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

Revenue Recognition
We recognize revenue on arrangements in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition." We recognize advertising revenues in the period in which the advertisement is displayed, provided that evidence of an arrangement exists, the fees are fixed or determinable and collection of the resulting receivable is reasonably assured. If fixed-fee advertising is displayed over a term greater than one month, revenues are recognized ratably over the period as described below. The majority of insertion orders have terms that begin and end in a quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not complete, the Company recognizes revenue for the period by pro-rating the total arrangement fee to revenue and deferred revenue based on a measure of proportionate performance of its obligation under the insertion order. The Company measures proportionate performance by the number of placements delivered and undelivered as of the reporting date. The Company uses prices stated on its internal rate card for measuring the value of delivered and undelivered placements. Fees for variable-fee advertising arrangements are recognized based on the number of impressions displayed, number of clicks delivered, or number of referrals generated during the period.
Under these policies, no revenue is recognized unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is deemed reasonably assured. The Company evaluates each of these criteria as follows:
• 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. 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 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.

Revenue from advertising sold to clients through agencies is reported at the net amount billed to the agency.
Allowance for Doubtful Accounts
We record a provision for doubtful accounts based on our historical experience of write-offs and a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, management considers the age of the accounts receivable, our historical write-offs, the creditworthiness of the client, the economic conditions of the client's industry, and general economic conditions, among other factors. Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our clients were to deteriorate, affecting their ability to make payments, additional provision for doubtful accounts may be required.
Liability to Former Stockholders
On October 15, 2004, we announced a program under which we would make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period. We account for the cost of this program as an expense recorded in general and administrative expenses. The ultimate total cost of this program is not reliably estimable because it is based on the ultimate number of valid requests received and future levels of the Company's common stock price. The Company's common stock price affects the liability because the amount of cash payments under the program is based in part on the recent level of the stock price at the date valid requests are received. We do not know how many of the requests for shares originally received by Travelzoo.com Corporation in 1998 were valid. We believe that only a portion of such requests were valid. In order to receive payment under the program, a person is required to establish that such person validly held shares in Travelzoo.com Corporation.

Since the total cost of the program is not reliably estimable, the amount of expense recorded in a period is equal to the number of actual claims received during the period multiplied by (i) the number of shares held by each individual former stockholder and (ii) the applicable settlement price based on the recent price of our common stock at the date the claim is received as stipulated by the program. Requests are generally paid within 30 days of receipt. Please refer to Note 10 to our unaudited condensed consolidated financial statements for further details about our liabilities to former stockholders. Results of Operations
The following table sets forth, as a percentage of total revenues, the results from our continuing operations for the periods indicated.

                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                 2009             2008             2009            2008
Revenues                                           100.0 %         100.0 %           100.0 %        100.0 %
Cost of revenues                                     6.2             4.4               5.9            3.2

Gross profit                                        93.8            95.6              94.1           96.8

Operating expenses:
Sales and marketing                                 57.0            55.5              53.4           53.4
General and administrative                          27.1            29.5              26.2           25.6

Total operating expenses                            84.1            85.0              79.6           79.0

Operating income from continuing
operations                                           9.7            10.6              14.5           17.8
Other income and expenses, net                       1.4            (0.1 )             0.1            0.5

Income from continuing operations,
before income taxes                                 11.1            10.5              14.6           18.3
Income taxes                                         5.5             7.8               7.5           11.5

Income from continuing operations                    5.6 %           2.7 %             7.1 %          6.8 %

For the three months ended September 30, 2009, we reported operating income from continuing operations of approximately $2.3 million. Our operating margin from continuing operations decreased to 9.7% for the three months ended September 30, 2009 compared to 10.6% for the same period last year. The main reason for the decrease in operating margin from continuing operations is our cost of revenues as a percentage of revenues increased for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 (see "Cost of Revenues" below). This was partially offset by a decrease in operating expense as a percentage of revenues for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 (see "Operating Expenses" below).
For the nine months ended September 30, 2009, we reported operating income from continuing operations of approximately $10.2 million. Our operating margin from continuing operations decreased to 14.5% for the nine months ended September 30, 2009 compared to 17.8% for the same period last year. The main reason for the decrease in operating margin from continuing operations is our cost of revenues as a percentage of revenues increased for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 (see "Cost of Revenues" below).
We do not know whether our cost of revenues as a percentage of revenues will continue to increase in future periods. Our cost of revenues will increase if the number of searches performed on Fly.com increases. We expect fluctuations of cost of revenues as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations.
We do not know what our sales and marketing expenses as a percentage of revenues will be in future periods. Increased competition in our industry may require us to increase advertising for our brand and for our products. Increases in the average cost of acquiring new subscribers (see "Subscriber Acquisition" below) may result in an increase of sales and marketing expenses as a percentage of revenues. We may decide to accelerate our subscriber acquisition for various strategic and tactical reasons and, as a result, increase our marketing expenses. We may see a unique opportunity for a brand marketing campaign that will result in an increase of marketing expenses. Further, our strategy to replicate our business model in selected foreign markets (see "Growth Strategy" below) may result in a significant increase in our sales and marketing expenses and have a material adverse impact on our results of operations. We expect fluctuations of sales and marketing expenses as a percentage of revenues from quarter to quarter. Some of the fluctuations may be significant and have a material impact on our results of operations.

We do not know what our general and administrative expenses as a percentage of revenues will be in future periods. There may be fluctuations that have a material impact on our results of operations. We expect our headcount to continue to increase in the future. The Company's headcount is one of the main drivers of general and administrative expenses. Therefore, we expect our absolute general and administrative expenses to continue to increase. In addition, we expect our expansion into foreign markets to result in a significant additional increase in our general and administrative expenses. Our general and administrative expenses as a percentage of revenues may also fluctuate depending on the number of requests received related to a program under which the Company intends to make cash payments to people who establish that they were former stockholders of Travelzoo.com Corporation, and who failed to submit requests to convert their shares into shares of Travelzoo Inc. within the required time period.
Reach
The following table sets forth the number of subscribers of each of our e-mail publications in North America and Europe as of September 30, 2009 and 2008 and the total number of page views for the homepages of the Travelzoo Web sites in North America and Europe for the nine months ended September 30, 2009 and 2008. Management considers the page views for the Travelzoo homepages as indicators for the growth of Web site traffic. Management reviews these non-financial metrics for two reasons: First, to monitor our progress in increasing the reach of our products. Second, to evaluate whether we are able to convert higher reach into higher revenues.

                                     September 30,              Year-over-Year
                                 2009             2008              Change
          Subscribers:
          North America
          Travelzoo Top 20     12,462,000       10,642,000                   17 %
          Newsflash            10,639,000        8,693,000                   22 %
          Europe
          Travelzoo Top 20      3,206,000        2,064,000                   55 %
          Newsflash             3,116,000        1,960,000                   59 %



                                                           Nine Months Ended September 30,             Year-over-Year
                                                              2009                   2008                 Change*
Page views of homepages of Travelzoo Web sites:
North America                                                 28,373,000            22,314,000                      27 %
Europe                                                        11,155,000             5,658,000                      97 %

* The comparability of year-over-year changes of page views of the homepages of Travelzoo Web sites may be limited due to the design and navigation of the Web sites.

In North America, revenues for the nine months ended September 30, 2009 increased by 8% from the same period last year. The total number of subscribers in North America to the Travelzoo Top 20e-mail newsletter as of September 30, 2009 increased by 17% compared to September 30, 2008 and page views of the homepages of the Travelzoo Web sites in North America for the nine months ended September 30, 2009 increased by 27% from the same period last year. In North America, revenues for the nine months ended September 30, 2009 increased at a lower rate than the rate of increase in the number of subscribers to our Travelzoo Top 20 e-mail newsletter and the rate of increase in Web site traffic. In North America, we believe we were unable to fully convert higher reach into higher revenues because we were unable to increase our advertising rates significantly due to intense competition in our industry.
In Europe, revenues for the nine months ended September 30, 2009 increased by 63% from the same period last year. In local currency terms, revenues for the nine months ended September 30, 2009 increased by 104% from the same period last year. The total number of subscribers in Europe to the Travelzoo Top 20 e-mail newsletter as of September 30, 2009 increased by 55% compared to September 30, 2008 and page views of the homepages of the Travelzoo Web sites in Europe for the nine months ended September 30, 2009 increased by 97% from the same period last year. In Europe, revenues in local currency terms increased at a higher rate than the rate of growth in subscribers to the Travelzoo Top 20 e-mail newsletter and the rate of growth in Web site traffic. Revenues
Our total revenues increased to $23.6 million for the three months ended September 30, 2009 from $18.6 million for the three months ended September 30, 2008. This represents an increase of $5.0 million or 27%. $2.8 million of the increase in revenues came from our operations in North America, which had an increase of 18% in revenues year-over-year and was attributed primarily to a $1.8 million increase in revenues from our publications, which includes the Travelzoo Web site, the Top 20 e-mail newsletter and the

Newsflash e-mail alert service and an $840,000 increase in revenues from our search products, which consists of SuperSearch and Fly.com. We launched Fly.comin February 2009. $2.2 million of the increase in revenues came from our operations in Europe, which had an increase of 83% in revenues year-over-year and was attributed primarily to a $1.6 million increase in revenue from fixed-fee advertising delivered in the Top 20 e-mail newsletter and on the Travelzoo Web site. In local currency terms, revenues from our operations in Europe increased 110% year-over-year. The strengthening of the U.S. dollar relative to the British Pound Sterling and the Euro in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 had an unfavorable impact on the revenues from our operations in Europe. Had foreign exchange rates remained constant in these periods, revenues from our operations in Europe for the three months ended September 30, 2009 would have been approximately $549,000 higher than reported revenues of $4.8 million.
Our total revenues increased to $70.2 million for the nine months ended September 30, 2009 from $61.2 million for the nine months ended September 30, 2008. This represents an increase of $9.0 million or 15%. $4.5 million of the increase in revenues came from our operations in Europe, which had an increase of 63% in revenues year-over-year and was attributed primarily to a $3.4 million increase in revenue from fixed-fee advertising delivered in the Top 20 e-mail newsletter and on the Travelzoo Web site and a $452,000 increase in revenue from our Newsflash e-mail alert service. In local currency terms, revenues from our operations in Europe increased 104% year-over-year. The strengthening of the U.S. dollar relative to the British Pound Sterling and the Euro in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 had an unfavorable impact on the revenues from our operations in Europe. Had foreign exchange rates remained constant in these periods, revenues from our operations in Europe for the nine months ended September 30, 2009 would have been approximately $2.4 million higher than reported revenues of $11.7 million. $4.5 million of the increase in revenues came from our operations in North America and was attributed primarily to a $2.2 million increase in revenues from our publications, which includes the Travelzoo Web site, the Top 20 e-mail newsletter and the Newsflashe-mail alert service and a $1.8 million increase in revenues from our search products, which consist of SuperSearch and Fly.com. We launched Fly.com in February 2009.
For three and nine months ended September 30, 2009, none of our customers accounted for 10% or more of our revenue. For the three and nine months ended September 30, 2008, Orbitz Worldwide accounted for 13% and 12% of our total revenues, respectively.
Management believes that our ability to increase revenues in the future depends mainly on the following factors:
• Our ability to increase our advertising rates;

• Our ability to sell more advertising to existing clients;

• Our ability to increase the number of clients;

• Our ability to develop new revenue streams; and

• Our ability to launch new products.

We believe that we can increase our advertising rates if the reach of our publications increases. We do not know if we will be able to increase the reach of our publications. We believe that we can sell more advertising if the market for online advertising continues to grow and if we can maintain or increase our market share. We believe that the market for online advertising continues to grow. We do not know if we will be able to maintain or increase our market share. We historically have increased the number of clients in every year since inception. We do not know if we will be able to increase the number of clients in the future. We do not know if we will have market acceptance of our new products.
Our goal is to increase our advertising rates at least once a year in each market, preferably as of January 1 of each year. However, we did not increase our advertising rates in the U.S. on January 1, 2008 or January 1, 2009 due to intense competition in our industry. We intend to continue reviewing advertising rates and considering increases once a year as of January 1. However, there is no assurance that we will increase our advertising rates. Depending on the level of competition in the industry and the condition of the online advertising market, we may decide not to increase our advertising rates in all or certain markets.
Average annualized revenue per employee increased to $510,000 for the three months ended September 30, 2009 from $477,000 for the three months ended September 30, 2008. The increase in average revenue per employee for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 was due to a faster rate of growth in revenues from our operations in North America and Europe compared to the rate of growth in headcount for our operations in North America and Europe.

Cost of Revenues
Cost of revenues consists primarily of network expenses, including fees we pay for co-location services and depreciation and maintenance of network equipment, payments made to third-party partners of the Travelzoo Network, fees we pay related to user searches on Fly.com, amortization of capitalized Web site development costs, and salary expenses associated with network operations staff. Our cost of revenues increased to $1.5 million for the three months ended September 30, 2009 from $819,000 for the three months ended September 30, 2008. As a percentage of revenue, cost of revenues increased to 6.2% for the three months ended September 30, 2009 from 4.4% for the three months ended September 30, 2008. The $645,000 increase in cost of revenues for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 was primarily due to a $492,000 increase in fees we pay related to user searches on Fly.com and a $214,000 increase in depreciation and maintenance costs.
Our cost of revenues increased to $4.1 million for the nine months ended September 30, 2009 from $1.9 million for the nine months ended September 30, 2008. As a percentage of revenue, cost of revenues increased to 5.9% for the nine months ended September 30, 2009 from 3.2% for the nine months ended September 30, 2008. The $2.2 million increase in cost of revenues for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily due to a $1 million increase in fees we pay related to user searches on Fly.com, a $632,000 increase in depreciation and maintenance costs, . . .