##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  ANNUAL
    REPORT PURSUANT TO SECTION 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 1934For the fiscal year ended
    December 31, 2006oro

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

(I.R.S. EmployerIncorporation or
    Organization)

Identification No.)590 Madison Avenue,
    21st Floor,

10022New York, New York

(Zip Code)(Address of Principal Executive
    Offices)   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
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 



TRAVELZOO
    INC.
  Table of
    Contents
  PagePART
    IItem 1.


Business


2Item 1A.


Risk
    Factors


10Item 1B.


Unresolved Staff
    Comments


17Item 2.


Properties


17Item 3.


Legal
    Proceedings


17Item 4.


Submission of
    Matters to a Vote of Security Holders


17PART
    IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


18Item 6.


Selected
    Consolidated Financial Data


19Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


19Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


30Item 8.


Financial
    Statements and Supplementary Data


31Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


51Item 9A.


Controls and
    Procedures


51Item 9B.


Other
    Information


52PART
    IIIItem 10.


Directors and
    Executive Officers of the Registrant


52Item 11.


Executive
    Compensation


53Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


53Item 13.


Certain
    Relationships and Related Transactions


53Item 14.


Principal
    Accountant Fees and Services


53PART
    IVItem 15.


Exhibits and
    Financial Statement Schedules


53EXHIBIT 10.7EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   1




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##### Table of Contents



Forward-Looking
    Statements
   PART I  Item 1.
    Business  Overview
    Travelzoo Travelzoo Top 20 e-mail Newsflash e-mail SuperSearch, pay-per-click
  Rent-A-Car.
         2




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##### Table of Contents



Travelzoo pooling-of-interests
      pooling-of-interests
      Our
    Industry
   3




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##### Table of Contents



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 e-mail Newsflash e-mail SuperSearch, pay-per-click
 4




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##### Table of Contents



PublicationPublication

Content

Schedule

Reach/Usage*

Advertiser Benefits

Consumer BenefitsTravelzooWeb sites

Web sites in the U.S., Canada,
    U.K., and Germany listing thousands of outstanding sales and
    specials from more than 600 travel companies

24/7

4.1 million unique visitors
    per month

Broad reach, sustained exposure,
    targeted placements by destination and travel segment

24/7
    access to deals, ability to search and browse by destination  or
    keywordTravelzoo Top 20

Popular
    e-mail
    newsletter listing 20 of the weeks most outstanding deals
    from selected travel companies

Weekly

10.4 million subscribers

Mass push
    advertising vehicle to quickly stimulate incremental travel

Weekly access to 20 outstanding,
    handpicked deals chosen from among thousandsNewsflash

Regionally-targeted
    e-mail alert
    service with a single time-sensitive and newsworthy travel offer

Within 2 hours of an offer
    being identified

8.1 million subscribers

Regional targeting, 100% share of
    voice for advertiser, flexible publication schedule

Breaking news offers delivered
    just-in-timeSuperSearch

Travel search engine using a
    proprietary algorithm to recommend sites and enable one-click
    searching

On-demand

4.9 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
    internal Travelzoo calculations using comScore Media Metrix and
    Alexa data. For Top 20, Newsflash,and
    SuperSearch,reach/usage information is based on internal
    Travelzoo statistics as of December 31, 2006.    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. 5




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##### Table of Contents




    Real-Time Performance Reports.  We provide
    travel companies with real-time tracking of the performance of
    their advertising campaigns. Our solution enables travel
    companies to optimize their campaigns by removing or updating
    unsuccessful listings and further promote successful listings.
    Access to Millions of Consumers.  We provide
    travel companies fast access to millions of travel shoppers.
    National Reach.  We offer access to Internet
    users across the U.S., Canada, U.K., and Germany.  Benefits
    to Consumers
  Travelzoo Travelzoo Top 20 Newsflash, SuperSearch
  
    Aggregation of Offers From Many Companies.  Our
    TravelzooWeb sites and our Travelzoo Top 20e-mail
    newsletter aggregate information on current special offers from
    more than 600 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 below.
    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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##### Table of Contents



Clients
    American Airlines

Interstate Hotels & ResortApple Vacations

JetBlue AirwaysATA

Kimpton HotelsAvis Rent A Car

Liberty TravelBritish Airways

LufthansaBudget Rent A Car

Marriott HotelsCaesars Entertainment

OrbitzCheapTickets

Pleasant HolidaysExpedia

Royal CaribbeanFairmont Hotels and Resorts

Spirit AirlinesFrontier Airlines

Starwood Hotels & Resorts
    WorldwideFunjet Vacations

United AirlinesHarrahs

Vanguard Rent-A-CarHawaiian Airlines

Virgin AtlanticHilton Hotels     Sales and
    Marketing
    e-mail word-of-mouth.
  Technology
  e-mails
   7




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Competition
  pay-per-click
      Government
    Regulation and Legal Uncertainties
    Privacy Concerns. e-mail
  Anti-Spam Legislation. e-mail
  Domain Names.
 8




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##### Table of Contents



Jurisdictions.
  Intellectual
    Property
  Travelzoo Travelzoo
    Top 20. Travelzoo Travelzoo Top 20
          Employees
   9




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##### Table of Contents



Internet
    Access to Other Information
  Form 10-K, Form 10-Q Form 8-K Form 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-quarter
  
    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
    acquisition of new subscribers and our expansion efforts in
    other regions;
    the introduction, development, timing, competitive pricing and
    market acceptance of our products and services and those of our
    competitors;
    our ability to attract and retain key personnel;
    our ability to manage our anticipated growth and expansion;
    our ability to attract traffic to our Web sites;
    technical difficulties or system downtime affecting the Internet
    generally or the operation of our products and services
    specifically; and 10




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##### Table of Contents




    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 two clients for a substantial part of our
    revenues.
    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.
        Our
    business may be sensitive to recessions.
   11




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Our
    operations could be significantly hindered by the occurrence of
    a natural disaster or other catastrophic event.
    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.
    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; 12




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##### Table of Contents




    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;
    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.
  pay-per-click
 13




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##### Table of Contents



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.
      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.
   14




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##### Table of Contents




    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.
     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
  Travelzoo
 16




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##### Table of Contents



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    Item 4.
    Submission
    of Matters to a Vote of Security Holders   17




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##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
    High


Low2006:Fourth Quarter

$
40.10


$
28.23Third Quarter

$
37.87


$
26.17Second Quarter

$
52.99


$
18.41First Quarter

$
25.19


$
16.502005:Fourth Quarter

$
26.30


$
16.61Third Quarter

$
34.27


$
21.31Second Quarter

$
56.70


$
27.02First Quarter

$
99.75


$
41.54       Dividend
    Policy
    Sales of
    Unregistered Securities
    Repurchases
    of Equity Securities
    Performance
    Graph
   18




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##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data    Consolidated
    Statement of Operations Data:
  Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)Revenues

$
69,525


$
50,772


$
33,679


$
17,991


$
9,848Income from operations


29,753



14,870



11,033



3,739



1,422Net income


16,803



7,963



6,037



2,050



853Net income per share 
    basic

$
1.08


$
0.49


$
0.36


$
0.11


$
0.04Net income per share 
    diluted

$
1.01


$
0.45


$
0.33


$
0.10


$
0.04Shares used in per share
    calculation  basic


15,503



16,249



16,879



19,425



19,425Shares used in per share
    calculation  diluted


16,712



17,731



18,475



20,527



19,896   Consolidated
    Balance Sheet Data:
  December 31,2006


2005


2004


2003


2002(In thousands)Cash and cash equivalents

$
33,415


$
24,469


$
26,435


$
3,522


$
1,258Short term investments






19,887



10,032







Working capital


36,472



48,136



40,027



3,460



1,340Total assets


43,700



55,452



43,257



6,726



3,240Stockholders equity


36,817



48,533



40,263



3,841



1,791   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    Overview
    Travelzoo Travelzoo Top 20 e-mail Newsflash e-mail SuperSearch, pay-per-click
  Travelzoo Travelzoo Top 20 e-mail Newsflash e-mail SuperSearch, pay-per-click
 19




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##### Table of Contents




    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; and
    Revenue per employee as a measure of productivity.  Critical
    Accounting Policies
    Revenue
    Recognition
      
    Evidence of an arrangement.  We consider 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.  We consider 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.  We
    conduct 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 we expect that the
    client will be able to pay amounts under the arrangement as
    payments become due. If we determine that collection is not
    reasonably assured, then we defer the revenue and recognize the
    revenue 20




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##### Table of Contents



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
     21




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##### Table of Contents



Results
    of Operations
    Year Ended December 31,2006


2005


2004Revenues


100
%


100
%


100
%Cost of revenues


1



2



2Gross profit


99



98



98Operating expenses:Sales and marketing


42



51



47General and administrative


14



18



18Total operating expenses


56



69



65Income from operations


43



29



33Interest income


2



2



Income before income taxes


45



31



33Income taxes


21



15



15Net income


24
%


16
%


18
%        22




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##### Table of Contents



Reach
  e-mail Travelzoo Travelzoo Travelzoo
  Year Ended December 31,


Year-Over-Year2006


2005


Growth(2)Subscribers:North AmericaTravelzoo Top 20


9,751,000



9,057,000



+8
%Newsflash


7,545,000



6,163,000



+22
%EuropeTravelzoo Top 20


625,000



295,000



+112
%Newsflash


551,000



206,000



+167
%Page views of homepages of
    TravelzooWeb sites:North America


40,983,000



38,170,000



+7
%Europe(1)


3,447,000



268,000



N/A     (1)
    
    For the year ended December 31, 2005, the data only
    includes information from November 9 to December 31, 2005.
    No information available for period before November 9, 2005.(2)
    
    The comparability of
    year-over-year
    changes of page views of the homepages of TravelzooWeb
    sites may be limited due to the design and navigation of the Web
    sites. Additionally, we believe that the increased use of
    security software has adversely affected the tracking of page
    views.  Travelzoo Top 20 e-mail Travelzoo
  Revenues
    Travelzoo Travelzoo Top 20 Newsflash SuperSearch
 23




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##### Table of Contents



SuperSearch. Travelzoo Travelzoo Top 20 Newsflash
      
    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
   24




---



##### Table of Contents



Operating
    Expenses
  Sales and
    Marketing
    e-mail SuperSearch Travelzoo.
    start-up
  General
    and Administrative
         25




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##### Table of Contents



Subscriber
    Acquisition
  Travelzoo Top 20 Newsflash e-mail
    
    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.
    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.  North
    America:
  Average Cost perAcquisition of a NewPeriod

Subscriber


New Subscribers


Unsubscribes


BalanceQ1 2004

$
2.23



920,063



(185,151
)


6,937,496Q2 2004

$
2.58



858,899



(634,702
)


7,161,693Q3 2004

$
1.26



1,298,962



(602,628
)


7,858,027Q4 2004

$
1.70



694,026



(406,316
)


8,145,737Q1 2005

$
2.59



659,459



(475,938
)


8,329,258Q2 2005

$
2.62



806,734



(533,109
)


8,602,883Q3 2005

$
3.19



740,768



(422,868
)


8,920,783Q4 2005

$
2.41



729,460



(273,389
)


9,376,854Q1 2006

$
2.54



714,643



(317,947
)


9,773,550Q2 2006

$
2.11



737,735



(532,676
)


9,978,609Q3 2006

$
1.86



491,524



(327,471
)


10,142,662Q4 2006

$
1.56



373,559



(288,883
)


10,227,338   Europe:
  Average Cost perAcquisition of a NewPeriod

Subscriber


New Subscribers


Unsubscribes


BalanceQ3 2005

$
1.65



127,857



(5,577
)


140,153Q4 2005

$
2.02



174,514



(16,898
)


297,769Q1 2006

$
2.15



143,666



(16,831
)


424,604Q2 2006

$
2.69



129,438



(34,070
)


519,972Q3 2006

$
1.23



126,566



(29,794
)


616,744Q4 2006

$
2.94



69,489



(30,943
)


655,290  26




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##### Table of Contents



Segment
    Information
  Form 10-K
  North
    America
  Year Ended December 31,2006


2005


2004(In thousands)Net revenues

$
66,509


$
50,161


$
33,679Income from operations


31,337



16,000



11,033Income from operations as a % of
    revenues


47
%


32
%


33
%     SuperSearch
     27




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##### Table of Contents



Europe
  Year Ended December 31,2006


2005


2004(In thousands)Net revenues

$
3,232


$
757


$
Loss from operations


(1,586
)


(1,117
)


Loss from operations as a % of
    revenues


49
%


148
%


n/a       Interest
    Income
    Income
    Taxes
        Liquidity
    and Capital Resources
   28




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##### Table of Contents



Travelzoo
     29




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##### Table of Contents



2007


2008


2009


2010


Thereafter


TotalOperating leases

$
1,761


$
250


$
95


$



$



$
2,106Purchase obligations


168



14















182Total commitments

$
1,929


$
264


$
95


$



$



$
2,288     Growth
    Strategy
    
    Replicate our business model in selected foreign markets in
    Europe and the Asia Pacific region; and
    Expand the scope of our business model.    Travelzoo
    Recent
    Accounting Pronouncements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk     30




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  TRAVELZOO
    INC.
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReports of
    Independent Registered Public Accounting Firm


32Consolidated
    Balance Sheets


34Consolidated
    Statements of Operations


35Consolidated
    Statements of Stockholders Equity and Comprehensive
    Income


36Consolidated
    Statements of Cash Flows


37Notes to
    Consolidated Financial Statements


38  31




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           Internal Control 
    Integrated Framework
  KPMG
    LLP
    32




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Internal Control 
    Integrated Framework
        Internal
    Control  Integrated Framework Internal Control  Integrated
    Framework
    KPMG
    LLP
    33




---



##### Table of Contents



TRAVELZOO
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands, except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
33,415


$
24,469Short term investments






19,887Accounts receivable, less
    allowance for doubtful accounts of $726 and $418 at 2006 and
    2005, respectively


7,274



9,020Deposits


177



28Prepaid expenses and other current
    assets


506



631Deferred tax assets


1,980



1,020Total current assets


43,352



55,055Deposits, less current portion


142



190Deferred tax assets, less current
    portion






28Property and equipment, net


172



159Intangible assets, net


34



20Total assets

$
43,700


$
55,452LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,839


$
2,373Accrued expenses


2,149



3,394Deferred revenue


750



296Income tax payable


1,142



856Total current liabilities


6,880



6,919Deferred tax liabilities


3



Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par
    value per share (5,000 shares authorized; none issued)






Common stock, $0.01 par value
    per share (40,000 shares authorized; 15,250 and
    16,250 shares issued and outstanding at 2006 and 2005,
    respectively)


153



163Additional paid-in capital


2,076



30,645Retained earnings


34,566



17,763Accumulated other comprehensive
    income (loss)


22



(38
)Total stockholders equity


36,817



48,533Total liabilities and
    stockholders equity

$
43,700


$
55,452    34




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##### Table of Contents



TRAVELZOO
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Years Ended December 31,2006


2005


2004(In thousands, except per share amounts)Revenues

$
69,525


$
50,772


$
33,679Cost of revenues


1,038



878



695Gross profit


68,487



49,894



32,984Operating expenses:Sales and marketing


29,378



25,915



15,731General and administrative


9,356



9,109



6,220Total operating expenses


38,734



35,024



21,951Income from operations


29,753



14,870



11,033Interest income


1,249



961



126Gain (loss) on foreign currency


3



(15
)


Income before income tax expense


31,005



15,816



11,159Income tax expense


14,202



7,853



5,122Net income

$
16,803


$
7,963


$
6,037Net income per share:Basic net income per share

$
1.08


$
0.49


$
0.36Diluted net income per share

$
1.01


$
0.45


$
0.33Shares used in computing basic net
    income per share


15,503



16,249



16,879Shares used in computing diluted
    net income per share


16,712



17,731



18,475    35




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##### Table of Contents



TRAVELZOO
    INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 AND
    COMPREHENSIVE INCOME
 Years Ended December 31, 2006, 2005, and 2004
 AccumulatedAdditional





Other


TotalCommon Stock


Treasury


Paid-In


Retained


Comprehensive


StockholdersShares


Amount


Stock


Capital


Earnings


Income (Loss)


Equity(In thousands)Balances, December 31, 2003


19,425


$
194


$



$
(116
)

$
3,763


$



$
3,841Reduction of reported shares
    outstanding upon expiration of merger exchange period


(4,116
)


(41
)






41











Proceeds from exercises of options


174



2







369











371Tax benefit of non-qualified stock
    options exercise














1,932











1,932Recovery of profit from purchase
    and sale of stock by employees














34











34Proceeds from issuance of common
    stock, net of related issuance costs


750



7







28,040











28,047Comprehensive Income:Net income


















6,037







6,037Total comprehensive income


























6,037Balances, December 31, 2004


16,233



162







30,300



9,800







40,262Proceeds from exercises of options


17



1







34











35Tax benefit of non-qualified stock
    options exercise














435











435Additional issuance costs related
    to Q4 2005














(124
)










(124
)Comprehensive income:Foreign currency translation
    adjustment






















(38
)


(38
)Net income


















7,963







7,963Total comprehensive income


























7,925Balances, December 31, 2005


16,250



163







30,645



17,763



(38
)


48,533Repurchase of common stock


(1,000
)






(28,579
)














(28,579
)Retirement of common stock






(10
)


28,579



(28,569
)










Comprehensive income:Foreign currency translation
    adjustment






















60



60Net income


















16,803







16,803Total comprehensive income


























16,863Balances, December 31, 2006


15,250


$
153


$



$
2,076


$
34,566


$
22


$
36,817    36




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##### Table of Contents



TRAVELZOO
    INC.
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income

$
16,803


$
7,963


$
6,037Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


131



167



161Deferred income taxes


(929
)


(676
)


(181
)Provision for losses on accounts
    receivable


304



317



121Tax benefit of stock option
    exercises






435



1,932Accrued income for short-term
    investments


(449
)


(49
)


Changes in operating assets and
    liabilities:Accounts receivable


1,511



(4,019
)


(3,078
)Deposits


(95
)


(55
)


(24
)Prepaid expenses and other current
    assets


136



40



(543
)Accounts payable


440



1,940



216Accrued expenses


(1,278
)


938



1,136Deferred revenue


449



205



69Income tax payable


285



919



(1,311
)Net cash provided by operating
    activities


17,308



8,125



4,535Cash flows from investing
    activities:Purchases of property and equipment


(119
)


(156
)


(40
)Purchase of short-term investments


(14,663
)


(49,500
)


(10,032
)Sale of short-term investments


35,000



39,693



Purchases of intangible assets


(34
)






(2
)Net cash provided by (used in)
    investing activities


20,184



(9,963
)


(10,074
)Cash flows from financing
    activities:Proceeds from issuance of common
    stock, net of related costs






(124
)


28,047Proceeds from stock option
    exercises






35



371Recovery of profit from purchase
    and sale of stock by employees










34Repurchase of common stock


(28,579
)






Net cash provided by (used in)
    financing activities


(28,579
)


(89
)


28,452Effect of exchange rate changes on
    cash and cash equivalents


33



(39
)


Net increase (decrease) in cash
    and cash equivalents


8,946



(1,966
)


22,913Cash and cash equivalents at
    beginning of year


24,469



26,435



3,522Cash and cash equivalents at end
    of year

$
33,415


$
24,469


$
26,435Supplemental disclosure of cash
    flow information:Cash paid for income taxes, net of
    refunds received

$
14,845


$
7,176


$
4,683    37




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##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2006, 2005, and 2004
  (1)  Summary
    of Significant Accounting Policies
  (a)
    The
    Company and Basis of Presentation  Travelzoo Travelzoo Top 20 e-mail Newsflash e-mail SuperSearch pay-per-click
      Travelzoo pooling-of-interests
   38




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##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       pooling-of-interests
  (b)
    Revenue
    Recognition  Travelzoo Travelzoo
    Top 20 e-mail Newsflash SuperSearch.
 39




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##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       
    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.  Travelzoo Top 20 Newsflash
    (c)
    Net
    Income Per Share   40




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##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended December 31,2006


2005


2004Basic net income per share:Net income

$
16,803


$
7,963


$
6,037Weighted average common shares


15,503



16,249



16,879Basic net income per share

$
1.08


$
0.49


$
0.36Diluted net income per share:Net income

$
16,803


$
7,963


$
6,037Weighted average common shares


15,503



16,249



16,879Effect of dilutive
    securities  stock options


1,209



1,482



1,596Weighted average common and
    potential common shares


16,712



17,731



18,475Diluted net income per share

$
1.01


$
0.45


$
0.33   (d)
    Use of
    Estimates    (e)
    Property
    and Equipment    December 31,2006


2005Computer hardware and software

$
372


$
351Office equipment


442



352814



703Less accumulated depreciation


642



544Total

$
172


$
159      41




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (f)
    Intangible
    Assets    December 31,2006


2005Acquired amortized intangible
    assets:Internet domain names

$
382


$
348Less accumulated amortization


348



328Total

$
34


$
20         Year ended December 31,2007

$
72008


72009


72010


7Thereafter


6$
34   (g)
    Cash
    Equivalents and Short-Term Investments    held-to-maturity
  (h)
    Advertising
    Costs    (i)
    Income
    Taxes   42




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (j)
    Comprehensive
    Income    (k)
    Impairment
    of Long-Lived Assets    (l)
    Stock-Based
    Compensation      (m)
    Web
    Site Development Costs  No. 00-02,
  (n)
    Foreign
    Currency   43




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (o)
    Recent
    Accounting Pronouncements    (2)  Commitments
    and Contingencies
       44




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (3)  Allowance
    for Doubtful Accounts and Accrued Expenses
    Balance at December 31, 2003

$
71Additions  charged to
    costs and expenses, net


121Deductions  write-offs


(65
)Balance at December 31, 2004


127Additions  charged to
    costs and expenses, net


317Deductions  write-offs


(26
)Balance at December 31, 2005


418Additions  charged to
    costs and expenses, net


308Balance at December 31, 2006

$
726     December 31,2006


2005Accrued compensation expense

$
456


$
199Accrued advertising expense


1,257



2,847Accrued professional services
    expense


215



149Other accrued expenses


221



199Total accrued expenses

$
2,149


$
3,394   (4)  Income
    Taxes
    2006


2005


2004U.S.

$
33,196


$
16,950


$
11,159Foreign


(2,191
)


(1,134
)


$
31,005


$
15,816


$
11,159    45




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Current


Deferred


Total(In thousands)2006:Federal

$
11,372


$
(866
)

$
10,506State


3,759



(63
)


3,696$
15,131


$
(929
)

$
14,2022005:Federal

$
6,536


$
(595
)

$
5,941State


1,993



(81
)


1,912$
8,529


$
(676
)

$
7,8532004:Federal

$
4,117


$
(349
)

$
3,768State


1,367



(13
)


1,354$
5,484


$
(362
)

$
5,122       2006


2005


2004Federal tax at statutory rates

$
10,852


$
5,536


$
3,794State taxes, net of federal income
    tax benefit


2,402



1,243



894Foreign loss


767



397



Non-deductible expenses and other


181



677



434Total income tax expense

$
14,202


$
7,853


$
5,122    46




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2006


2005Deferred tax assets:Accruals and allowances

$
665


$
361State income taxes


1,253



619Intangible assets


98



100Gross deferred tax assets

$
2,016


$
1,080Deferred tax liabilities:Property and equipment

$
(39
)

$
(32
)Gross deferred tax liabilities


(39
)


(32
)Net deferred tax assets

$
1,977


$
1,048     (5)  Stockholders
    Equity
       47




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (6)  Stock-based
    Compensation
              Weighted-Weighted-


AverageAverage


Remaining


AggregateShares


Exercise Price


Contractual Life


Intrinsic Value(In thousands)Outstanding at December 31,
    2005


2,211,074


$
1.03Outstanding at December 31,
    2006


2,211,074


$
1.03



4.11 years


$
63,948Exercisable and fully vested at
    December 31, 2006


2,211,074


$
1.03



4.11 years


$
63,948   in-the-money
  48




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Shares


Weighted-AverageOutstanding and


Remaining


Weighted-AverageExercise Price

Exercisable


Contractual Life


Exercise Price$1.00


2,158,349



4.09 years


$
1.00$2.00


42,725



4.83 years



2.00$3.00


10,000



5.25 years



3.002,211,074



4.11 years


$
1.03   (7)  Segment
    Reporting and Significant Customer Information
        North America


Europe


Elimination


ConsolidatedYear ended December 31,
    2006:Revenues from unaffiliated
    customers

$
66,303


$
3,222


$



$
69,525Intersegment revenues


206



10



(216
)


Total net revenues


66,509



3,232



(216
)


69,525Operating income (loss)


31,337



(1,586
)


2



29,753Year ended December 31,
    2005:Revenues from unaffiliated
    customers

$
50,016


$
756


$



$
50,772Intersegment revenues


145



1



(146
)


Total net revenues


50,161



757



(146
)


50,772Operating income (loss)


16,000



(1,117
)


(13
)


14,870As of December 31,
    2006Property and equipment, net:

$
126


$
46


$



$
172Total assets


45,922



3,093



(5,315
)


43,700As of December 31,
    2005Property and equipment, net:

$
139


$
20


$



$
159Total assets


56,191



748



(1,487
)


55,452    49




---



##### Table of Contents



TRAVELZOO
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Percent ofPercent of


AccountsRevenues


ReceivableYear Ended December 31,


December 31,


December 31,Customer

2006


2005


2004


2006


2005Travelport Limited


16
%


12
%



*


16
%


15
%Expedia, Inc.


14
%



*



*


16
%



*Sabre Holdings Corporation



*


15
%


12
%



*


13
%     *
    
    Less than 10%    (8)  401(k)
    Plan
    (9)  Unaudited
    Quarterly Information
    Quarters EndedDec 31,


Sept 30,


June 30,


Mar 31,


Dec 31,


Sept 30,


June 30,


Mar 31,2006


2006


2006


2006


2005


2005


2005


2005(In thousands, except per share amounts)Revenues

$
17,652


$
17,586


$
17,358


$
16,929


$
13,901


$
13,384


$
12,258


$
11,228Cost of revenues


256



232



286



264



249



225



224



179Gross profit


17,396



17,354



17,072



16,665



13,652



13,159



12,034



11,049Operating expenses:Sales and marketing


7,331



6,975



7,973



7,099



7,632



7,101



6,152



5,030General and administrative


2,394



2,249



2,112



2,601



2,496



1,878



2,127



2,608Total operating expenses


9,725



9,224



10,085



9,700



10,128



8,979



8,279



7,638Income from operations


7,671



8,130



6,987



6,965



3,524



4,180



3,755



3,411Interest income


323



280



302



344



304



279



218



160Foreign currency gain (loss)


(10
)


7



13



(7
)


(6
)


(4
)


(4
)


Income before income taxes


7,984



8,417



7,302



7,302



3,822



4,455



3,969



3,571Income tax expense


3,699



3,866



3,452



3,185



2,168



2,156



1,791



1,739Net income

$
4,285


$
4,551


$
3,850


$
4,117


$
1,654


$
2,299


$
2,178


$
1,832Basic net income per share

$
.28


$
.30


$
.25


$
.26


$
.10


$
.14


$
.13


$
.11Diluted net income per share

$
.26


$
.28


$
.23


$
.24


$
.10


$
.13


$
.12


$
.10  50




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure     Item 9A.
    Controls
    and Procedures  Rule 13a-15(e).
  Rule 13a-15(f))
  Managements
    Report on Internal Control Over Financial Reporting
      Internal Control  Integrated
    Framework. Form 10-K.
  RALPH
    BARTEL
   Chairman of the Board and Chief Executive Officer
  WAYNE
    LEE
   Chief Financial Officer
   51




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant      Name

Age

PositionRalph Bartel, Ph.D.


41


President and Chief Executive
    OfficerHolger Bartel, Ph.D.


40


Executive Vice PresidentSteven M. Ledwith


49


Chief Technology OfficerWayne Lee


35


Chief Financial OfficerChristopher Loughlin


33


Executive Vice President, EuropeRaymond Ng


45


Executive Vice President, AsiaShirley Tafoya


43


Senior Vice President of Sales   Ralph Bartel, Ph.D.,
  Holger Bartel, Ph.D.,
  Steven M. Ledwith
  Wayne Lee, CPA
  Christopher Loughlin
 52




---



##### Table of Contents



Raymond Ng
  Shirley Tafoya
  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    Our Consolidated Financial Statements are included
    in Part II, Item 8:
             53




---



##### Table of Contents



Supplementary Consolidated Financial Statement
    Schedules:
    Exhibits:
   54




---



##### Table of Contents



SIGNATURES
      By:
    /s/  WAYNE
    LEE   Chief Financial Officer
    attorney-in-fact, Form 10-K, attorney-in-fact attorney-in-fact
    Signature

Title(s)

Date/s/  RALPH
    BARTELRalph
    Bartel

Chairman of the Board and Chief
    Executive Officer

March 14, 2007/s/  WAYNE
    LEEWayne
    Lee

Chief Financial Officer

March 14, 2007/s/  HOLGER
    BARTELHolger
    Bartel

Executive Vice President and
    Director

March 14, 2007/s/  DAVID
    J. EHRLICHDavid
    J. Ehrlich

Director

March 14, 2007/s/  DONOVAN
    NEALE-MAYDonovan
    Neale-May

Director

March 14, 2007/s/  KELLY
    M. URSOKelly
    M. Urso

Director

March 14, 2007  55




---



##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber



Description3
.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
.3



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
.4*



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)10
.5*



Revised Executive Bonus Plan,
    effective July 1, 2006. (Incorporated by reference to
    Exhibit 10.1 on
    Form 10-Q
    (File
    No. 000-50171),
    filed August 9, 2006)10
.6*



Christopher Loughlin amended
    Service Agreement, effective as of July 1, 2006, between
    Travelzoo (Europe) Limited and Christopher Loughlin.
    (Incorporated by reference to Exhibit 10.2 on
    Form 10-Q
    (File
    No. 000-50171),
    filed August 9, 2006)10
.7*



Wai Ming (Raymond) Ng Service
    Agreement, dated February 5, 2007, between Travelzoo Inc.
    and Wai Ming Ng.21
.1



Subsidiaries of Travelzoo Inc.23
.1



Consent of Independent Registered
    Public Accounting Firm24
.1



Power of Attorney (included on
    signature page)31
.1



Certification of Chief Executive
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231
.2



Certification of Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
.1



Certification Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200232
.2



Certification Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     *
    
    This exhibit is a management contract or a compensatory plan or
    arrangement.
    
    Filed herewith.
    
    Furnished herewith.