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Press Releases 2006

Pethealth Inc. Announces Record Revenue and its full Results for the Quarter Ended March 31, 2006.

OAKVILLE , ON, May 10, 2006. Pethealth Inc. (TSXV:PTZ) ("Pethealth" or "the Company") today announced its financial results for the quarter ended March 31, 2005 and the restatement of its 2004 and 2005 annual results.

Highlights

Quarter ended March 31, 2006

• Total revenue for the three months ended March 31, 2006 was $4.53 million, up 41% over the three months ended March 31, 2005.

• Net loss for the three months ended March 31, 2006 was $150,855, compared to the restated net loss of $466,089 recorded in Q1, 2005.

• EBITDA loss for Q1 2006 was $33,195 compared to a restated EBITDA loss of $382,840 for the same period in the prior year.

• Total policies in force ( Canada and the United States) as at March 31, 2006, stood at 157,411 vs. 124,711 for the same date in the prior year, an increase of 26%. Core policies in force stood at 125,174, an increase of 20% over the previous year. ShelterCare policies in force stood at 32,237, up 48% from the previous year.

• The cumulative calendar 2006 loss ratio for the U.S. core pet insurance book of business stood at 43.9% as at March 31, 2006, within the company’s established 43%-45% target band.

• Gross premiums earned by the Company’s insurance carriers were $8.9 million for the three months ended March 31, 2006, up 28% from the same period in the prior year.

• The Company has filed restated financial results for the years ended 2005 and 2004 as more fully described below.

Results of Operations

Pethealth Inc. reports its financial results in a single reportable segment. However, in order to provide readers of the financial results greater insight into the growing diversity of the Company’s operations, it has elected to provide financial results by program line, that is, by its “insurance operations” and its “non-insurance operations”. The Company’s i nsurance operations currently consist of the distribution and administration of the PetCare, ShelterCare, QuickCare and CherryBlue pet insurance programs while non-insurance operations are made up of its 24PetWatch manufacturer-neutral pet registry, recovery and database management services, including the distribution of microchip technology, and the development and distribution of PetPoint, its animal shelter management software program . The following table details the operational results from each program line:

The Company announced today that following a review of its cash management systems, it determined that certain inaccuracies were reported by the Company during the 2005 and 2004 financial period in respect of the reporting of certain electronic customer payments and service fees processed in the United States. The Company filed today on SEDAR, together with the applicable provincial securities regulatory authorities, restated financial statements for the period ended December 31, 2005, together with the applicable restated 2004 comparables for the same period.

The accounting adjustment does not impact the Company’s revenues or its business plan.

The impact of these adjustments on 2004 annual financial statement balances is as follows:

The impact of these changes on the 2005 annual financial statement balances is as follows:

The Company has amended its cash management reporting system and processes to rectify the sources of the errors identified to ensure the correctness and accuracy of its financial information. The Company's Annual Meeting of Shareholders will be held today as previously announced in Toronto and shareholders in attendance will receive the restated financial statements for the period ended December 31, 2005. The Company remains committed to maintaining its strong operations and ensuring the effectiveness of its internal controls over financial reporting.

“Except for the restatement of our 2004 and 2005 financials, Q1 was an outstanding quarter for the company,” said Mark Warren, President and Chief Executive Officer. “Year on year revenue growth accelerated from previous quarters and, for the first time in the company’s history, we had both positive earnings and EBITDA in our core insurance business. Management takes full responsibility for failing to detect the reconciliation errors sooner. However, the errors in both systems and internal controls have been satisfactorily addressed. The errors had no impact on our revenue and the reduction in our reported cash position will not affect our ability to execute on our current business plan.”

Insurance Operations:

The Company is the number two provider of pet insurance to the companion animal market in North America as measured by both paid policies in force and gross written premium.

Pet insurance revenues are earned primarily through commissions and fees generated from the placement of core and ShelterCare pet insurance policies at a blended commission rate of approximately 36%. Commissions and fees earned in Q1 2006 from core policies increased by 25% to $3,148,771 from Q1 2005 and commissions and fees earned from ShelterCare policies in force increased by 48%. The growth in revenues earned from core and ShelterCare policies is the result of the 20% and 60% respective year on year increase in the number of core and ShelterCare policies in force. The number of core policies in force at March 31, 2006 stood at 125,174 while 96,593 enrolments in the ShelterCare program were completed during the quarter.

The Company achieved record new core pet insurance policies sales in the United States during the quarter of 13,708, a 9.4% increase from those sold in the first quarter of 2005.

The Company’s U.S. core pet insurance programs produced a calendar year loss ratio of 43.9% which is within the Company’s established target band of 43% to 45%. The Company has estimated the accident year loss ratio for the year to date at 48.0%. On February 9, 2006, the Company announced that it had added the Insurance Corporation of Hannover as an underwriter in the United States. Under the terms of the agreement, the Company will participate in a portion of the underwriting results for policies placed with Hannover.

The Company recorded an average annual administration cost per policy of $35 for the rolling twelve month period ended March 31, 2006, down from a restated $38 in the preceding twelve month rolling period. This 8% reduction is the result of the Company’s continued efforts to leverage its infrastructure and to create operational efficiencies. The Company believes that this cost per policy, whether measured on an absolute basis or as a percentage of premiums, is the best in the industry. Acquisition cost per policy was an average of US$67 compared to US$65 for the same twelve month periods. Acquisition cost per policy was relatively flat through the period as the relative weightings of the various marketing channels from which policies were acquired remained stable.

The pet insurance operations contributed net income of $166,451 to the consolidated loss during the quarter compared to a restated contributed net loss of $160,720 in the prior year. In addition, the pet insurance operations achieved EBITDA of $242,509 for the period compared to a restated EBITDA loss of $90,756 in the prior year.

As announced on April 19, 2006, the Company’s insurance programs were approved for sale in the state of Massachusetts, effective April 3, 2006. The Company began selling pet insurance policies to residents of Massachusetts in April which are being underwritten by the Insurance Corporation of Hannover.

In November 2001, the Company entered into a Strategic Alliance Agreement with Petfinder.com L.L.C. whereby the Company would be the exclusive provider of its ShelterCare pet health insurance through the Petfinder network of animal welfare organisations in North America. In May 2003, the partnership was renewed, under modified terms, for a further three years. On February 28, 2006, the Company notified Petfinder in writing that it did not wish to renew the partnership, under the current terms, beyond the current expiration date. The agreement expired on May 2, 2006.

Pethealth believes that it is now better served strategically to promote its insurance programs in the shelter/animal welfare community in conjunction with its 24PetWatch microchip and its PetPoint management software programs. As a result, the Company implemented a revised strategy which commenced May 3, 2006, which the Company believes will be positive for both earnings and cash flow as the Company focuses more of its marketing expenses related to the ShelterCare program on areas where the response to date to the full range of Pethealth’s services has been the most positive. In other jurisdictions, the Company has substituted an alternative line of its pet health insurance for the ShelterCare program.

Non-Insurance Operations:

During 2002, the Company determined that to maximise long term shareholder value it would have to take advantage of opportunities to develop complementary products and services within the North American companion animal market. Additionally, these new services, while outside of its core business of insurance, would be selected on the basis of their ability to not only create new revenue streams but also to enhance the Company’s pet insurance business either by providing for a greater number of policy sales or by consolidating the channels through which it was currently distributing its pet insurance programs. It was determined that to maximise the opportunity, some of the initiatives undertaken in their initial states would not necessarily be revenue generating but would provide the platform on which significant revenues could ultimately be created.

The concept of providing free base platforms on both a Business to Business and Business to Consumer basis is becoming more commonplace within the financial services sector as a whole as a result of the development of technology and specifically the Internet. Pethealth, anticipating this trend, has placed itself at the forefront in developing the concept of free platforms for pet owners (24PetWatch free registry), animal shelters (PetPoint) and veterinary clinics (EVE) within the industry as a whole.  The Company believes that significant additional revenue streams can be generated by offering complementary services that these clients of Pethealth will be prepared to pay for given their value, and overall quality.

As at March 31, 2005, the Company had an aggregate of 544,966 pets registered in its 24PetWatch pet registry up 111% for the total registered at March 31, 2005.

During the quarter, the Company achieved revenues of $649,787 from the sale of 112,600 microchips and related readers to the animal shelter and veterinary communities, an increase in revenue of 104% from the sale of 56,795 microchips and related readers reported in Q1 2005. Pethealth is the largest provider of microchip technology for companion animals in Canada on a monthly basis and is the fastest growing company in the United States, with what the Company estimates at 25% of the companion animal market.

As of March 31, 2006, 238 animal shelters and rescue organisations had licensed the PetPoint application and 191 had begun to use it to run their organisations day-to-day operations. As of the date of this release, 285 shelters had licensed the system and 224 were using it in daily operations.

During the quarter, the electronic delivery of the ShelterCare insurance program generated administrative savings of approximately $74,000, as 46% of the 96,593 pets enrolled in the ShelterCare program during the quarter were completed electronically.

The Company has completed the development of the second version of the application which expands the number of claims which can be processed on-line. The Company successfully completed the applications test phase in 2005. EVE is currently available in 171 veterinary practices.

Consolidated Results

The Company’s consolidated EBITDA loss was $33,195 for the quarter compared to an EBITDA loss of $382,840 in the prior year. The Company had a net loss of $150,855 ($0.01 per share) for the quarter compared to a restated net loss of $466,089 ($0.01 per share) for the same period in the prior year.

At December 31, 2005, the Company had total assets of $6,015,097 including cash resources of $1,845,209.

* As the Company writes new or renewing pet insurance policies, its insurance carriers earn written premiums and pay the Company commissions over the term of each pet insurance policy. The Company’s revenues consist of commissions and fees, microchip technology sales, interest and other income.

** The Company believes the presentation of EBITDA is a useful means of providing investors with additional information in reviewing and analyzing the Company’s operating results. EBITDA is considered to be a non-GAAP earnings measure and does not have any standardized meaning prescribed by GAAP. It is, therefore, unlikely to be comparable to similar measures presented by other issuers.

About Pethealth

Pethealth is a leading provider of pet insurance and pet related data management services to the North American companion animal industry. Pethealth offers a unique range of products and services for veterinarians, shelters and pet owners through a number of wholly owned subsidiaries using a range of brand names including PetCare, ShelterCare, QuickCare, CherryBlue, 24PetWatch, PetPoint, PetMedInfo and PetMedAlert.

Pethealth is based in Oakville, Ontario. To find out more about Pethealth, visit the web site at www.pethealthinc.com.

The TSX Venture Exchange Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Statements contained in this news release, if not historical, are forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from the results described in forward-looking statements.

Not for dissemination in the United States of America or to United States news wire services.

For further information contact:
Mark Warren, President and CEO
Glen Tennison , Chief Financial Officer

Pethealth Inc. (905) 842-2615

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