      | )     |        |         |       |       |          |   |       |          |        |   |        |       |       |   |      |       |       |   |      |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|Income before income taxes   |                            |                          | 3,822  |       |          |   | 4,455  |          |        |   | 3,969   |       |        |         | 3,571  |       |          |   | 3,833  |          |        |   | 3,337   |       |       |   | 2,274 |       |       |   | 1,716 |      
|Income tax expense           |                            |                          | 2,168  |       |          |   | 2,156  |          |        |   | 1,791   |       |        |         | 1,739  |       |          |   | 2,104  |          |        |   | 1,371   |       |       |   | 940   |       |       |   | 707   |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|Net income                   |                            | $                        | 1,654  |       |          | $ | 2,299  |          |        | $ | 2,178   |       |        | $       | 1,832  |       |          | $ | 1,729  |          |        | $ | 1,966   |       |       | $ | 1,334 |       |       | $ | 1,009 |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|Basic net income per share   |                            | $                        | .10    |       |          | $ | .14    |          |        | $ | .13     |       |        | $       | .11    |       |          | $ | .11    |          |        | $ | .13     |       |       | $ | .08   |       |       | $ | .05   |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      
|Diluted net income per share |                            | $                        | .10    |       |          | $ | .13    |          |        | $ | .12     |       |        | $       | .10    |       |          | $ | .09    |          |        | $ | .11     |       |       | $ | .08   |       |       | $ | .05   |      
|                             |                            |                          |        |       |          |   |        |          |        |   |         |       |        |         |        |       |          |   |        |          |        |   |         |      



|    |                 
|--- | ----------------
|(8) | Subsequent Event



49



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##### Table of Contents








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








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

13a-15(e).


13a-15(f)


Managements Report on Internal Control Over Financial
Reporting






Internal Control  Integrated
Framework. 10-K.




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



50



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##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







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





|                     |  |     |    |  |          |                                                                
|-------------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Ralph Bartel, Ph.D.  |  |     | 40 |  |          | President, Chief Executive Officer, and Chief Financial Officer
|Holger Bartel, Ph.D. |  |     | 39 |  |          | Executive Vice President                                       
|Steven M. Ledwith    |  |     | 48 |  |          | Chief Technology Officer                                       
|Christopher Loughlin |  |     | 32 |  |          | Senior Vice President and General Manager, Europe              
|Lisa Su              |  |     | 30 |  |          | Controller (Chief Accounting Officer)                          
|Shirley Tafoya       |  |     | 42 |  |          | Senior Vice President of Sales                                 

Ralph Bartel, Ph.D.,


Holger Bartel, Ph.D.,


Steven M. Ledwith


Christopher Loughlin


Lisa Su


Shirley Tafoya


51



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##### Table of Contents








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








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








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








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






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





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



| |                                                         
| | --------------------------------------------------------
| | Reports of Independent Registered Public Accounting Firm
|
| | 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.

52



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SIGNATURES






| |               
| | --------------
| | Travelzoo Inc.



| |     |                 
| | --- | ----------------
| | By: | /s/ Ralph Bartel

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



attorney-in 10-K, attorney-in attorney-in




|                                       |  |                                                                                 |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                              |  | Title(s)                                                                        |  | Date          
|                                       |  |                                                                                 |  |               
|                                      
|/s/ Ralph BartelRalph Bartel           |  | Chairman of the Board, Chief Executive Officer, and Chief
    Financial Officer |  | March 15, 2006
|                                      
|/s/ Lisa SuLisa Su                     |  | Controller (Chief Accounting Officer)                                           |  | March 15, 2006
|                                      
|/s/ Holger BartelHolger Bartel         |  | Executive Vice President and Director                                           |  | March 15, 2006
|                                      
|/s/ David J. EhrlichDavid J. Ehrlich   |  | Director                                                                        |  | March 13, 2006
|                                      
|/s/ Donovan Neale-MayDonovan Neale-May |  | Director                                                                        |  | March 9, 2006 
|                                      
|/s/ Kelly M. UrsoKelly M. Urso         |  | Director                                                                        |  | March 9, 2006 

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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)                                                     
|        | 10 | .6 |  |            |  | Christopher Loughlin Service Agreement, dated as of May 16,
    2005, between Travelzoo UK Ltd and Christopher Loughlin
    (Incorporated by reference to Exhibit 10.1 to our
    Form 10-K (File No. 000-50171), filed
    August 15, 2005)                                    
|        | 21 | .1 |  |            |  | Subsidiaries of Travelzoo Inc. **                                                                                                                                                                                                                                               
|        | 23 | .1 |  |            |  | Consent of Independent Registered Public Accounting Firm**                                                                                                                                                                                                                      
|        | 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***                                                                                                                                                                                                              






| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| | * | This exhibit is a management contract or a compensatory plan or
    arrangement.



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



|    |                    
|--- | -------------------
|*** | Furnished herewith.