**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form 10-K** **SB**




x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




For
      the
      fiscal year ended December 31, 2006




**or**




o
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




For
      the
      transition period from __________ to __________




**Commission
      File No. 0-18412**




**YTB
      International, Inc.**


(Name
      of
      small business issuer in its charter)




**Delaware**
            
            **20-2181181**(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification No.)





**1901
      East Edwardsville Road**


**Wood
      River, Illinois 62095**


(Address
      of principal executive offices) (Zip code)





Issuer’s
      telephone number: (618) 655-9477





Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.001 per share







Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports) and (2) has been subject
      to such filing requirements for the past 90 days. Yes S No £




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. £




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes £ No S




State
      issuer’s revenues for its most recent fiscal year. $50,896,730.




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates, computed by reference to the price at which the common equity
      was sold, or the average bid and asked price of such common equity, as of March
      28, 2007. $104,556,260.




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 39,028,217 shares of Common Stock, par value
      $.001 per share, outstanding as of March 28, 2007.




DOCUMENTS
      INCORPORATED BY REFERENCE:




Document
      Incorporated by Reference      Part
      of
      Report into Which Incorporated




Proxy
      Statement for 2007 Annual       Part
      III


Meeting
      of
      Stockholders




Transitional
      Small Business Disclosure Format (check one) Yes £ No S .










Table
      of
      Contents





PART
                  IItem
                  1.
              
              Description
                  of Business
              
              
              
              2Item
                  2.
              
              Description
                  of Properties
              
              
              
              5Item
                  3.
              
              Legal
                  Proceedings
              
              
              
              6Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              
              6PART
                  IIItem
                  5.
              
              Market
                  for Common Stock and Related Stockholder Matters
              
              
              7Item
                  6.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              
              8Item
                  7.
              
              Financial
                  Statements
              
              
              
              19Item
                  8.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosures
              19Item
                  8A.
              Controls
                  and Procedures
              
              
              
              20Item
                  8B.
              
              Other
                  Information
              
              
              
              23PART
                  IIIItem
                  9.
              
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  ComplianceWith
                  Section 16(a) of the Exchange Act
              
              
              23*Item
                  10.
              
              Executive
                  Compensation
              
              
              
              23*Item
                  11.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              23*Item
                  12.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              23*Item
                  13.
              
              Exhibits
              
              
              
              
              24*Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              
              
              25**
              Incorporated
                  by Reference to the Issuer's Proxy Statement for its 2007 Annual
                  Meeting
                  of Stockholders.











**PART
      I**




**Item
      1.**  **Description
      of Business.**




YTB
      International, Inc., a Delaware corporation (the “Company” or “We”) (formerly,
      REZconnect Technologies, Inc.) is a leader in the travel services business
      and
      has operated in the travel services industry for 25 years. We offer an
      interactive, real-time travel booking engine and access to preferred deals
      with
      leading travel industry suppliers to our licensees and to small office and
      home
      office agencies and independent travel agencies. Our revenue stream is comprised
      primarily of initial license fees as each online travel agency is sold, monthly
      license fees from our licensed travel agents (“ Referring
      Travel Agents ”
or
      “ RTAs ”)
      and
      commissions on the sale of travel products.




We
      believe that we are at the forefront of several growing trends: increasing
      consumer spending in the travel industry; the boom in home-based businesses
      and
      the growing acceptance of conducting retail business on the Internet. With
      job
      security as well as an ability to spend time with family an ever increasing
      concern, the ability to own a home-based business is becoming an increasingly
      attractive option. As more people use the Internet to become better informed
      and
      to save time and money, we believe that online travel planning will continue
      to
      make tremendous inroads in the marketplace. At the same time, luxury cruise
      ship
      companies and resort builders are gearing up for a new wave of retirees, which
      we believe will add to the demand for travel-related products and
      services.




We
      conduct our business operations through three distinct wholly-owned
      subsidiaries: (i) YourTravelBiz.com, Inc., which uses a referral marketing
      system to offer and sell licenses for online travel agencies; (ii) YTB Travel
      Network, Inc., together with its subsidiary YTB Travel Network of Illinois,
      Inc., which licenses and services our RTAs; and (iii) REZconnect Technologies,
      Inc., a franchisor of traditional “brick and mortar” travel agencies, as well as
      Internet-based travel-related services and technology, which offers proprietary
      reservation systems for the travel and entertainment industry.




We
      operate our businesses under various trade names “YourTravelBiz.com,”
“YourTravelBiz,” “YTBnet.com,” “YTB Travel and Cruises,” “Travel Network,”
“Global Travel Network,” “Travel Network Vacation Central,” “YTB.com,” as well
      as web sites “Bookmytravel.com,” and “REZconnect.com.”




While
      previously concentrating on the establishment of our “brick and mortar”
franchise operations, our management recognized that margins in the travel
      agency industry are generally shrinking, due in large measure to reductions
      by
      airlines in commission rates and to greater competition throughout the industry.
      To combat these trends and strengthen our competitive position, we sought to
      bring an advanced technology to the travel and lodging industry by investing
      in
      software development and offering new online travel agency
      opportunities. **** All
      travel arrangements from the online travel sites that we host are serviced
      by
      the divisions of the Company. As of December 31, 2006, there were approximately
      59,800 such online sites in operation.




We
      were
      originally incorporated in the State of New York in June 1982 as Travel Network,
      Ltd., doing business as Global Travel Network. Summary information regarding
      the
      development of our business is found below under the heading “Corporate
      History.”




Until
      recently, our common stock was quoted on the Over-The-Counter Bulletin Board
      (the “OTC-BB”) under the symbol YTBL.OB. Because of our inability to remain
      current in our periodic reporting obligation under the Securities Exchange
      Act
      of 1934, as amended (the “ Exchange
      Act ”),
      our
      common stock has been moved for quotation to the Pink Sheets under the symbol
      YTBL.PK. Because we have become current with our periodic reports under the
      Exchange Act, we intend to have our common stock quoted on the OTC-BB once
      again
      and to apply for its listing in the near future on the American Stock Exchange,
      although no assurances can be given in this regard.




**Current
      Operations**




Our
      three
      distinct, wholly-owned subsidiary divisions operate as follows:




***YourTravelBiz.com,
      Inc.***




YourTravelBiz.com,
      Inc. (“YTB Marketing”) conducts business through recruitment, enrollment,
      training, and support of its sales force. There are currently approximately
      120,000 independent contractors, known as Independent Marketing Representatives
      (each, an “IMR”), who are responsible for enrolling RTAs, most of whom work from
      their homes. IMRs are compensated via a multilevel marketing commission
      structure. An IMR might utilize a number of methods for attracting new RTAs,
      including the use of informational meetings and events, newspaper advertising,
      and one-on-one meetings with individuals seeking a home-based business
      enterprise.


2








YTB
      Marketing was created to market travel agency websites to RTAs in a referral
      marketing program that incentivizes IMRs to bring RTAs into the system. RTAs
      are
      also independent contractors and are provided with training materials and onsite
      training at various locations throughout the United States. YTB Marketing
      charges an initial license feel of $449.95 plus $49.95 per month, on a
      month-to-month basis, for RTAs to own and operate an online travel site, and
      YTB
      Travel (as defined below) can also earn additional transactional compensation
      from travel purchased off each website.




***YTB
      Travel Network, Inc. (and its subsidiary YTB Travel Network of Illinois,
      Inc.)***




YTB
      Travel Network, Inc. (together with its subsidiary YTB Travel Network of
      Illinois, Inc., collectively, “YTB Travel”) business is comprised of
      arrangements to sell airline tickets, cruise packages and other services, plus
      travel sales, from the approximately 59,800 RTAs’ web sites which it hosts. YTB
      Travel handles travel processing, document distribution and travel commission
      payments, including tracking transactions for each of the sites. RTAs are
      schooled through our travel training courses. This training is accomplished
      through a combination of company conference calls, e-training modules and
      hands-on certification seminars.




***REZconnect
      Technologies, Inc.***




REZconnect
      Technologies, Inc. (“Technologies”) includes a “brick and mortar” travel
      franchise system and provides our technology software and services to the travel
      industry. Technologies builds reservation systems using proprietary applications
      for suppliers within the travel industry. Technologies sells and services travel
      stores within the travel industry and includes RezCity.com, an online city
      guide
      and travel store. Technologies operates under the following brands: Travel
      Network, Global Travel Network and Travel Network/Vacation Central.




The
      Technologies’ consumer driven websites provide strong content and
      booking-ability, with over 60 booking engines incorporated into any one site,
      covering all aspects of the travel industry.




**Competition
      and Customer Base**




The
      travel industry is highly diverse, specialized and one of the most competitive
      industries in the United States. Much of the travel business is niche oriented
      and highly price sensitive. Many of our competitors are much more highly
      capitalized. One of the principal functions of our share exchange transaction
      and reincorporation in late 2004 (as described in “Corporate History” below) was
      to position us to be more competitive.





We
      have
      the characteristics of both an online travel provider and a “brick and mortar”
travel agency, selling our travel-related products through traditional “brick
      and mortar” travel agencies and online sites. This unique positioning results in
      our having few direct competitors. Our competition can be classified into three
      separate types of companies: online travel providers; retail travel providers;
      and electronic distributors of travel information and services. Websites such
      as
      Travelocity.com, Priceline.com, **** Expedia.com
      and Orbitz.com are retailers of travel online, unlike YTB Travel which serves
      in
      a facilitator function only. In addition, the YTB Travel target markets serve
      as
      direct referrals for the Company’s RTAs.




The
      Company’s franchise travel agency business is subject to competition.
      Travelocity, through its subsidiary World Choice Travel, a competitor, is now
      a
      revenue-generating preferred supplier for air ticketing and hotel on our travel
      sites.




To
      our
      knowledge, there are currently no other direct network marketing companies
      specializing in the travel online business similar to YTB Marketing. Hence,
      while there are travel site network marketing companies in existence, we do
      not
      believe that they are direct competitors of YTB Marketing.




Because
      of our direct marketing approach and our diffuse customer base, we are not
      dependent on major customers for a significant portion of our
      revenues.




**Regulatory
      Framework**




Our
      current and prospective operations within the travel services industry are
      not
      restricted to a material extent by any current or proposed governmental
      regulations, nor is governmental approval required for the conduct of our
      business (other than ordinary course travel licenses and similar approvals).
      Similarly, environmental laws do not materially limit or materially impact
      our
      operations, nor does compliance with environmental laws impose a material cost
      on our business. YTB Marketing, whose IMRs sell the online travel agency
      business opportunity of YTB Travel, is subject to the various state and federal
      laws and regulations governing the structure and conduct of network
      marketing companies.




3







**Corporate
      History**




We
      were
      originally incorporated as a New York corporation in June 1982 as Travel
      Network, Ltd., doing business as Global Travel Network. In February 1994, we
      re-incorporated in the State of New Jersey. In 1998, our assets were transferred
      to Global Travel Network, L.L.C. (“GTN”). GTN was created as a conduit to
      participate in the franchise Global Travel Network business of Travel Network,
      Ltd.




In
      September 1999, Playorena, Inc., a public shell company, acquired the
      outstanding equity of GTN in exchange for 5,063,379 shares of Playorena’s common
      stock (including 123,292 shares reserved for issuance upon the exercise of
      certain warrants previously issued by GTN and 4,931,087 shares issued to equity
      holders of GTN), representing 94.5% of the issued and outstanding common stock
      of Playorena upon completion of the share exchange. Following the merger with
      Playorena, Inc., the surviving entity’s name was changed to ETRAVNET.COM, Inc.
      In August 2001, ETRAVNET.COM, Inc. changed its name to REZconnect Technologies,
      Inc.




In
      December 2004, we acquired all of the issued and outstanding stock of
      YourTravelBiz.com, Inc., then an Illinois corporation, pursuant to a share
      exchange transaction. In this transaction the stockholders of YourTravelBiz.com,
      Inc. received, in exchange for 100% of YourTravelBiz.com, Inc.’s capital stock,
      11,522,376 newly issued shares of our capital stock (the “Exchange Stock”). The
      number of shares of Exchange Stock issued was one share greater than the total
      number of then-outstanding shares of our stock and consisted of 7,430,000 shares
      of our common stock and 4,092,376 shares of our Series B Convertible Preferred
      Stock (“ Series
      B Stock ”).
      The
      Series B Stock was created and issued because we did not have a sufficient
      number of authorized and un-issued shares of our common stock available for
      issuance to the YourTravelBiz.com, Inc. stockholders in the transaction. Each
      share of Series B Stock was converted into one share of our common stock on
      January 9, 2005. The issuance of the Exchange Stock was not registered, as
      the
      transaction was exempt from registration pursuant to Section 4 (2) of the
      Securities Act of 1933, as amended (the “Securities Act”).




Effective
      January 4, 2005, we reincorporated in Delaware, changed our name to YTB
      International, Inc., and increased the number of authorized shares of our common
      stock to 50,000,000. A principal result of the share exchange transaction was
      the creation of our current multiple subsidiary operating
      structure.




**Employees**


As
          of
          December 31, 2006, we had a total of 144 full-time employees (this number
          which
          excludes our IMRs and RTAs, who are independent contractors and not
          our employees). Our employees are not represented by any collective bargaining
          agreement and we have never experienced a work stoppage. We believe that
          we
          enjoy good relations with our employees.
 4


**Item
      2.****Description
      of Property.**




The
      following table sets forth certain information concerning the Company’s
      principal facilities:





**PROPERTY
                  LOCATION**
              
              **APPROXIMATE
                  AREA IN SQUARE FEET**
              
              **PRIMARY
                  USES OF PROPERTY**
              
              **OWNERSHIP
                  OR LEASE**1901
                  East Edwardsville Road,
                Wood
                  River, Illinois
              
              120,000
              
              Corporate
                  headquarters
              
              Owned
                  (1)560
                  Sylvan Avenue,
                Englewood
                  Cliffs, New Jersey
              
              2,000
              
              REZconnet
                  Technologies, Inc.
                (subsidiary)
                  headquarters
              
              Leased
                  (2)One
                  Country Club View Drive,
                Edwardsville,
                  Illinois
              
              13,000
              
              Administration
              
              Leased
                  (3)Two
                  Country Club View Drive,
                2nd
                  Floor,
                Edwardsville,
                  Illinois
              
              5,000
              
              Administration
              
              Leased
                  (4)(1)
                  Subject to mortgage in original principal amount of $2,500,000,
                  which
                  bears interest at a floating rate equal to the prime rate, less
                  0.50%.
                  Currently, $2,500,000 of principal remains outstanding under such
                  mortgage.(2)
                  Lease term expires in April 2008.(3)
                  Lease term expires on June 30, 2010. Also, subject to Landlord
                  option to
                  transfer title and receive stock.(4)
                  Lease term expires on October 31, 2010. Also, subject to Landlord
                  option
                  to transfer title and receive
                  stock.


**Owned
      Real Property**




Our
      headquarters office is located at 1901 East Edwardsville Road, Wood River,
      Illinois 62095. We acquired the 12 acres of land on which our headquarters
      office is located, including the 100,000 square foot building that houses our
      headquarters office (collectively, the “Property”) for $2.5 million on July 26,
      2006. We financed the purchase of the Property by borrowing $2.5 million from
      Meridian Bank, a local bank controlled by two of our directors. The loan is
      evidenced by a note of like principal amount that we issued to Meridian Bank
      (the “Note”), which bears interest at a floating rate equal to the prime rate,
      less 0.50%, determined on a daily basis. Interest only is payable monthly for
      the first two years of the note after which the entire principal will be paid
      or
      the note will be refinanced. Although
      the scheduled balloon principal payment is due July 26, 2008, the Note is
      payable upon demand per the terms thereof, however, no demand has been made
      to
      date. The
      Note
      is collateralized by a mortgage on the Property and a $500,000 certificate
      of
      deposit. The certificate of deposit will be released after we have made $625,000
      of improvements to the Property. Through the use of working capital funds,
      we
      have completed a $2.5 million renovation of 20,000 square feet of the
      building for our current operations. As a result of those renovations, as of
      December 31, 2006, we believe that we had met the requirements for the release
      of the certificate of deposit, although due to procedural requirements imposed
      by Meridian Bank, it has not actually been released yet. Besides the $2.5
      million of renovations already carried out, we are planning an additional $8.0
      million renovation project for the Property, which we will finance via general
      working capital funds.




The
      chairman and principal shareholder of Meridian Bank, Timothy Kaiser, M.D.,
      is
      also one of our directors. Another of our directors, Clay Winfield, is a
      principal shareholder and director of Meridian Bank. The loan transaction with
      Meridian Bank was approved by the independent members of our Board of Directors.
      See Item 12. “Certain Relationships and Related Transactions” and the
      information incorporated by reference therein.




In
      addition to the property that houses our headquarters office, we also acquired,
      in December 2006, 1.08 acres of land that included a 20,000 square foot building
      contiguous to our current office for $508,693 cash as part of the future
      facility plan for our corporate headquarters that began back in July
      2006.





5


**Leased
      Real Property**




In
      addition to our owned real property, we lease office space (which housed our
      previous headquarters office) in two buildings in Edwardsville, Illinois under
      separate commercial lease agreements with Meridian Land Company, Inc.
      (“ Meridian
      Land ”),
      the
      owner of the buildings. The combined rental cost of both spaces is $15,000
      per
      month. In addition, each lease contains an addendum which includes a two-year
      warrant to purchase shares of our common stock in exchange for the deed to
      the
      related property, unencumbered. The first lease, which covers approximately
      13,000 square feet, expires on June 30, 2010 and includes an addendum with
      a
      two-year warrant that is exercisable for 500,000 shares of our common stock
      at a
      price equal to (i) $1.00 (in the aggregate), plus (ii) unencumbered title to
      the
      property. Separately, we have the option to purchase the property for a cash
      price of $1,850,000. Correspondingly, the second lease, which covers
      approximately 5,000 square feet and expires on October 31, 2010, includes an
      addendum with a two-year warrant that is exercisable for 625,000 shares of
      our
      common stock at a price equal to (i) $1.00 (in the aggregate), plus (ii)
      unencumbered title to the property. Separately, we have the option to purchase
      the second property for a cash price of $2,350,000. The Company plans on
      re-locating a portion of its travel staff to the leased space in Illinois during
      the second quarter of 2007.




Meridian
      Land is controlled by Timothy Kaiser, M.D. and Clay Winfield, each of whom
      are
      members of our Board of Directors. The lease transactions with Meridian Land
      were approved by the independent members of our Board of Directors. See Item
      12.
“Certain Relationships and Related Transactions” and the information
      incorporated by reference therein.




Besides
      our current and previous headquarters offices, we also lease office space at 560
      Sylvan Avenue ,
      Englewood Cliffs, New Jersey 07632, principally for the operations of our
      Technologies subsidiary. Our New Jersey offices consist of approximately 2,000
      square feet of leased space. The current monthly rent under our New Jersey
      lease
      is $4,083, and such lease expires in April 2008.




**Adequacy
      of Property**




All
      of
      our owned and leased real properties are in good working condition, and we
      believe that they are adequate to meet our current operational needs. In
      addition, we believe that all such properties are adequately covered by
      insurance.




We
      began
      planning an $8.0 million project for the renovation of our current headquarters
      office in late 2006. Please see the description below in Item 6 (Management’s
      Discussion and Analysis), sub-heading “Liquidity and Capital Resources”, for
      further discussion of this renovation project and the expenditures that will
      be
      incurred in connection therewith.




**Real
      Estate Investment Policies**




We
      do not
      have any policies in place with respect to investments in (i) real estate or
      interests in real estate, (ii) real estate mortgages or (iii) securities of
      or
      interests in persons primarily engaged in real estate activities. The real
      estate that we own and leased were acquired to support our operations and for
      long-term investment purposes.




**Item
      3. Legal Proceedings.**




None.




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




None.




6


**PART
      II**




**Item
      5. Market for Common Equity and Related Stockholder
      Matters.**




**Common
      Stock Prices**




Beginning
      in 1990, when Playorena, Inc. (the public company that is a predecessor of
      the
      current Company) underwent an initial public offering of its common stock,
      such
      common stock was traded on the NASDAQ Stock Market or quoted on the OTC-BB
      under
      the symbol “PLEX.” Upon Playorena, Inc.’s acquisition of all of the outstanding
      equity of GTN in September 1999 (as described above in Item 1. Description
      of
      Business, sub-heading “Corporate History”), the common stock of the surviving
      entity, ETRAVNET.COM, Inc., was quoted under the symbol “ETRV”. The symbol under
      which such common stock was quoted was subsequently changed to “ETVT” on
      December 20, 1999. Upon the change of ETRAVNET.COM, Inc.’s name to REZconnect
      Technologies, Inc. in August 2001, the symbol under which the common stock
      was
      quoted was changed to “REZT”, which it remained until our acquisition of all the
      issued and outstanding stock of YourTravleBiz.com, Inc.





Upon
      the
      consummation of our acquisition of YourTravleBiz.com, Inc. and our
      reincorporation in Delaware as YTB International, Inc. in January 2005, our
      common stock began to be quoted on the OTC-BB under the symbol “YTBL.OB.” On May
      24, 2006, our common stock was suspended from quotation on the OTC-BB as a
      result of our not having filed our Annual Report on Form 10-KSB for the year
      ended December 31, 2005 in a timely manner with the United States Securities
      and
      Exchange Commission (the “SEC”). Since that time, our common stock has been
      quoted on the Pink Sheets under the common stock symbol “YTBL.PK.” Because we
      have become current with our periodic reports under the Exchange Act, we intend
      to have our common stock quoted on the OTC-BB once again and to apply for its
      listing in the near future on the American Stock Exchange, although no
      assurances can be given in this regard.





The
      following table sets forth the high and low bid prices per share of our common
      stock for the periods indicated:




High
              
              LowFiscal
                  year ended December 31, 2006First
                  quarter
              
              $
              1.37
              
              $
              1.06Second
                  quarter
              
              
              1.55
              
              
              1.11Third
                  quarter
              
              
              2.95
              
              
              1.21Fourth
                  quarter
              
              
              3.28
              
              
              1.85Fiscal
                  year ended December 31, 2005First
                  quarter
              
              $
              1.70
              
              $
              1.25Second
                  quarter
              
              
              2.54
              
              
              1.70Third
                  quarter
              
              
              3.77
              
              
              1.80Fourth
                  quarter
              
              
              2.50
              
              
              0.95


At
      March
      28, 2007, the closing price per share for our common stock, as reported by
      the
      Pink Sheets was $5.09.




**Shareholders**




As
      of
      December 31, 2006, we had 366 common shareholders of record.




**Dividend
      Policy**




We
      have
      neither declared nor paid a cash dividend on our common stock since we became
      a
      publicly traded company. It is the policy of our Board of Directors to retain
      all available funds to finance the development and growth of our business.
      The
      payment of cash dividends in the future will be dependent upon our earnings
      and
      financial requirements.





**Recent
      Sales of Unregistered Securities**




We
      have
      not engaged in the sale of any equity securities that have not been registered
      under the Securities Act during the fiscal year covered by this report that
      has
      not been previously reported by us.




7







**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation.**




**Overview**




We
      are a
      leading provider of Internet-based travel related services and operate through
      our three subsidiaries: YourTravelBiz.com, Inc., YTB Travel Network, Inc. and
      REZconnect Technologies, Inc. YourTravelBiz.com, Inc. (“YTB Marketing”)
      establishes online travel agencies and compensates its IMRs via a multilevel
      marketing commission structure. YTB Travel Network, Inc. (“YTB Travel”)
      contracts with the online travel agencies, provides online booking systems,
      fulfills travel orders and pays travel commissions. REZconnect Technologies,
      Inc. (“Technologies”) is a travel technology provider, including online travel
      booking engine technologies, and is a franchisor of travel
      agencies.




We
      offer
      our customers a reliable source of travel products and services through our
      relationships with selected travel providers, including major airlines, cruise
      lines, hotels and car rental agencies, as well as wholesale travel providers.
      We
      offer our customers the ability to make reservations on over 400 airlines,
      at
      more than 57,000 hotels and with most major car rental companies, cruise lines
      and tour package operators.




Our
      multi-segment operating model provides us with a competitive advantage because
      few travel related companies have expertise in travel, marketing and technology.
      We have been able to obtain more favorable pricing terms with our vendors as
      a
      result of economies of scale. In addition, more favorable commission rates
      are
      able to be realized based on the larger volume.




We
      also
      benefit from the synergies among our operating segments. YTB Marketing markets
      and establishes online travel agencies on behalf of YTB Travel. YTB Marketing
      has a unique business model and strategy of creating a network of commissioned
      IMRs who exclusively market the online travel agencies of YTB Travel. A
      purchaser of an online travel agency license from YTB Travel is known as a
      Referring Travel Agent (“RTA”). Each RTA pays $449.95 for the purchase of an
      online travel store, plus the first month’s RTA license fee of $49.95, which
      monthly fee continues for as long as the RTA operates their online store. YTB
      Travel retains a percentage of the travel commissions generated by the RTAs.
      In
      contrast Travelocity, Priceline.com, Expedia and Orbitz focus their promotion
      efforts on the customer. Whereas we spend less than 1% of net revenues on
      advertising, our major competitors typically spend over 25% of their revenue
      on
      advertising.




YTB
      Marketing’s sales of online travel agencies on behalf of YTB Travel are not
      subject to the seasonality of the travel business. Also, typical online travel
      merchants sell a commodity (travel), which does not engender strong customer
      loyalty. By contrast, each RTA develops personal relationships with his or
      her
      customers, who book travel through the RTA’s own online travel store, thereby
      creating a significant advantage for our companies over the major online travel
      companies. The cost to book a trip through an RTA is usually nearly identical
      to
      booking a trip through a major online travel company. The RTAs’ online stores
      provide access to more than 60 booking engines, including World Choice Travel
      (a
      subsidiary of Travelocity), Hotels.com, Apple Vacations, Collette Vacations,
      Ourvacationstore.com and more.




As
      of
      December 31, 2006, there are approximately 59,800 RTA travel store websites
      in
      operation and numerous registered travel agents, which include franchisees
      and
      independent travel agents, using the Vacation Central travel portal site. Site
      owners are permitted to solicit organizations and associations for travel sites.




YTB
      Travel is the travel management subsidiary that processes travel sales from
      online business models and processes and handles bookings (reservations) from
      approximately 59,800 websites and negotiates deals with over 60 preferred
      vendors, and receives incentives based on the volume of business that it
      produces. The fulfillment is offered through interactive, real time booking
      engines and access to preferred deals with leading travel industry suppliers.
      The emerging market shift to the Internet for travel services presents the
      opportunity for advancement of products and services by referral relationships.
      Future revenue growth should accelerate as more RTAs are added to the system,
      and as each goes through the various training programs that YTB Travel provides.
      RTA sites are available for use 24 hours, 7 days a week, providing travel agents
      the ability to personally follow-up with the online consumer and provide
      customer service.




Technologies
      generates revenue through registered travel agents and over 60 active franchised
      travel agencies. Technologies offers consumer driven websites which provide
      strong content and travel book-ability with over 60 booking engines incorporated
      into one site, covering virtually all aspects of the travel industry.




8







Our
      revenues are comprised primarily of online travel store sales and monthly RTA
      license fees, franchise fees and franchise service fees and commissions paid
      by
      travel providers. In addition, certain travel suppliers pay performance-based
      compensation known as “override commissions” or “overrides.” Commission revenues
      and gross retail sales, net of allowances for cancellations, are recognized
      generally based on the expected date of travel. Overrides are recognized on
      an
      accrual basis once the amount has been confirmed with the travel supplier.
      Franchise fees are recognized when all material services and conditions required
      have been performed and the ability to collect the franchise fee is relatively
      assured. We generally defer recognition of franchise fees until such amounts
      have been collected from the franchisee. Franchise service fees are recognized
      on an accrual basis as earned. Revenue from online travel store sales is
      deferred and recognized ratably as revenue over a 12-month period.




With
      respect to travel services, revenues are generated by transactions with
      customers who make offers to purchase offline, tickets or packages supplied
      by
      participating vendors. Because the Company is the merchant of record in these
      transactions, revenue for these services includes the total amount billed to
      the
      customer.




The
      commission rates paid by travel suppliers, in addition to overrides, are
      determined by individual travel suppliers and are subject to change.
      Historically, typical standard base commission rates paid by travel suppliers
      have been approximately 10% for hotel reservations, 5% to 10% for car rentals,
      10% to 16% for cruises and vacation packages and a nominal service fee for
      airline tickets. During the past several years, leisure vendors (including
      tour
      operators, cruise lines and hotel and car packagers) have not reduced their
      commission levels but in fact have offered YTB Travel incentive commissions
      above the standard compensation for its volume business. YTB Travel expects
      that
      its weighted average commission of online transaction revenues will increase
      due
      to the fact that its leisure bookings are much greater as a percentage of total
      sales than airline ticketing, the latter offering lower commissions. Each
      website travel storeowner pays a monthly license fee of $49.95 to us, and can
      earn transactional compensation from travel purchased from his or her website.
      There can be no assurance that travel suppliers will not reduce commission
      rates
      paid to YTB Travel or eliminate such commissions entirely, which could,
      individually or in the aggregate, have a material adverse effect on our
      business, operating results and financial condition.




9


**Results
      of Operations**




The
      following table sets forth, for the periods indicated, the percentage
      relationship of certain items from our consolidated statement of operations
      to
      our total revenues:




2006
                  
                  
                  2005
                  
                  
                  VarianceYear
                      Ended
                    December
                      31,
                  
                  
                  %
                      of Net
                    Revenues
                      2006
                  
                  
                  Year
                      Ended
                    December
                      31,
                  
                  
                  %
                      of Net
                    Revenues
                      2005
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  Inc.(Decr.)
                      %NET
                      REVENUESOnline
                      travel stores and monthly fees
                  
                  $
                  36,887,611
                  
                  
                  
                  72.4
                  %
                  
                  $
                  14,302,638
                  
                  
                  
                  66.2
                  %
                  
                  $
                  22,584,973
                  
                  
                  
                  157.9
                  %Travel
                      commissions and services
                  
                  
                  7,364,413
                  
                  
                  
                  14.5
                  %
                  
                  
                  4,941,007
                  
                  
                  
                  22.9
                  %
                  
                  
                  2,423,406
                  
                  
                  
                  49.0
                  %Franchise
                      services fees and other fees
                  
                  
                  332,345
                  
                  
                  
                  0.7
                  %
                  
                  
                  443,693
                  
                  
                  
                  2.1
                  %
                  
                  
                  (111,348
                  )
                  
                  
                  -25.1
                  %Training
                      programs and marketing materials
                  
                  
                  5,766,081
                  
                  
                  
                  11.3
                  %
                  
                  
                  1,579,960
                  
                  
                  
                  7.3
                  %
                  
                  
                  4,186,121
                  
                  
                  
                  265.0
                  %Other
                  
                  
                  546,280
                  
                  
                  
                  1.1
                  %
                  
                  
                  326,019
                  
                  
                  
                  1.5
                  %
                  
                  
                  220,261
                  
                  
                  
                  67.6
                  %Total
                      net revenues
                  
                  
                  50,896,730
                  
                  
                  
                  100.0
                  %
                  
                  
                  21,593,317
                  
                  
                  
                  100.0
                  %
                  
                  
                  29,303,413
                  
                  
                  
                  135.7
                  %OPERATING
                      EXPENSESMarketing
                      commissions
                  
                  
                  29,908,507
                  
                  
                  
                  58.8
                  %
                  
                  
                  13,881,404
                  
                  
                  
                  64.2
                  %
                  
                  
                  16,027,103
                  
                  
                  
                  115.5
                  %Travel
                      commissions
                  
                  
                  4,893,012
                  
                  
                  
                  9.6
                  %
                  
                  
                  3,454,033
                  
                  
                  
                  16.0
                  %
                  
                  
                  1,438,979
                  
                  
                  
                  41.7
                  %Depreciation
                      and amortization
                  
                  
                  408,025
                  
                  
                  
                  0.8
                  %
                  
                  
                  944,619
                  
                  
                  
                  4.4
                  %
                  
                  
                  (536,594
                  )
                  
                  
                  -56.8
                  %Marketing
                      and selling
                  
                  
                  3,144,211
                  
                  
                  
                  6.2
                  %
                  
                  
                  239,853
                  
                  
                  
                  1.1
                  %
                  
                  
                  2,904,358
                  
                  
                  
                  1210.9
                  %General
                      and administrative
                  
                  
                  18,595,959
                  
                  
                  
                  36.5
                  %
                  
                  
                  8,954,335
                  
                  
                  
                  41.5
                  %
                  
                  
                  9,641,624
                  
                  
                  
                  107.7
                  %Total
                      operating expenses
                  
                  
                  56,949,714
                  
                  
                  
                  111.9
                  %
                  
                  
                  27,474,244
                  
                  
                  
                  127.2
                  %
                  
                  
                  29,475,470
                  
                  
                  
                  107.3
                  %LOSS
                      FROM OPERATIONS
                  
                  
                  (6,052,984
                  )
                  
                  
                  (11.9
                  %)
                  
                  
                  (5,880,927
                  )
                  
                  
                  (27.2
                  %)
                  
                  
                  (172,057
                  )
                  
                  
                  2.9
                  %OTHER
                      INCOME/(EXPENSE)Change
                      in fair value of derivatives
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  312,143
                  
                  
                  
                  1.4
                  %
                  
                  
                  (312,143
                  )
                  
                  
                  -100.0
                  %Interest
                      and dividend income
                  
                  
                  170,224
                  
                  
                  
                  0.4
                  %
                  
                  
                  102,049
                  
                  
                  
                  0.5
                  %
                  
                  
                  68,175
                  
                  
                  
                  66.8
                  %Interest
                      expense
                  
                  
                  (93,617
                  )
                  
                  
                  (0.2
                  %)
                  
                  
                  (2,986,052
                  )
                  
                  
                  (13.8
                  %)
                  
                  
                  2,892,435
                  
                  
                  
                  -96.9
                  %Total
                      income/(expense)
                  
                  
                  76,607
                  
                  
                  
                  0.2
                  %
                  
                  
                  (2,571,860
                  )
                  
                  
                  (11.9
                  %)
                  
                  
                  2,648,467
                  
                  
                  
                  -103.0
                  %NET
                      LOSS
                  
                  $
                  (5,976,377
                  )
                  
                  
                  (11.7
                  %)
                  
                  $
                  (8,452,787
                  )
                  
                  
                  (39.1
                  %)
                  
                  $
                  2,476,410
                  
                  
                  
                  -29.3
                  %


10


The
      following table sets forth the number of RTAs for each period covered by this
      report, as well as the sales figures for each period.





RTAs
                  as of
              
              RTAs
                  as ofDecember
                  31, 2006
              
              December
                  31, 200559,736
              
              21,385Site
                  sales for the
              
              Site
                  sales for the12
                  months ended
              
              12
                  months endedDecember
                  31, 2006
              
              December
                  31, 200558,985
              
              22,473





The
      RTA
      numbers represent the number of active RTAs paying $49.95 per month to us as
      monthly license fees.  The site sales numbers represent the number of
      online travel store sites sold during each respective period.  The number
      of sales, and the number of recurring monthly license fees paid, each directly
      impacts our revenues and expenses.  As each new site is sold for $449.95,
      marketing commissions are paid on that sale.  Likewise, each recurring
      monthly license fee paid results in marketing commissions paid to the
      IMRs.  As the number of active RTAs grows, the amount of our travel
      commissions revenue grows as well.  Correspondingly, our travel commissions
      expense follows suit.





The
      growth on a year-to-year basis of our organization that is evidenced by the
      above numbers directly impacts our financial results, both on the revenue side,
      as well as the expense side.  As more sites are sold and maintained, the
      amount of marketing and travel commissions correspondingly increase, as do
      other
      volume related expenses, such as wage and benefit costs.  As more sales are
      made, our entire infrastructure needs to keep pace with the sales volume.





At
      YTB
      Marketing, we engage network marketing as our method of distribution of the
      online travel websites to new RTAs. IMRs are recruited, trained, motivated,
      recognized, supported, and compensated for the sale of our travel websites.
      A
      number of Company-sponsored events and programs are conducted annually to
      benefit IMRs in the building of their businesses. Below are some events that
      throughout the year:




·
            **National
                Convention:**The YTB National Convention has been conducted annually in St. Louis
                since
                2003.  The registration fee of $100 - $200 provides participants with
                four days of training, motivation, and recognition for sales achievement.
                Planned for the August 2007 National Convention is “YTB University,” a
                two-day school of business building and travel sales classes, conducted
                by
                YTB’s leading field sales people, corporate staff, travel industry vendors
                and experts, and outside professionals. The final two days of the
                convention consist of a series of general sessions, comprised of
                instructional and motivational speakers, awards and recognition,
                special
                announcements, launch of contests, travel industry vendor presentations,
                and keynote speeches by our corporate founders and field leaders. 
                The attendance at the convention in 2004 was 700; in 2005, it was
                approximately 1,300; and in 2006 3,200 field RTAs and IMRs attended.
                It is
                anticipated that 2007 attendance could top
                10,000.




·
            **Regional
                Meetings**-
                Throughout the year our founders, corporate staff, and field leaders
                plan
                and participate in various regional meetings around the nation for
                IMRs
                and RTAs. These events, ranging from one-evening 2 to 3-hour meetings
                to
                two-day meeting and seminars, and contain many of the elements of
                our
                National Convention. Attendance can range from a few hundred to several
                thousand attendees. These events usually begin in January with a
“Founders
                Tour,” whereby our founders travel to 60 - 70 cities to conduct
                meetings.





·
            **CRTA
                Events**-
                These events - “RTA Certification” or “CRTAs” - are conducted by our Sales
                Directors, our top sales achievers.  They are primarily for the
                benefit of new RTAs and IMRs. There is a $149 tuition payment required
                for
                the event although no tuition is paid for repeat attendance. The
                one-day
                course consists of travel and marketing training, and is conducted
                normally on weekends in up to 20 to 30 cities around the nation
                monthly.





·
            **Coach’s
                Birthday Bash**-
                A sales contest - “Coach’s Birthday Bash” - is launched annually at our
                National Convention and runs through the end of the year. The contest
                winners (100 in January 2005, 200 in January 2006, and 400 in January
                2007,) are treated to several days on a cruise or trip to an exotic
                location for socializing, and recognition , motivational, and training
                seminars.  The January trip coincides with the birthday of one of our
                founders, Lloyd “Coach” Tomer.





11


·
            **Funshine
                Travel Trade Shows**-
                Twice annually, in the spring on the west coast and in the fall on
                the
                east coast, there is conducted a Funshine Travel Trade Show, attended
                by
                upwards of 3,000 of our RTAs.  The Funshine event features major
                national travel vendors conducting travel seminars and distributing
                their
                vacation materials on cruises, golf packages, hotels and resorts,
                theme
                parks, and US and European packages, among others.   Event
                planning starts a year in advance for these travel events, and features
                major vendors such as Disney, Carnival Cruises, Apple Vacations,
                Trafalgar
                Tours, and many more.





These
      events contribute to rapid growth in the sales of online travel stores and
      also
      aid in the retention of IMR’s and RTA’s throughout the year.





***Revenues***




Net
      revenues totaled $50,896,730 and $21,592,317 for the year ended December 31,
      2006 and 2005, respectively.





·
            Online
                travel store sales and monthly fee revenue increased $22,584,974
                or 157.9%
                in 2006 to $36,887,611 from $14,302,638 in 2005. The increase is
                due to
                the significant growth of YourTravelBiz.com attributable to the increase
                in active RTAs. We believe our significant growth in RTAs is attributable
                to the emerging market shift to the Internet for travel services
                which
                presents the opportunity for advancement of products and services
                by
                referral relationships and the boom in home-based
                businesses.





·
            Travel
                agency commissions for 2006 increased $2,423,406 or 49.0% in 2006
                to
                $7,364,413 from $4,941,007 reported in 2005. The increase is attributable
                to an increase in the number of customers utilizing the Company as
                their
                travel provider in 2006 due to the significant growth in referring
                travel
                agents.





·
            Franchise
                service fees and other fees decreased $111,348 or 25.1% in 2006 to
                $332,345 from $443,693 reported in 2005. The decrease is largely
                attributable to the transition to the Internet for travel bookings
                away
                from traditional/brick-and-mortar travel
                agencies.


·
            Training
                programs and marketing materials revenue increased in 2006 as compared
                to
                2005 by $4,186,121 or 265.0% to $5,766,081 from $1,579,960. This
                increase
                is due to the significant growth of sales revenues primarily from
                training
                programs, sales aides and miscellaneous promotional and marketing
                materials purchased by an increasing number of IMRs. Revenue from
                the sale
                of the “Success from Home” magazine, new in 2006, accounts for
                approximately $1.8 million of the increase from 2005. Additional
                increases
                in 2006 related to training programs revenue and sales aides and
                miscellaneous marketing materials revenue in the amount of approximately
                $1.7 million and $614,000, respectively, compared to
                2005.


·
            Other
                revenue increased in 2006 as compared to 2005 by $220,261 to $546,280
                from
                $326,019 primarily due to the increase in convention revenues.





***Operating
      Expenses***




·
            Marketing
                commissions increased by $16,027,103 or 115.5% in 2006 to $29,908,507
                from
                $13,881,404 in 2005. This increase is due to the significant increase
                in
                active RTAs sold by our IMRs as well as the average amount of commissions
                paid per new RTA due to an increase in Dream Bonuses paid as well
                as the
                number of override commissions paid. The Dream Bonus is a $10,000
                bonus
                paid when IMRs have recruited and maintained 100 paying RTAs. The
                initial
                license fee was increased October 1, 2006 in order to cover the increased
                costs incurred by the Company due to the increase in average commissions
                paid. Additionally, newly implemented commissions programs contributed
                approximately $434,300 to the increase year over year. The year ended
                December 31, 2006 also includes $4,083,306 in bonus expense for the
                Company’s IMRs earned in conjunction with a bonus program that began in
                the fourth quarter of 2005.


·
            Travel
                commissions for the year ended December 31, 2006 increased $1,438,979
                or
                41.7% to $4,893,012 from $3,454,033 reported in the comparable prior
                year
                period. The increase is attributable to an increase in the number
                of
                customers utilizing the Company as their travel provider in 2006
                due to
                the significant growth in referring travel
                agents.




12




·
              Depreciation
                  and amortization was $408,025 for the year ended 2006 compared
                  to $944,619
                  in 2005. During 2005, depreciation and amortization included $103,815
                  of
                  amortization of capitalized software and $517,000 of amortization
                  of an
                  intangible asset for RTA agreements. Both of these items became
                  fully
                  amortized by December 31, 2005 and were not included in 2006. This
                  reduction year over year is partially offset by approximately $100,000
                  in
                  depreciation and amortization related to new 2006 additions to
                  property
                  and equipment.
 
 ·
              Marketing
                  and selling expenses increased by $2,904,358 or 1,210.9% from $239,853
                  in
                  the year 2005 to $3,144,211 in 2006. This increase is primarily
                  due to YTB
                  Magazine expense of $2,246,079. Other increases resulted from the
                  increase
                  in CRTA events held, and regional meetings, and the increase in
                  number and
                  size of open houses at our headquarters office “Red Carpet
                  Days.


·
            General
                and administrative expenses increased $9,641,624 or 107.7% to $18,595,959
                for the year ended 2006 from $8,954,335 in 2005. As a percentage
                of total
                net revenues, these expenses were 36.5% in 2006 and 41.5% in 2005.
                Although the two periods are relatively flat as a percentage of sales,
                the
                increase in general and administrative expense in 2006 is attributable
                to
                the significant growth in the number of active RTAs resulting in
                increased
                costs associated with the growth in the Company’s infrastructure to
                support the increased volume. The increase is also attributable to
                costs
                associated with the ongoing implementation of new Company-wide business
                strategies, such as the increase in the number of CRTA events held,
                the
                establishment of a Spanish division, the establishment of a formal
                marketing division and legal and accounting fees related to the
                restatement of prior years’ financial
                statements.








***Variability
      of Results***




The
      Company’s travel products and services gross bookings have increased from 2005
      to 2006 due to increase in the number of hosted websites and an increase in
      products and services sold to travel agencies utilizing our unique private
      label
      agent only web-based booking site. Cost of travel revenues have similarly
      increased from 2005 to 2006.




As
      a
      result of the Company’s operating history in online commerce and the variability
      that can be experienced by our franchising operations, the Company is unable
      to
      accurately forecast its revenues. The Company’s current and future expense
      levels are based predominantly on its operating plans. The Company may be unable
      to adjust spending in a timely manner to compensate for any unexpected revenue
      shortfall. Accordingly, any significant shortfall in revenues would likely
      have
      an adverse effect on the Company’s business, operating results and financial
      condition. Further, the Company currently intends to substantially increase
      its
      operating expenses to develop and offer new and expanded travel services, to
      fund increased sales and marketing and customer service operations and to
      develop its technology and transaction processing systems. To the extent such
      expenses precede or are not subsequently followed by increased revenues, the
      Company’s operating results will fluctuate and net losses in a given period may
      be greater than expected.




The
      Company expects to experience fluctuations in its future quarterly operating
      results due to a variety of other factors, many of which are outside the
      Company’s control. Factors that may adversely affect the Company’s quarterly
      operating results include, but are not limited to (i) the Company’s ability to
      retain existing travel customers, attract new customers at a steady rate and
      maintain customer satisfaction, (ii) changes in travel product inventory
      availability from third party suppliers and commission rates paid by travel
      suppliers, (iii) the announcement or introduction of new or enhanced sites,
      services and products by the Company or its competitors, (iv) general economic
      conditions specific to the Internet, online commerce or the travel industry,
      (v)
      the level of use of online services and consumer acceptance of the Internet
      and
      commercial online services for the purchase of consumer travel products and
      services such as those offered by the Company, (vi) the Company’s ability to
      upgrade and develop its systems and infrastructure and to attract new personnel
      in a timely and effective manner, (vii) the level of traffic on the Company’s
      online sites, (viii) technical difficulties, system downtime or Internet
      brownouts, (ix) the amount and timing of operating costs and capital
      expenditures relating to expansion of the Company’s business, operations and
      infrastructure, (x) governmental regulation and (xiii) unforeseen events
      affecting the travel industry, including terrorist activities similar to
      September 11 and the conflict with Iraq.




In
      addition, the Company expects that it will experience seasonal fluctuations
      in
      the travel industry, Internet and commercial online and travel product
      purchases. The Company anticipates that travel bookings will typically increase
      during the first and second quarter in anticipation of summer travel and will
      typically decline during the third quarter. Internet and commercial online
      service usage and the rate of growth of such usage may be expected typically
      to
      decline during the summer. Depending on the extent to which the Internet and
      commercial online services are accepted as an travel sales medium, seasonality
      in the level of customer travel expenditures could become more pronounced for
      Internet-based travel sales.




13




Due
        to
        the foregoing factors, quarterly revenues and operating results are difficult
        to
        forecast, and the Company believes that quarter-to-quarter comparisons of
        its
        operating results will not necessarily be meaningful and should not be relied
        upon as an indication of future performance. It is likely that the Company’s
        future quarterly operating results from time to time will not meet the
        expectations of security analysts or investors. In such event, the price
        of the
        Company’s common stock would likely be materially and adversely
        affected.


**Liquidity
      and Capital Resources**




The
      information below outlines the extraordinary cash expenditures we made in 2006.
      A portion of the legal and audit fees will be an ongoing expenditure, but not
      nearly to the magnitude that these fees were incurred in 2006 in connection
      with
      the restatement of our operating results. Despite our need to expend large
      amounts to correct problems from the past, we were still able to fund the
      renovation of the Wood River facility and also expand our staff significantly
      during the year. In addition, we sponsored several large events from which
      we
      did not profit, but which helped to spur growth in our business.




New
                  building cash outlays for construction, equipment, etc.
              
              $
              3,400,000Legal
                  fees
              
              
              699,992Audit
                  fees
              
              
              834,461Other
              
              
              32,323Total
              
              $
              4,966,776




The
      following table presents a summary of our cash flows for each of the last two
      fiscal years:





2006
              
              2005Net
                cash provided by (used in):Operating
                  activities
              
              
              
              
              $
              908,425
              
              $
              107,722Investing
                  activities
              
              
              
              
              
              (558,396
              )
              
              (3,589,691
              )Financing
                  activities
              
              
              
              
              
              (580,387
              )
              
              3,686,608Net
                  increase (decrease) in cash
              
              
              
              
              $
              (230,358
              )
              $
              204,639





Net
      cash
      provided by operating activities in 2006 increased by $800,703 to $908,425
      from
      the $107,722 provided in 2005. The increase is primarily the result of the
      growth that we experienced in 2006.





Net
      cash
      used in investing activities was $558,396 during 2006 as compared to cash used
      during 2005 of $3,589,691. This $3,031,295 decrease in cash used was primarily
      due to an increase in purchases of property and equipment in 2006 offset by
      in
      an increase in net proceeds from the sale of available-for-sale securities
      in
      2006 compared with 2005.





Net
      cash
      used in financing activities was $580,387 in 2006 and cash provided during
      2005
      was $3,686,608. The cash consumed by financing activities in 2006 was primarily
      attributable to $500,000 in restricted cash representing collateral for the
      outstanding note on the property for the new corporate headquarters and $750,000
      in restricted cash representing a reserve held by the Company's credit card
      processor offset by a bank overdraft balance of $812,464. The cash provided
      by
      financing activities in the prior year was primarily the result of raising
      capital from the sale of a convertible note which occurred in January 2005
      and
      October 2005 for $2,000,000 and $1,000,000, respectively, and from an issuance
      of stock in a private placement to investors resulting in gross proceeds of
      $960,000 in February 2005.


14


On
        July
        26, 2006, we spent $2,500,000 for the purchase of 12 acres of land which
        includes a 100,000 square foot building (the “ Property ”)
        which
        houses our new corporate headquarters in Wood River, Illinois. We financed
        the
        purchase of the Property by borrowing $2.5 million from Meridian Bank, a
        local
        bank controlled by two of our directors. The loan is evidenced by a note
        of like
        principal amount that we issued to Meridian Bank (the “ Note ”),
        which
        bears interest at a floating rate equal to the prime rate, less 0.50%,
        determined on a daily basis. Interest only is payable monthly for the first
        two
        years of the Note after which the entire principal will be paid or the Note
        will
        be refinanced. Although
        the scheduled balloon principal payment is due July 26, 2008, the Note is
        payable upon demand per the terms thereof, however, no demand has been made
        to
        date. The
        Note
        is collateralized by a mortgage on the Property and a $500,000 certificate
        of
        deposit. The certificate of deposit will be released after we have made $625,000
        of improvements to the Property. Through the use of working capital funds,
        we
        have completed $2.5 million of renovations to 20,000 square feet of the building
        located on the Property which we utilize for our current operations. As a
        result
        of those renovations, as of December 31, 2006, we believe that we had met
        the
        requirements for the release of the certification of deposit, although due
        to
        procedural requirements imposed by Meridian Bank, it has not actually been
        released yet. In addition to the $2.5 million of renovations that we have
        already carried out, we are planning an additional $8 million renovation
        project
        for the Property, which we will finance with cash flow from operations. Although
        no formal commitments have been made, we anticipate spending approximately
        $2.0
        million of the aggregate $8.0 million under the renovation project in the
        fourth
        quarter of 2007.


In
      December 2006, we purchased 1.08 acres that included a 20,000 square foot
      building contiguous to the property acquired in July 2006. The acquisition
      cost
      was $508,693. Working capital funds were used for this acquisition.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**Future
      Cash Flows**





To
      facilitate an understanding of our contractual obligations and other
      commitments, the following table is provided.





PAYMENTS
                    DUE BY PERIOD*thousands*
                
                Total
                
                2007
                
                2008-09
                
                2010-11
                
                2012
                    & BeyondContractual
                    obligations:Short-term
                    debt
                
                $
                2,500,000
                
                $
                -
                
                $
                2,500,000
                
                $
                -
                
                $
                -Long-term
                    debt
                
                
                262,815
                
                
                21,156
                
                
                44,933
                
                
                48,670
                
                
                148,056Operating
                    leases
                
                
                1,190,087
                
                
                337,445
                
                
                656,500
                
                
                196,142
                
                
                -Purchase
                    obligations formaterials
                    and services (1)
                
                
                280,840
                
                
                182,740
                
                
                98,100
                
                
                -
                
                
                -TOTAL
                
                $
                4,233,742
                
                $
                541,341
                
                $
                3,299,533
                
                $
                244,812
                
                $
                148,056
  (1)
                Amount
                    represents outstanding purchase commitments at December 31, 2006.
                    The
                    purchase commitments principally relate to future services to
                    be received
                    related to the Company's 2007 convention of $182,740 and the
                    2008
                    convention of $98,100.


**Liquidity**





As
      of
      December 31, 2006, we had $1,014,591 in short-term investments. We also reported
      a bank overdraft of $812,464 as of December 31, 2006 which resulted from checks
      cut during the last week of the period that had not yet cleared the bank. This
      overdraft was covered by receipts of cash in the subsequent period when the
      checks were presented to the bank. We believe that short term investments on
      hand at December 31, 2006 and our cash flow from operations will be sufficient
      to meet our obligations on a timely basis for the next 12 months. However,
      our
      lack of external financing sources may limit our ability to continue to grow
      and
      to achieve strategic business objectives that may be targeted by our Board
      of
      Directors. Such limitations may have an adverse impact on our financial
      position, results of operations and liquidity.


15


**Critical
      Accounting Policies and Estimates**




Our
      financial statements and accompanying notes are prepared in accordance with
      accounting principles generally accepted in the United States. The preparation
      of financial statements requires that we estimate the effect of various matters
      that are inherently uncertain as of the date of the financial statements. Each
      of these required estimates varies in regard to the level of judgment involved
      and its potential impact on our reported financial results. Estimates are deemed
      critical when a different estimate could have reasonably been used or where
      changes in the estimate are reasonably likely to occur from period to period,
      and would materially impact our financial condition, changes in financial
      condition or results of operations. Our significant accounting policies are
      discussed in Note 2 in the accompanying Notes to Consolidated Financial
      Statements. Critical accounting estimates for us include the determination
      of
      the estimated RTA life which impacts revenue recognition and related
      marketing commissions/bonuses, impairment of goodwill and realization of
      deferred tax assets, and are discussed in the following
      paragraphs.




Revenue
      Recognition






*A
      summary of our revenue recognition policies, as they relate to the specific
      revenue streams, is as follows:*




*Online
      travel store sales and monthly fees*





We
      generate revenue from the selling of online travel agencies, and from providing
      training and ongoing services to the new business owners of online travel
      agencies, i.e., RTA(s). We determined that our initial sale of each online
      travel store was deemed to fall under the SEC’s Staff Accounting Bulletin No.
      104, “Revenue Recognition” (“SAB 104”) and Emerging Issues Task Force 00-21
      (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple
      Deliverables”. SAB 104 and EITF 00-21 require the initial sales price, including
      all up-front fees received from new RTA sales, to be amortized over the expected
      useful life of the RTA. The calculation of the expected useful life was based
      upon a review of the sales for each month and the length of time each RTA
      continues with the Company. We then applied a weighted average to the
      calculations. Likewise, the commission paid in connection with negotiations
      to
      sell the business would be amortized over the same period. Any excess of expense
      to acquire the business over the proceeds received, is recognized immediately
      and not amortized. Monthly license fees are recognized in the month the services
      are provided. We review the underlying calculations of the expected useful
      life
      of the RTA annually.







*Travel
      commissions and services*





Commissions
      and incentives earned from travel sales are recognized as revenue when the
      related travel has been completed by the customer. Commissions earned where
      the
      Company acts in the capacity of a travel product wholesaler are recorded at
      their gross amount. The cost of such revenue is recorded separately as an
      operating expense.





*Franchise
      service fees and other fees*





Technologies
      is a franchisor of traditional “brick and mortar” travel agencies. The initial
      franchise fee related to the sale of these travel agencies is due upon execution
      of a franchise agreement with the franchisee. The initial franchise fee is
      deferred and subsequently recognized as revenue when all material conditions
      prior to the opening of a franchised business have been satisfied. Fees paid
      are
      non-refundable once a site location has been selected.




*Training
        programs and marketing materials revenue*
 
 Sales
        revenues from the sale of IMR sales aides and miscellaneous promotional and
        marketing materials are recognized when the related merchandise is shipped
        to
        the IMR. Sales revenues from training programs are recognized when the IMR
        has
        completed the related training course.
 
 *Other
        revenue*
 
 Sales
        revenues from convention attendance are recognized during the period in which
        the convention occurs.


16
 Marketing
          compensation plan
  The
          Company offers a compensation plan to its IMRs under an arrangement that
          pays
          the IMRs direct sales commissions, override compensation (if qualified)
          and
          other bonus incentives based on the amounts attributable to each IMR’s personal
          and team travel agency sales, or enrolled referrals. The “commission override”
is comprised of a small portion of the monthly license fee RTAs pay to
          the
          Company, which is paid to the IMR who is responsible for selling the online
          travel store sites to such RTAs.  Direct sales commissions and override
          compensation are paid on a weekly basis, based upon the amount of the previous
          week’s sales. Residual commissions are paid on a monthly basis for active travel
          agencies, following the month earned. All commissions are earned by maintaining
          a minimum number of personal enrollments. Commission costs are capitalized
          and
          recognized as expense in proportion to the related revenue recognized,
          over a
          period of twelve months, which is based upon the estimated RTA life. In
          the
          event that the commission payout is greater than the average commission
          revenue
          collected, the difference is immediately charged to expense when incurred.
  Goodwill
 
 In
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets,” (“SFAS 142”), we assess goodwill for
        impairment annually during the fourth quarter, or more frequently, if an
        event
        occurs or circumstances change that more likely than not reduce the fair
        values
        of reporting units below their carrying values. The impairment test requires
        us
        to estimate the fair value of our reporting units. If the carrying value
        of the
        reporting unit exceeds the fair value, the goodwill of the reporting unit
        is
        potentially impaired and we proceed to step two of the impairment analysis.
        In
        step two of the analysis, we will record an impairment loss equal to the
        excess
        of the carrying value of the reporting unit’s goodwill over its implied fair
        value should such a circumstance arise.
  Income
        Taxes
  SFAS
        109,
“Accounting for Income Taxes *”,* establishes financial accounting and reporting standards for the effect of
        income taxes. We provide deferred income tax assets and liabilities based
        on the
        estimated future tax effects of differences between the financial and tax
        basis
        of assets and liabilities based on currently enacted tax laws. We assess
        temporary differences that result from differing treatments of certain items
        for
        tax and accounting purposes. These differences result in deferred tax assets
        and
        liabilities, which are shown on our consolidated balance sheet. We must assess
        the likelihood that deferred tax assets will be realized. To the extent that
        we
        believe that realization is not likely, a valuation allowance is established.
        When a valuation allowance is established or increased in an accounting period,
        a corresponding tax expense is recorded in our consolidated statement of
        operations. Judgment is required in assessing the future tax consequences
        of
        events that have been recognized in our financial statements or tax returns.
        Fluctuations in the actual outcome of these future tax consequences could
        materially impact our financial position or our results of
        operations.




We
      have
      made certain other estimates that, while not involving the same degree of
      judgment, are important to understanding our financial statements. These
      estimates are in the areas of assessing recoverability of long-lived assets
      and
      in establishing reserves in connection with our accounts receivable. On an
      ongoing basis, management evaluates its estimates and judgments in these areas
      based on its substantial historical experience and other relevant factors.
      Management’s estimates as of the date of the financial statements reflect its
      best judgment giving consideration to all currently available facts and
      circumstances. As such, these estimates may require adjustment in the future,
      as
      additional facts become known or as circumstances change.




Our
      management has discussed the development and selection of these critical
      accounting policies with the Audit Committee of our Board of Directors and
      the
      Audit Committee has reviewed our disclosure relating to it in this Management
      Discussion and Analysis or Plan of Operation section of our annual
      report.





17


**New
      Accounting Pronouncements**





The
      Company adopted SFAS No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* ,
      effective January 1, 2006. The amendments made by SFAS No. 151 clarify that
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      materials (spoilage) should be recognized as current-period charges and require
      the allocation of fixed production overheads to inventory based on the normal
      capacity of the production facilities. The adoption of SFAS No. 151 did not
      have
      a material impact on the consolidated financial statements of the
      Company.





The
      Company adopted SFAS No. 154, *Accounting
      Changes and Error Corrections—a replacement of APB Opinion No. 20* (Accounting
      Changes) and FASB Statement No. 3 ( *Reporting
      Accounting Changes in Interim Financial Statements* ),
      effective January 1, 2006. SFAS No. 154 provides guidance on accounting for
      and
      reporting of accounting changes and error corrections. It requires retrospective
      application to prior periods’ financial statements, unless it is impracticable
      to determine either the specific period effects or the cumulative effect of
      the
      change. The adoption of SFAS No. 154 did not have a material impact on the
      Company’s consolidated financial statements.





In
      July
      2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
      income taxes recognized in the financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosures, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. As a result of the Company’s net operating
      losses, this statement will have minimal impact on its consolidated financial
      statements. The Company will reassess the impact of this statement when the
      Company becomes profitable.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
      157 defines fair value, establishes a framework for measuring fair value and
      expands disclosures about fair value measurements. SFAS 157 applies under other
      accounting pronouncements that require or permit fair value measurement. SFAS
      157 does not require any new fair value measurement and the Company is currently
      evaluating the impact, if any, of SFAS 157 on its financial position, results
      of
      operations and cash flows. SFAS 157 requires prospective application for fiscal
      years beginning after November 15, 2007.





In
      September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 123(R) (“SFAS 158”)." SFAS 158 requires
      employers to recognize the funded status of a defined benefit postretirement
      plan as an asset or liability in its statement of financial position and to
      recognize changes in that funded status in comprehensive income in the year
      in
      which the changes occur. Under SFAS 158, employers are required to measure
      plan
      assets and benefit obligations as of the date of their fiscal year-end statement
      of financial position. SFAS 158 is effective for the Company at the end of
      the
      2006 fiscal year. The Company does not currently have any plans under the scope
      of this statement.





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was
      issued to provide interpretive guidance on how the effects of the carryover
      or
      reversal of prior year misstatements should be considered in quantifying a
      current year misstatement. The provisions of SAB 108 must be applied to annual
      financial statements no later than the first fiscal year ending after November
      15, 2006. The adoption of SAB 108 had no impact on the Company's
      consolidated financial position, results of operations and cash
      flows.





The
      Company does not believe that there are any other new accounting pronouncements
      that the Company is required to adopt that are likely to have at least some
      effect on the Company’s future financial statements.





18


**Restatement
      of Prior Year Financial Statements**





We
      recently filed Amendments No. 1 and 2 to our Annual Report on Form 10-KSB for
      our fiscal year ended December 31, 2005 (the “2005 10-KSB”). These amendments
      reflect the following changes:





During
      a
      review of our outstanding options and warrants, we discovered that the expense
      related to 200,000 warrants previously issued had not been recognized in the
      2005 consolidated financial statements. We amended the 2005 10-KSB to reflect
      this additional expense of $311,028, or ($0.01) per share, and to update the
      related disclosure. See Note 11, “Capital Stock,” and Note 15, “Restatement of
      Financial Statements” in the Notes to Consolidated Financial Statements for a
      detailed discussion of the effect of the restatement. Furthermore, the Company
      clarified the disclosure in Item 8A. “Controls and Procedures”, Item 8C.
      "Management's Remediation Plan", Item 12. “Certain Relationships and Related
      Transactions” and Note 10, “Related Party Transactions,” to the Notes to
      Consolidated Financial Statements.





In
      addition, certain items in the Consolidated Statement of Cash Flows for the
      year
      ended December 31, 2005 were reclassified to properly reflect non-cash items
      as
      well as the gross activity related to the conversion of debt to common stock
      that occurred in the fourth quarter of 2005. Certain reclassifications were
      also
      made in the Consolidated Statement of Changes in Stockholders’ Equity for the
      year ended December 31, 2005 to provide additional detail regarding the value
      of
      warrants issued in conjunction with the convertible debt, as well as a
      reclassification on the Consolidated Statement of Operations between the “Change
      in the fair market value of derivatives” and “Interest Expense”.





Amendment
      No. 2 was filed simply to include the signature block on page F1, “Report of
      Independent Registered Accounting Firm” that was unintentionally omitted from
      the prior filing.





The
      amendments do not reflect events occurring after the filing of the original
      2005
      10-KSB, nor do they modify or update the disclosures contained therein as
      affected by subsequent events. The amendments continue to speak as of the date
      of the original 2005 10-KSB, and do not modify or update any other item or
      disclosures in the original 2005 10-KSB.








**Forward-Looking
      Statements**





All
      statements other than statements of historical fact included in this annual
      report, including without limitation statements regarding our financial
      position, business strategy and the plans and objectives of our management
      for
      future operations are forward-looking statements. When used in this annual
      report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”
and similar expressions, as they relate to us or our management, identify
      forward-looking statements. Such forward-looking statements are based on the
      beliefs of our management, as well as assumptions made by and information
      currently available to our management. Actual results could differ materially
      from those contemplated by the forward-looking statements as a result of certain
      factors, including but not limited to, business and economic conditions,
      competitive factors and pricing pressures, capacity and supply constraints.
      Such
      statements reflect our views with respect to future events and are subject
      to
      these and other risks, uncertainties and assumptions relating to our operations,
      results of operations, growth strategy and liquidity. Readers are cautioned
      not
      to place undue reliance on these forward-looking statements. We do not undertake
      any obligation to release publicly any revisions to these forward-looking
      statements to reflect future events or circumstances or to reflect the
      occurrence of unanticipated events.





**Item
      7.**  **Financial
      Statements.**





Our
      consolidated financial statements prepared in accordance with Regulation S-B
      are
      included as Appendix
      A to this
      annual report and are incorporated by reference in this Item 7.





**Item
      8. Changes In and Disagreements With Accountants on Accounting and Financial
      Disclosure.**





In
      September 2005, Dischino & Associates, P.C. (“Dischino”) and the Company
      mutually agreed that Dischino would not continue to act as our independent
      auditor following Dischino’s review of our financial statements for the quarter
      ended September 30, 2005. Based on the recommendation of our Audit Committee,
      our Board of Directors, at a meeting held on December 22, 2005, approved the
      engagement of UHY LLP (“UHY”) as our independent registered public accounting
      firm for the fiscal year ending December 31, 2005. On January 4, 2006
      arrangements were finalized for the engagement of UHY. Prior to its appointment,
      we did not consult with UHY regarding matters or events set forth in Items
      304(a) (2) (i) and (ii) of Regulation S-B promulgated by the U.S. Securities
      and
      Exchange Commission.








19











The
      reports of Dischino on our financial statements for each of the two fiscal
      years
      ended December 31, 2004 and 2003 did not contain an adverse opinion or a
      disclaimer of opinion and were not qualified or modified as to uncertainty,
      audit scope, or accounting principles. In connection with the audits of our
      financial statements for each of the two fiscal years ended December 31, 2004
      and 2003, and through January 4, 2006, there were no disagreements with Dischino
      on any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedure, which, if not resolved to the
      satisfaction of Dischino, would have caused Dischino to make reference to the
      matter in its reports.





During
      each of the two fiscal years ended December 31, 2004 and 2003, and through
      January 4, 2006, no information is required to be reported under Item
      304(a)(1)(iv)(B) of Regulation S-B.




**Item
      8A. Controls and Procedures.**





**a.**  **Evaluation
      of disclosure controls and procedures.**





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in the reports that we file or submit under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
      processed, summarized and reported within the time period specified in the
      rules
      and forms of the SEC, and
      that
      such information is accumulated and communicated to management, including our
      Chief Executive Officer  and Chief Financial Officer , as appropriate, to
      allow timely decisions regarding required disclosure .
      In connection with our Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2006, as required under Rule 13a-15(b) of the Exchange Act, our
      management, including our Chief Executive Officer and Chief Financial Officer,
      conducted an evaluation of the effectiveness of our disclosure controls and
      procedures. Based on that evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      not
      effective as of December 31, 2006. There
      were material weaknesses in our disclosure controls and procedures in so far
      as
      they were not effective in gathering, analyzing and disclosing information
      needed to satisfy our disclosure obligations under the Exchange Act. .




As
      a
      result of the above, we reorganized our executive personnel to address these
      issues. In connection with the reorganization, we are developing procedures,
      forms, checklists and reporting packages to address these deficiencies, and
      management believes progress had been made to improve our system of disclosure
      controls and procedures .
      However, despite management efforts, there continues to exist material
      weaknesses in our disclosure
      controls and procedures .
      Management believes additional progress in strengthening our disclosure
      controls and procedures will
      continue through 2007.




On
      January 6, 2006, we self-reported to the staff of the SEC (the “Staff”) that we
      had become aware that our previous independent accounting firm, Dischino and
      Associates, P.C., had provided prohibited services and appeared to have not
      followed the standards of the Public Company Accounting Oversight Board
      (“PCAOB”). On January 19, 2006, we initiated an internal inquiry into those
      accounting-related matters which we disclosed in our Current Report on Form
      8-K
      filed with the SEC on January 19, 2006. Based on the findings of the inquiry,
      on
      February 6, 2006, our management and the Audit Committee of our Board of
      Directors concluded that we needed to restate certain of our financial
      statements and that the financial statements included in our Annual Report
      on
      Form 10-KSB, Amendment No. 5 for the year ended December 31, 2004 and the
      financial statements included in the Company’s Quarterly Reports on Form 10-QSB
      for the quarters ended March 31, 2004, June 30, 2004, September 30, 2004, March
      31, 2005, June 30, 2005 and September 30, 2005 could not be relied
      upon.





As
      a
      result of the notification of non-reliance filed, we began a restatement of
      the
      affected years’ and quarters’ financial statements. We believe that the
      restatements resulted from the record retention deficiencies and lack of
      internal controls at the Company while it was still REZconnect Technologies,
      Inc. (i.e., prior to the December 2004 share exchange transaction with
      Yourtravelbiz.com, Inc.). However, we are taking numerous steps to tighten
      controls and strengthen internal control policies and procedures.





In
      addition, during the restatement process, we also discovered other matters
      giving rise to adjustments. These matters relate to insufficient personnel
      resources and technical accounting expertise within the accounting function
      to
      affect a timely financial close process. In conjunction with this effort, we
      conducted an in-depth review of our application of accounting principles and
      system of internal controls. As a result of this investigation, we identified
      numerous material weaknesses in our internal controls and improper application
      of accounting principles. A material weakness is a significant deficiency,
      or
      combination of significant deficiencies, that results in more than a remote
      likelihood that a material misstatement of the annual or interim financial
      statements will not be prevented or detected. We have quantified the errors
      caused by these deficiencies and have prepared restated financial statements
      and
      disclosures to correct the identified errors.


20








The
      restatements are described in more detail in Note 14 of the Notes to
      Consolidated Financial Statements included in our Annual Report filed on Form
      10-KSB, Amendment No. 6 for the year ended December 31, 2004. Internal controls
      over financial reporting, including the application of accounting policies
      and
      principles, are within the scope of disclosure controls. Therefore, management
      has concluded that there were material weaknesses in our disclosure controls
      as
      of December 31, 2006 and 2005. Remediation of those internal control issues
      is
      currently in process. The following is a summary of those weaknesses identified
      by management:





·
            We
                did not maintain sufficient competent personnel to maintain an appropriate
                accounting and financial reporting organizational structure. Specifically,
                we did not maintain personnel with an appropriate level of accounting
                knowledge, experience and training in the selection, application
                and
                implementation of generally accepted accounting principles commensurate
                with our financial reporting requirements. As a result, our controls
                over
                selection and application of accounting principles were ineffective.
                This
                deficiency resulted in the improper presentations in our financial
                statements.





·
            Our
                design and operation of controls over the accounting closing and
                reporting
                process were not effective due to lack of timely and complete preparation
                of account analyses and reconciliations, a lack of appropriate review
                of
                account reconciliations and supporting analyses and errors in account
                balance classification. This lack of proper evaluations resulted
                in
                cut-off, completeness and presentation errors in our financial
                statements.





·
            We
                did not maintain effective controls over the development of accounting
                estimates. Specifically, we did not have controls in place to conduct
                a
                review over the propriety or collectibility of account and notes
                receivable in order to determine the proper recorded value of those
                assets
                and the proper valuation of the allowance for doubtful accounts.
                In
                addition, the deficient controls did not allow for the proper evaluation
                of the estimated lives of RTAs so that a proper matching of revenue
                and
                expense could be accomplished. Additionally, we did not analyze average
                marketing commissions paid in relation to original RTA enrollment
                transactions in order to determine proper expense
                recognition.





·
            We
                did not maintain proper internal controls over expenditures and accounting
                for certain liabilities which resulted in unrecorded liabilities
                and
                expenses.




·
            Our
                Board of Directors failed to maintain documentation of actions that
                it had
                approved. Formal Board of Director meeting minutes were not maintained
                during this reporting period. As result, certain share-based transactions
                were not recorded or were recorded incorrectly in our financial statements
                for the year ending December 31,
                2005.








**b.**  **Changes
      in internal control over financial reporting.**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rule 13a-15(f) under the Exchange
      Act. Our internal control system is designed to provide reasonable assurance
      to
      our management and Board of Directors regarding the reliability of financial
      reporting and preparation and fair presentation of published financial
      statements for external purposes in accordance with generally accepted
      accounting principles. Our system of internal control over financial reporting
      includes those policies and procedures that (i) pertain to the maintenance
      of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of our assets; (ii) provide reasonable assurance
      that transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles, and
      that
      our receipts and expenditures are being made only in accordance with
      authorizations of our management and directors; and (iii) provide reasonable
      assurance regarding prevention or timely detection of unauthorized acquisition,
      use, or disposition of our assets that could have a material effect on our
      financial statements. All internal control systems, no matter how well designed,
      have inherent limitations. Therefore, even those systems determined to be
      effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation.




In
      connection with our Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2006, as required under Rule 13a-15(d) of the Exchange Act, our
      management, including our Chief Executive Officer and Chief Financial Officer,
      conducted an evaluation of whether there had been any change in our internal
      control over financial reporting that occurred during our fiscal year ended
      December 31, 2006. Based on such assessment, management concluded that the
      changes described below in Item 8A, sub-heading (c) (“Management Remediation
      Plan”) that have been effected in remedying the weaknesses in our internal
      control over financial reporting have materially affected and will be likely
      to
      continue to affect our internal control over financial reporting.




21









**c.
      Management remediation plan.**





Our
      management and Audit Committee are committed to addressing and resolving the
      material weaknesses described above fully and promptly, by putting in place
      the
      personnel, processes, technology and other resources appropriate to support
      our
      financial reporting processes.





To
      remediate the internal control material weaknesses described above, management
      has commenced implementation of the following measures:





•                 
      For material transactions that are unique or outside our core operations, we
      will continue to document our process for accounting for such transactions
      and
      we will improve our process for researching the applicable accounting literature
      and documenting our conclusions, by consulting with outside experts to ensure
      our interpretations are correct.





•                 
      We will prepare a standardized memorandum that is required to be completed
      for
      each transaction that is unique or outside our normal core operations that
      is
      material to our financial statements. This memo will be reviewed and approved by
      our Chief Financial Officer.





•                 We
      will enhance formal communication with, and approval by, our Chief Financial
      Officer and Audit Committee of our application of Generally Accepted Accounting
      Principles in the United States (“US GAAP”) and account policy decisions for
      transactions that are outside our core operations and will adhere to the advice
      received from outside experts.





•                 
      All Board of Directors’ meetings as well as Board committee meetings minutes
      will be reviewed by an appropriate member of the internal accounting staff
      to
      determine if there are any transactions that need to be accounted for properly
      or events that rise to the level of disclosure.




•                 
      Management will evaluate and augment when necessary, the qualifications of
      accounting personnel and staffing levels at both our Illinois and New Jersey
      locations.





•                 
      Management will establish new policies and procedures as part of an enhanced
      quarterly and annual financial review close process to include additional
      analysis and support for the financial accounts as well as to ensure that all
      appropriate disclosures are made in accordance with US GAAP and the rules and
      regulations of the SEC.





We
      have undertaken remedial action to address and correct the weakness in our
      internal controls and disclosure controls identified subsequent to the end
      of
      2005. These actions include adopting an adequate review of the annual and
      quarterly financial statements, engaging qualified personnel to prepare the
      statements and ensuring that the personnel receive continuing professional
      educational related specifically to SEC Reporting and US GAAP. These actions
      commenced during the quarter that began January 1, 2006.





We
      have
      begun the extensive process of documenting and evaluating our internal control
      procedures in order to satisfy the requirements of Section 404 of the
      Sarbanes-Oxley Act which will apply to us beginning with our fiscal year 2008.
      Section 404 will require an annual report by our management as to the
      effectiveness of our internal controls over financial reporting and will require
      our independent registered public accounting firm to attest to management’s
      evaluation report.





22


**Internal
      Inquiry**





As
      reported above, the Audit Committee initiated an internal inquiry into (i)
      possible improper recognition of approximately $30,000 in revenue for the period
      ended June 30, 2005 as reported in our Form 10-QSB for the quarter ended June
      30, 2005, which possible improper recognition we believe was rectified in our
      Form 10-QSB for the period ended September 30, 2005, and (ii) the probability
      that Dischino & Associates, P.C., our former independent auditor, was not
      independent during a portion of the period in which it performed services on
      behalf of the Company. Our management concluded that in light of the fact that
      it appears our former audit firm provided certain prohibited services and
      appeared not to have followed appropriate auditing standards, the financial
      statements included in our originally filed Annual Reports for the years ended
      December 31, 2003 and 2004, and our Quarterly Reports on Form 10-QSB for years
      2004 and 2005 could not be relied upon. Accordingly, all of the affected
      statements and filings have been restated and re-audited.





The
      legal
      firm of Greenberg Traurig was retained by the Audit Committee of our Board
      of
      Directors to handle the inquiry and to make recommendations to the Audit
      Committee. In April 2006, the findings of Greenberg Traurig were presented
      to
      the Audit Committee of our Board of Directors. As a result, the Audit Committee
      presented certain resolutions to the Board of Directors which were adopted
      on
      April 24, 2006. The resolutions included, but were not limited to, enhanced
      controls over an executive’s ability to enter into contracts on our behalf,
      additional controls over safeguarding our assets and changes to enhance our
      record retention procedures.








**Item
      8B.**  **Other
      Information.**





None.




**Item
      9. Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance With Section 16(a) of the Exchange
      Act.**




The
      information required by this Item is incorporated herein by reference to the
      following sections of our definitive proxy statement for the 2007 Annual Meeting
      of Stockholders: “Proposal 1- Election of Directors”, “Executive Officers of the
      Company”, Section 16(a) Beneficial Ownership Reporting Compliance”, and
“Corporate Governance” (including “Code of Ethics”).







**Item
      10. Executive Compensation.**




The
      information required by this Item is incorporated herein by reference to the
      following section of our definitive proxy statement for the 2007 Annual Meeting
      of Stockholders: “Executive Compensation”.







**Item
      11. Security Ownership of Certain beneficial Owners and Management and Related
      Stockholder Matters.**




The
      information required by this Item is incorporated herein by reference to the
      following sections of our definitive proxy statement for the 2007 Annual Meeting
      of Stockholders: “Security Ownership of Officers, Directors and 5% Owners” and
“Equity Compensation Plan Information”.







**Item
      12. Certain Relationships and Related Transactions, and Director
      Independence.**




The
      information required by this Item is incorporated herein by reference to the
      following sections of our definitive proxy statement for the 2007 Annual Meeting
      of Stockholders: “Proposal 1- Election of Directors”, “Corporate Governance” and
“Certain Relationships and Related Transactions”.




23


**Item
      13. Exhibits.**




2.1
            Amended
                and Restated Merger and Stock Exchange Agreement dated November 19,
                2004
                by and between REZconnect Technologies, Inc. and YourTravelBiz.com,
                Inc.,
                incorporated by reference to YTB International, Inc.’s Current Report on
                Form 8-K as amended, Exhibit 2.1, filed June 20,
                2005.  3.1
            Articles
                of Incorporation of the Company, incorporated by reference to YTB
                International, Inc.’s Current Report on Form 8-K, Exhibit 3.1, filed
                January 10, 2005.  3.2
            Amended
                By-Laws of the Company, incorporated by reference to YTB International,
                Inc.’s Current Report on Form 8-K, Exhibit 3.2, filed January 10,
                2005.




4.1
            Stockholders’
                Agreement dated December 8, 2004 by and among Great River Enterprises,
                LP#1, J. Scott Tomer, J. Kim Sorensen, Michael Y. Brent, Derek J.
                Brent
                and REZconnect Technologies Inc., incorporated by reference to YTB
                International, Inc.’s Current Report on Form 8-K, as amended, Exhibit 4.1,
                filed June 20, 2005.





4.2
            Agreement
                and Irrevocable Proxy, dated November 22, 2006, by and among J. Lloyd
                Tomer, J. Scott Tomer, J. Kim Sorensen, jointly and severally, and
                Michael
                Y. Brent, Derek Brent and Darren Brent, jointly and severally, with
                respect to certain matters specified therein, incorporated by reference
                to
                Exhibit 99.1 to the Schedule 13D/A filed by Great River Enterprises,
                LP
                #1, J. Lloyd Tomer, J. Scott Tomer and J. Kim Sorensen on November
                24,
                2006.





10.1
            Form
                of Franchise Agreement, incorporated by reference to REZconnect
                Technologies, Inc.’s Annual Report for fiscal year 2004 on Form 10-KSB
                Amendment No. 6, Exhibit 10.2, filed November 22,
                2006.





10.2
            Form
                of Area Franchise Agreement (otherwise known as the Master Franchise
                Agreement), incorporated by reference to REZconnect Technologies,
                Inc.’s
                Annual Report for fiscal year 2004 on Form 10-KSB, Amendment No.
                6,
                Exhibit 10.3, filed November 22,
                2006.





10.3
            Lease
                Agreement dated July 1, 1996 by and between Wal-Mart Stores, Inc.
                and
                Travel Network, incorporated by reference to Etravnet.com, Inc.’s Annual
                Report for fiscal year 1999 on Form 10-KSB, Exhibit 10.2, filed March
                30,
                2000.





*10.4
            Employment
                Agreement dated January 30, 2006 and effective December 1, 2005 by
                and
                between John D. Clagg and YTB International Inc., incorporated by
                reference to YTB International Inc.’s Current Report on Form 8-K, Exhibit
                10.1, filed February 7, 2006.


*10.5
            Employment
                Agreement dated January 1, 2005 by and between Michael Y. Brent and
                YTB
                International, Inc.





*10.6
            Employment
                Agreement dated January 1, 2005 by and between Derek Brent and YTB
                International, Inc.  *10.7
            Employment
                Agreement dated January 1, 2005 by and between J. Scott Tomer and
                YTB
                International, Inc.





*10.8
            Employment
                Agreement dated January 1, 2005 by and between J. Kim Sorensen and
                YTB
                International, Inc.





10.9
            Lease
                Agreement, effective as of July 1, 2005, by and between the Company
                and
                Meridian Land Company, Inc. with respect to that certain real property
                located at One Country Club View, Edwardsville, Illinois 62025,
                incorporated by reference to YTB International, Inc,’s Annual Report on
                Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December
                31,
                2005, Exhibit 10.13, filed March 13,
                2007.





10.10
            Lease
                Agreement, effective as of November 1, 2005, by and between the Company
                and Meridian Land Company, Inc. with respect to that certain real
                property
                located at Two Country Club View, 2ndFloor, Edwardsville, Illinois 62025, incorporated by reference to
                YTB
                International, Inc,’s Annual Report on Form 10-KSB/A (Amendment No. 1) for
                the fiscal year ended December 31, 2005, Exhibit 10.14, filed March
                13,2007.




*10.11
              Amendment
                  to Employment Agreement dated November 22, 2006 by and between
                  Derek Brent
                  and YTB International, Inc.
 
 *10.12
              Amendment
                  to Employment Agreement dated November 22, 2006 by and between
                  Michael Y.
                  Brent and YTB International, Inc.


14
            YTB
                International, Inc. Code of Business Ethics Summary





21
            Subsidiaries
                of YTB International, Inc.




31.1
            Chief
                Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a)
                of
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.




24


31.2
              Chief
                  Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a)
                  of
                  the Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.


#32.1
            Chief
                Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





#32.2
            Chief
                Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





*
            Denotes
                a management contract or compensatory plan or arrangement required
                to be
                filed as an exhibit to this Form
                10-KSB.





#
            These
                certifications are attached as Exhibits 32.1 and 32.2 accompanying
                this
                Annual Report on Form 10-KSB pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 and shall not be deemed “filed” by YTB International, Inc. for
                the purposes of Section 18 of the Exchange Act. A signed original
                of this
                written statement required by Section 906 has been provided to YTB
                International, Inc. and will be retained by YTB International, Inc.
                and
                furnished to the Securities and Exchange Commission or its staff
                upon
                request.







**Item
      14. Principal Accountant Fees and Services.**




The
      information required by this Item is incorporated herein by reference to the
      following section of our definitive proxy statement for the 2007 Annual Meeting
      of Stockholders: “Proposal 2- Ratification of the Company’s Selection of its
      Auditors”.




25


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act,
      the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.







**YTB
                  International, Inc**By:
              /s/
                  J. Scott TomerJ.
                  Scott TomerChief
                  Executive Officer and DirectorDate:
              April
                  2, 2007**Signature**
              
              
              **Title**
              
              
              
              **Date**/s/
              J.
                  Scott Tomer
              
              
              Director
                  and Chief Executive Officer
              
              
              April
                  2, 2007J.
                  Scott Tomer
              
              
              (principal
                  executive officer)/s/
              J.
                  Lloyd Tomer
              
              
              Chairman
                  of the Board of Directors
              
              
              April
                  2, 2007J.
                  Lloyd Tomer/s/
              J.
                  Kim Sorensen
              
              
              Director
                  and President
              
              
              April
                  2, 2007J.
                  Kim Sorensen/s/
              John
                  Simmons
              
              
              Director
              
              
              April
                  2, 2007John
                  Simmons/s/
              Harold
                  Kestenbaum
              
              
              Director
              
              
              April
                  2, 2007Harold
                  Kestenbaum/s/
              Clay
                  Winfield
              
              
              
              Director
              
              
              April
                  2, 2007Clay
                  Winfield/s/
              Lou
                  Brock
              
              
              
              Director
              
              
              April
                  2, 2007Lou
                  Brock/s/
              Andrew
                  Wilder
              
              
              Director
              
              
              April
                  2, 2007Andrew
                  Wilder/s/
              Timothy
                  Kaiser
              
              
              Director
              
              
              April
                  2, 2007Timothy
                  Kaiser/s/
              John
                  D. Clagg
              
              
              Chief
                  Financial Officer and Treasurer
              
              
              April
                  2, 2007John
                  D. Clagg
              
              
              (principal
                  financial and accounting officer)/s/
              Andrew
                  F. Cauthen
              
              
              Secretary
              
              
              April
                  2, 2007Andrew
                  F. Cauthen


26


YTB
      INTERNATIONAL, INC.


TABLE
      OF CONTENTS


YEARS
      ENDED DECEMBER 31, 2006 AND 2005




Page(s)Report of
                  Independent Registered Public Accounting Firm
              
              
              F1Financial
                  StatementsConsolidated
                Balance Sheets as of December 31, 2006 and 2005
              
              
              F2Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                2005
              
              F3Consolidated
                Statements of Changes in Stockholders' Equity (Deficit) for the Years
                EndedDecember
                31, 2006 and 2005
              
              
              
              
              
              F4Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005
              
              F5Notes
                  to Consolidated Financial Statements
              
              
              
              
              F7-F24







**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
 The
        Board
        of Directors and Stockholders of
 YTB
        International, Inc.
 Wood
        River, Illinois 62095
 
 
 We
        have
        audited the accompanying consolidated balance sheets of YTB International,
        Inc.
        (the “Company”) as of December 31, 2006 and 2005, and the related consolidated
        statements of operations, changes in stockholders’ equity (deficit), and cash
        flows for each of the years in the two-year period ended December 31, 2006.
        These financial statements are the responsibility of the Company’s management.
        Our responsibility is to express an opinion on these financial statements
        based
        on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of the Company as
        of
        December 31, 2006 and 2005, and the consolidated results of its operations
        and
        its cash flows for each of the years in the two year period ended December
        31,
        2006 in conformity with accounting principles generally accepted in the United
        States of America.
  
  /s/
        UHY
        LLP
  St.
        Louis, Missouri
  
  April
        2,
        2007





F-1


YTB
      INTERNATIONAL, INC.


Consolidated
      Balance Sheets


December
      31, 2006 and 2005




December
                  31, 2006
              
              December
                  31, 2005ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              -
              
              $
              230,358Restricted
                  cash
              
              
              1,250,000
              
              
              -Available-for-sale
                  securities
              
              
              1,014,591
              
              
              3,611,003Accounts
                  receivable (less allowance for doubtful accounts of$6,919
                  in 2006 and $24,888 in 2005)
              
              
              103,539
              
              
              64,402Notes
                  receivable
              
              
              1,233,624
              
              
              20,000Inventory
              
              
              1,016,690
              
              
              -Prepaid
                  marketing commissions
              
              
              12,978,516
              
              
              4,212,417Other
                  prepaid expenses and current assets
              
              
              394,125
              
              
              285,169Total
                  current assets
              
              
              17,991,085
              
              
              8,423,349Property
                  and equipment, net
              
              
              6,191,408
              
              
              631,992Intangible
                  assets, net
              
              
              2,468,580
              
              
              2,542,020Goodwill
              
              
              2,224,322
              
              
              2,224,322Other
                  assets
              
              
              14,994
              
              
              16,184**TOTAL
                  ASSETS**
              
              $
              28,890,389
              
              $
              13,837,867LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)Current
                  liabilities:Bank
                  overdraft
              
              $
              812,464
              
              $
              -Accounts
                  payable and accrued expenses
              
              
              5,099,248
              
              
              1,944,640Current
                  maturities of long-term debt
              
              
              21,156
              
              
              19,532Deferred
                  revenue
              
              
              14,769,085
              
              
              4,660,200Notes
                  payable
              
              
              -
              
              
              122,055Accrued
                  bonuses
              
              
              7,435,132
              
              
              3,451,826Short-term
                  debt
              
              
              2,500,00
              
              
              -Convertible
                  debt derivatives
              
              
              -
              
              
              280,000Total
                  current liabilities
              
              
              30,637,085
              
              
              10,478,253Other
                  long-term liabilities:Long-term
                  debt, less current maturities
              
              
              241,659
              
              
              264,079Deferred
                  revenue, less current portion
              
              
              4,366
              
              
              4,366Other
                  liabilities
              
              
              23,636
              
              
              23,636Total
                  other long-term liabilities
              
              
              269,661
              
              
              292,081TOTAL
                  LIABILITIES
              
              
              30,906,746
              
              
              10,770,334STOCKHOLDERS'
                  EQUITY (DEFICIT)Preferred
                stock, $.001 par value,5,000,000
                  authorized, noneissued
                  and outstanding at December31,
                  2006 and 2005
              
              
              -
              
              
              -Common
                  stock, $.001 par value, 50,000,000 shares authorized;
                  27,870,454and
                  27,336,260 shares issued and outstanding at December 31, 2006 andDecember
                  31, 2005, respectively.
              
              
              27,870
              
              
              27,336Additional
                  paid-in capital
              
              
              20,268,006
              
              
              19,376,053Retained
                  earnings (deficit)
              
              
              (22,312,233
              )
              
              (16,335,856
              )Total
                  STOCKHOLDERS' EQUITY (DEFICIT)
              
              
              (2,016,357
              )
              
              3,067,533**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)**
              
              $
              28,890,389
              
              $
              13,837,867*See
                  accompanying notes to consolidated financial
                  statements.*


F-2


YTB
      INTERNATIONAL, INC.


Consolidated
      Statements of Operations


Years
      Ended December 31, 2006 and 2005




2006
              
              2005NET
                  REVENUESOnline
                  travel store sales and monthly fees
              
              $
              36,887,611
              
              $
              14,302,638Travel
                  commissions and services
              
              
              7,364,413
              
              
              4,941,007Franchise
                  service fees and other fees
              
              
              332,345
              
              
              443,693Training
                  programs and marketing materials
              
              
              5,766,081
              
              
              1,579,960Other
              
              
              546,280
              
              
              326,019Net
                  revenues
              
              
              50,896,730
              
              
              21,593,317OPERATING
                  EXPENSESMarketing
                  commissions
              
              
              29,908,507
              
              
              13,881,404Travel
                  commissions
              
              
              4,893,012
              
              
              3,454,033Depreciation
                  and amortization
              
              
              408,025
              
              
              944,619Marketing
                  and selling
              
              
              3,144,211
              
              
              239,853General
                  and administrative
              
              
              18,595,959
              
              
              8,954,335Total
                  operating expenses
              
              
              56,949,714
              
              
              27,474,244LOSS
                  FROM OPERATIONS
              
              
              (6,052,984
              )
              
              (5,880,927
              )OTHER
                  INCOME (EXPENSE)Change
                  in fair value of derivatives
              
              
              -
              
              
              312,143Interest
                  and dividend income
              
              
              170,224
              
              
              102,049Interest
                  expense
              
              
              (93,617
              )
              
              (2,986,052
              )Total
                  other income (expense)
              
              
              76,607
              
              
              (2,571,860
              )NET
                  LOSS
              
              $
              (5,976,377
              )
              $
              (8,452,787
              )NET
                  LOSS PER SHARE:Weighted-average
                  shares outstanding
              
              
              27,433,491
              
              
              24,861,904Net
                  loss per share - basic and diluted
              
              $
              (0.22
              )
              $
              (0.34
              )*See
                  accompanying notes to consolidated financial
                  statements.*





F-3


YTB
      INTERNATIONAL, INC.


Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit)


Years
      Ended December 31, 2006 and 2005





Delaware
                  Series B
              
              
              Delaware
                  Common
              
              
              Series
                  B
              
              
              
              
              
              
              
              
              Additional
              
              
              Retained
              
              
              TotalConvertible
                  Preferred
              
              
              Stock
              
              
              Convertible
                  Preferred
              
              
              Common
                  Stock
              
              
              Paid-in
              
              
              Earnings
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              (Deficit)
              
              
              EquityBalance
                  at January 1, 2005
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              4,092,376
              
              $
              4,092
              
              
              18,976,125
              
              $
              18,976
              
              $
              12,616,988
              
              $
              (7,883,069
              )
              $
              4,756,987Conversion
                  of common stock toDelaware
                  common stock uponreincorporation
                  in Delaware
              
              
              -
              
              
              -
              
              
              18,976,125
              
              
              18,976
              
              
              -
              
              
              -
              
              
              (18,976,125
              )
              
              (18,976
              )
              
              -
              
              
              -
              
              
              -Conversion
                    of series B preferred stock to Delaware common stock
                    uponreincorporation
                  in Delaware
              
              
              4,092,376
              
              
              4,092
              
              
              -
              
              
              -
              
              
              (4,092,376
              )
              
              (4,092
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Conversion
                  of preferred stock tocommon
                  stock
              
              
              (4,092,376
              )
              
              (4,092
              )
              
              4,092,376
              
              
              4,092
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Common
                  shares issued for services
              
              
              -
              
              
              -
              
              
              201,091
              
              
              201
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              352,787
              
              
              
              
              
              352,988Warrants
                  issued for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              311,028
              
              
              -
              
              
              311,028Common
                  shares issued through privateplacement
              
              
              -
              
              
              -
              
              
              1,200,000
              
              
              1,200
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              958,800
              
              
              -
              
              
              960,000Warrants
                  issued in conjunctionwith
                  debt offering
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              258,004
              
              
              -
              
              
              258,004Conversion
                  of debt to common stock
              
              
              -
              
              
              -
              
              
              2,766,668
              
              
              2,767
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,822,566
              
              
              -
              
              
              4,825,333Common
                  shares issued for optionsexercised
              
              
              -
              
              
              -
              
              
              100,000
              
              
              100
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              49,900
              
              
              -
              
              
              50,000Stock
                  option compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,980
              
              
              -
              
              
              5,980Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,452,787
              )
              
              (8,452,787
              )Balance
                  at December 31, 2005
              
              
              -
              
              
              -
              
              
              27,336,260
              
              
              27,336
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              19,376,053
              
              
              (16,335,856
              )
              
              3,067,533Settlement
                  of convertible debtderivative
                  with common shares
              
              
              -
              
              
              -
              
              
              200,000
              
              
              200
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              399,800
              
              
              -
              
              
              400,000Common
                  shares issued for services
              
              
              -
              
              
              -
              
              
              184,194
              
              
              184
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              294,276
              
              
              -
              
              
              294,460Common
                  shares surrendered for
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -cashless
                  option exercise
              
              
              -
              
              
              -
              
              
              (150,000
              )
              
              (150
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (299,850
              )
              
              -
              
              
              (300,000
              )Common
                  shares issued for cashlessoption
                  exercise
              
              
              -
              
              
              -
              
              
              300,000
              
              
              300
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              299,700
              
              
              -
              
              
              300,000Stock
                  option compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              198,027
              
              
              -
              
              
              198,027Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,976,377
              )
              
              (5,976,377
              )Balance
                  at December 31, 2006
              
              
              -
              
              $
              -
              
              
              27,870,454
              
              $
              27,870
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              $
              20,268,006
              
              $
              (22,312,233
              )
              $
              (2,016,357
              )
  *See
                  accompanying notes to consolidated financial
                  statements.*
 F-4
 YTB
        INTERNATIONAL, INC.


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2006 and 2005




2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  Loss
              
              $
              (5,976,377
              )
              $
              (8,452,787
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              408,025
              
              
              944,619Amortization
                  of deferred offering cost
              
              
              -
              
              
              174,020Shares
                  issued for services
              
              
              294,460
              
              
              352,988Warrants
                  issued for services
              
              
              -
              
              
              311,028Employee
                  stock option expense
              
              
              198,027
              
              
              5,980Change
                  in fair value of derivatives
              
              
              -
              
              
              (312,143
              )Amortization
                  of remaining debt discount on convertible debt
              
              
              -
              
              
              2,369,480Gain
                  on settlement of convertible debt derivative
              
              
              (460,820
              )
              
              -Change
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (39,137
              )
              
              (43,991
              )Notes
                  receivable
              
              
              (1,213,624
              )
              
              (20,000
              )Inventory
              
              
              (1,016,690
              )
              
              -Prepaid
                  marketing commissions
              
              
              (8,766,099
              )
              
              (2,589,772
              )Other
                  prepaid expenses and current assets
              
              
              (108,956
              )
              
              (285,169
              )Other
                  assets
              
              
              1,190
              
              
              (1,358
              )Accounts
                  payable and accrued expenses
              
              
              2,915,415
              
              
              1,080,893Accrued
                  bonuses
              
              
              3,983,306
              
              
              3,451,826Deferred
                  revenue
              
              
              10,108,885
              
              
              2,839,392Convertible
                  debt derivative
              
              
              580,820
              
              
              280,000Other
                  liabilities
              
              
              -
              
              
              2,716NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              908,425
              
              
              107,722CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property and equipment
              
              
              (3,154,808
              )
              
              (429,645
              )Accrued
                  transaction cost
              
              
              -
              
              
              (77,354
              )Proceeds
                  from sale of available-for-sale securities
              
              
              2,903,440
              
              
              5,908,078Purchases
                  of available-for-sale securities
              
              
              (307,028
              )
              
              (8,990,770
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (558,396
              )
              
              (3,589,691
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Bank
                  overdraft
              
              
              812,464
              
              
              -Other
                  current liabilities
              
              
              -
              
              
              (100,000
              )Repayment
                  of debt
              
              
              (20,796
              )
              
              (21,946
              )Repayment
                  of notes payable
              
              
              (122,055
              )
              
              (53,426
              )Restricted
                  cash-collateral for outstanding note andreserve
                  for credit card processing
              
              
              (1,250,000
              )
              
              -Proceeds
                  from convertible debentures
              
              
              -
              
              
              3,000,000Cash
                  paid for debt issuance costs
              
              
              -
              
              
              (148,020
              )Proceeds
                  from shares issued in private placement memorandum
              
              
              -
              
              
              960,000Shares
                  issued for option exercises
              
              
              -
              
              
              50,000NET
                  CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
              
              
              (580,387
              )
              
              3,686,608NET
                  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (230,358
              )
              
              204,639CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              230,358
              
              
              25,719CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              -
              
              $
              230,358
 *See
        accompanying notes to consolidated financial statements.*
  F-5
  YTB
        INTERNATIONAL, INC.
 Consolidated
          Statements of Cash Flows
 Years
          Ended December 31, 2006 and 2005
  SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              95,035
              
              $
              81,330SUPPLEMENTAL
                  NON-CASH INVESTING AND FINANCING ACTIVITIES:Property
                  and equipment included in accounts payable and accrued
                  expenses
              
              $
              239,193
              
              $
              -Increase
                  in short-term obligations and property and equipment
              
              $
              2,500,000
              
              $
              -Shares
                  issued in settlement of convertible debt derivative
              
              $
              400,000
              
              $
              -Shares
                  issued in cashless option exercise
              
              $
              150
              
              $
              -Increase
                  in notes payable and property and equipment
              
              $
              -
              
              $
              73,139Warrants
                  issued for debt offering costs
              
              $
              -
              
              $
              26,000Decrease
                  in notes receivable and deferred revenue
              
              $
              -
              
              $
              81,879Convertible
                  debt exchanged for common stock
              
              $
              -
              
              $
              4,825,333*See
                  accompanying notes to consolidated financial
                  statements.*
 
 F-6
 YTB
        INTERNATIONAL, INC.
 Notes
        to
        Consolidated Financial Statements








NOTE
      1
      - ORGANIZATION AND NATURE OF OPERATIONS




YTB
      International, Inc. (“YTBI,” or the “Company”) and its three wholly-owned
      subsidiaries, YourTravelBiz.com, Inc. (“YTB Marketing”), and YTB Travel Network,
      Inc. (“YTB Travel”) and REZconnect Technologies, Inc. (“Technologies”),
      sometimes hereafter collectively referred to as the “Company”, are the entities
      that resulted from a corporate reorganization that took place on January 4,
      2005. On that date, the Company re-incorporated in the State of Delaware, while
      simultaneously effecting a name change, by means of a “downstream merger”
between itself (then incorporated in the State of New York under its former
      name
      of REZconnect Technologies, Inc., hereafter referred to as “the former
      REZconnect” during periods when incorporated as such), and a Delaware
      corporation formed for the purpose of the reorganization (the
“Reorganization”).




On
      December 8, 2004, prior to the Reorganization, the former REZconnect acquired
      100% of the outstanding common shares from the stockholders of
      YourTravelBiz.com, Inc. (“YTB, Inc.”), following requisite approval by the
      Boards of Directors and stockholders, in a business combination structured
      as a
      statutory merger under the laws of the State of New York and the reorganization
      provisions of the Internal Revenue Code. The acquisition, which was recorded
      at
      total value of $4,847,928, was effected by means of the former REZconnect
      exchanging 7,430,000 shares of its common stock and 4,092,376 shares of its
      Series B convertible preferred stock for all of the outstanding common stock
      of
      YTB, Inc.




As
      part
      of the Reorganization, the assets of the Company were assigned to three
      newly-organized wholly-owned subsidiaries, each a Delaware corporation:
      Technologies, YTB Marketing and YTB Travel.




On
      January 9, 2005, following both the Reorganization and a corresponding increase
      in the number of its authorized common shares from 20,000,000 to 50,000,000,
      each share of the aforementioned Series B convertible preferred stock was
      converted into one share of YTBI common stock.




The
      Company provides Internet-based travel-related services and technology, which
      offers proprietary reservation systems for the travel and entertainment
      industry, and is also a full-service provider of discount travel products and
      services to the leisure and small business traveler. The Company operates under
      various trade names, including “Your Travel Biz”, “YTBnet.com”, “Travel
      Network”, “Global Travel Network” and “Travel Network Vacation Central”, as well
      as Internet websites “Bookmytravel.com”, “REZconnect.com” and “RezCity.com”. The
      Company provides services to customers located primarily in the United States,
      and maintains its corporate headquarters in the State of Illinois. One of its
      subsidiaries maintains administrative offices in New Jersey.




Each
      of
      the three aforementioned operating subsidiaries was formed to divide the
      Company’s operations into three basic divisions. The YourTravelBiz.com, Inc.
      subsidiary markets online travel agencies on behalf of YTB Travel Network,
      Inc.
      by use of Independent Marketing Representatives (“IMRs”). The REZconnect
      Technologies, Inc. subsidiary owns, maintains and develops online and other
      booking technologies for suppliers within the travel industry. It also
      franchises brick and mortar travel agencies. The YTB Travel Network, Inc.
      subsidiary is a travel agency which books online travel transactions, collects
      payments, collects licensing fees, and pays travel sales
      commissions.




All
      of
      REZconnect’s franchised operations are independently owned and operated. All
      sales of travel products by the Company are made through its independent
      agencies and franchisees, or through its interactive websites. Operational
      expenses consist of franchise system sales and support personnel, executive
      management and minimal administrative personnel.











F-7


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements





NOTE
      2
      - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Principles
      of consolidation




The
      consolidated financial statements include the accounts of YTB International,
      Inc., and its wholly-owned subsidiaries, YourTravelBiz.com, Inc., YTB Travel
      Network, Inc., YTB Travel Network of IL, and REZconnect Technologies, Inc.
      All
      intercompany accounts and transactions are eliminated in
      consolidation.




Use
      of
      estimates


The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Significant estimates that are particularly
        sensitive to change in the near term include, but are not limited to the
        determination of the estimated RTA life which impacts revenue recognition
        and
        related marketing commissions/bonuses, impairment of goodwill, realization
        of
        deferred tax assets, the recoverability of capitalized software development
        costs and allowance for doubtful accounts. Actual results could differ from
        those estimates.




Cash
      and cash equivalents




The
      Company considers all highly liquid investments with an original maturity of
      three months or less to be cash equivalents.




Available-for-sale
      securities




The
      Company presents investments in marketable securities that are available for
      sale at fair value as determined by quoted market prices, with changes in
      realized/unrealized gains and losses recorded to other comprehensive income
      when
      material. As of December 31, 2006, the cost of marketable securities
      approximates fair value.




Accounts
      receivable




The
      Company reflects accounts receivable at the outstanding principal balance as
      of
      the balance sheet date, as adjusted by any charge-offs or allowances established
      as a reserve for potentially uncollectible accounts. The allowance for doubtful
      accounts reflects management’s best estimate of probable losses inherent in the
      accounts receivable balance. Management determines the allowance at the end
      of
      each reporting period based on the length of time receivables are past due,
      known troubled accounts, historical experience and other currently available
      evidence. Activity in the allowance for doubtful accounts is as
      follows:





2006
              
              2005Beginning
                  balance
              
              $
              24,888
              
              $
              169,644Provision
                  for doubtful accounts
              
              
              4,534
              
              
              119,815Accounts
                  written off
              
              
              (22,503
              )
              
              (264,571
              )Ending
                  balance
              
              $
              6,919
              
              $
              24,888


Notes
      receivable





Notes
      receivable are generally issued to certain IMRs at interest rates that
      approximate the current market interest rates and have terms of 1 year or
      less.  The notes receivable are guaranteed by sales directors with at least
      2,000 people or more in their organization, against future earnings of those
      sales directors.  When appropriate, a reserve is recorded against notes
      receivable to reduce the balance to the estimated net realizable value. As
      of
      December 31, 2006, no reserve has been recorded against the balance of
      $1,233,624 as management has a high level of assurance of the collectibility
      of
      these amounts.










F-8


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements





Concentration
      of credit risk




The
      Company is subject to credit risk through its cash, trade receivables,
      available-for-sale securities and notes receivable. The Company maintains its
      cash deposits in accounts insured up to $100,000 by the Federal Deposit
      Insurance Corporation. Balances in excess of the Federal Deposit Insurance
      Corporation totaled $1,083,394 and $98,854 at December 31, 2006 and 2005,
      respectively. The Company has deposits in a limited number of financial
      institutions with federally insured limits. Cash (including cash equivalents)
      at
      these institutions is normally in excess of the insured limits. However, the
      Company believes that the institutions are financially sound and there is only
      nominal risk of loss. There is no collateral currently required for cash, trade
      receivables, available-for-sale securities and notes receivable.





Fair
      value of financial instruments




The
      Company considers the carrying amounts of its accounts receivable, accounts
      payable and accrued expenses to approximate fair value because of the short
      maturity of these financial instruments. The Company considers amounts
      outstanding under debt agreements to approximate their fair value, based on
      the
      incremental borrowing rates currently available to the Company for financing
      with similar terms and maturities.





Inventory





Inventories
      are stated at lower of cost or market and consist of marketing sales aids such
      as “Success from Home” magazines, a promotional tool for the IMRs, and other
      printed marketing materials. At the end of each reporting period, when required,
      a provision is made to reduce excess and obsolete inventory to estimated net
      realizable value. Inventory items are predominantly sales aides material that
      are sold at Company cost or for a nominal profit to IMR’s to help facilitate
      their sales efforts.





Property
      and equipment




Property
      and equipment are recorded at cost. Depreciation and amortization of property
      and equipment generally is computed using the straight-line method based on
      the
      estimated useful lives of the assets. The estimated useful lives of buildings
      and building improvements range from 15 to 30 years, furniture and fixtures
      range from two to five years, equipment including computer hardware and software
      has an estimated useful life of three to five years, vehicles have a life
      of five years and leasehold improvements have a five year life, based on
      the term of the underlying lease. Maintenance and repairs are charged to expense
      when incurred.




Expenditures
      for improvements are capitalized, while normal repair and maintenance costs
      are
      charged to expense when incurred. When property and equipment are disposed,
      the
      related cost and accumulated depreciation are removed from the respective
      accounts and any gain or loss is credited or charged to income.





The
      company capitalizes interest on borrowings during the active construction period
      of major capital projects. Capitalized interest is added to the cost of
      qualified assets and is amortized over the estimated useful lives of the assets.
      Capitalized interest totaled $81,226 in 2006 and $0 in 2005.




In
      accordance with Accounting Standards Executive Committee Statement of Position
      (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or
      Obtained for Internal Use”, property and equipment includes amounts related to
      the capitalization of certain costs incurred in connection with developing
      or
      obtaining software for internal use.




Long-lived
      asset recoverability





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-lived Assets”, long-lived assets, primarily property and equipment, are
      tested for recoverability whenever events or changes in circumstances indicate
      that their carrying amount may not be recoverable.





The
      Company believes that the carrying amounts of its long-lived assets are fully
      recoverable. Accordingly, no impairment loss has been reflected in the Company’s
      reported results of operations for years ended December 31, 2006 or 2005.





F-9


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements








Intangible
      assets, net





Intangible
      assets other then domain names are amortized using the straight-line method
      over
      their estimated period of benefit, ranging from one to ten years. The Company
      periodically evaluates the recoverability of intangible assets and takes into
      account events or circumstances that warrant revised estimates of useful lives
      or that indicate that impairment exists. No impairment of intangible assets
      was
      identified during any of the periods presented.





Goodwill




Goodwill,
      which is the excess of cost over the fair value of net assets (including
      identifiable intangibles) acquired in a business acquisition, is not amortized
      but rather tested at least annually for impairment or whenever events or changes
      in circumstances indicate that the carrying amount of the asset might not be
      fully recoverable, in accordance with the provisions of SFAS No. 142, “Goodwill
      and Other Intangible Assets” SFAS 142 also requires the Company to compare the
      fair value of the acquired business to its carrying amount on an annual basis
      to
      determine if there is potential goodwill impairment. If the fair value of the
      acquired business is less than its carrying value, an impairment loss is
      recorded to the extent that the fair value of the goodwill is less than its
      carrying value. Fair values for acquired businesses are determined based on
      discounted cash flows, market multiples or appraised values. For further
      discussion of goodwill, see “Note 6: “Goodwill.”





Revenue
      Recognition





*Online
      travel store sales and monthly fees*





The
      Company generates revenue from the selling of on-line travel agencies, and
      from
      providing training and ongoing license services to the new business owners
      of
      such on-line travel agencies, i.e. Referring Travel Agent (“RTA(s)”). The
      recognition of all up-front fees received from new travel agency sales is
      deferred and recognized as income over a twelve-month period, which is the
      weighted average RTA life. Monthly license fees are recognized in the month
      the
      services are provided.





*Travel
      commissions and services*





Commissions
      and incentives earned from travel sales are recognized as revenue when the
      related travel has been completed by the customer. Commissions earned where
      the
      Company acts in the capacity of a wholesaler are recorded at their gross amount.
      The cost of such revenue is recorded separately as an operating
      expense.





*Franchise
      service fees and other fees*





The
      Company is a franchisor of traditional “brick and mortar” travel agencies. The
      initial franchise fee related to the sale of these travel agencies is due upon
      execution of a franchise agreement with the franchisee. The initial franchise
      fee is deferred and subsequently recognized as revenue when all material
      conditions prior to the opening of a franchised business have been satisfied
      and
      all substantial doubts of collectibility have been eliminated generally upon
      receipt of payment. Fees paid are non-refundable once a site location has been
      selected.




*Training
        programs and marketing materials revenue*
 
 Sales
        revenues from the sale of IMR sales aides and miscellaneous promotional and
        marketing materials are recognized when the related merchandise is shipped
        to
        the IMR. Sales revenues from training programs are recognized when the IMR
        has
        completed the related training course.
 
 *Other
        revenue*
 
 Sales
        revenues from convention attendance are recognized during the period in which
        the convention occurs.


F-10


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




Expense
        recognition of commission costs
  The
        Company incurs commission costs that are directly related to the origination
        of
        new RTA sales; sales which result in the deferral of revenue. Such incremental
        direct commission costs are capitalized in accordance with Financial Accounting
        Standards Board (“FASB”) Technical Bulletin No. 90-1 (“FTB 90-1”). In addition,
        the Company has elected to account for such commission costs in accordance
        with
        Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB") 104
        and FTB 90-1, by deferring and charging such costs to expense in proportion
        to
        the related revenue recognized, over the same deferral period of twelve
        months.


Marketing
          compensation plan
  The
          Company offers a compensation plan to its sales IMRs under an arrangement
          that
          pays the IMRs direct sales commissions, override compensation (if qualified)
          and
          other bonus incentives based on the amounts attributable to each IMR’s personal
          and team travel agency sales, or enrolled referrals. The “commission override”
is comprised of a small portion of the monthly license fee RTAs pay to
          the
          Company, which is paid to the IMR who is responsible for selling the online
          travel store sites to such RTAs.  Direct sales commissions and override
          compensation are paid on a weekly basis, based upon the amount of the previous
          week’s sales. Residual commissions are paid on a monthly basis for active travel
          agencies, following the month earned. All commissions are earned by maintaining
          a minimum number of personal enrollments. Commission costs are capitalized
          and
          recognized as expense in proportion to the related revenue recognized,
          over a
          period of twelve months, which is based upon the estimated RTA life. In
          the
          event that the commission payout is greater than the average commission
          revenue
          collected, the difference is immediately charged to expense when incurred.


Advertising
      costs




Pursuant
      to the provisions of Statement of Position (“SOP”) No. 93-7 issued by the
      American Institute of Certified Public Accountants, the Company expenses
      advertising costs as incurred. Advertising expense was $385,024 in 2006 and
      $26,306 in 2005.





Income
      taxes





The
      Company recognizes deferred income tax assets and liabilities for future tax
      consequences resulting from differences between the book and tax bases of
      existing assets and liabilities. A valuation allowance is provided for that
      portion of deferred income tax assets which may not be realized.





Stock-based
      compensation





Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
      2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires
      employee equity awards to be accounted for under the fair value method.
      Accordingly, share-based compensation is measured at the grant date, based
      on
      the fair value of the award. Prior to January 1, 2006, the Company accounted
      for
      awards granted under its equity incentive plans using the intrinsic value method
      prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for
      Stock Issued to Employees” (APB No. 25), “Accounting
      for Stock Issued to Employees,” FASB Interpretation No. 44 (“FIN 44”),
“Accounting for Certain Transactions Involving Stock Based Compensation—an
      Interpretation of APB No. 25,” and related interpretations and provided the required pro forma disclosures prescribed by SFAS No. 123,
      “Accounting for Stock-Based Compensation” (SFAS No. 123), as
      amended.





Under
      APB
      No. 25 and FIN 44, compensation expense is based on the difference, if any,
      on
      the date of the grant, between the fair value of our stock and the exercise
      price of the stock option being granted. Certain options, which have been
      re-priced, are subject to the “variable accounting” requirements of APB No. 25
      and FIN 44 that require the Company record compensation expense for changes
      in
      the fair value of the Company’s common stock when it exceeds the re-priced
      amount.





F-11


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




Had
      the
      Company accounted for stock option grants in accordance with SFAF 123(R), the
      fair value recognition method would have had the following effects on the
      consolidated financial statements for the year ended December 31,
      2005:


2005Net
                  loss - as reported
              
              $
              (8,452,787
              )Add:Add:
                  Stock-based compensation expense included in reported net
                  loss
              
              
              5,980Less:
                    Additional stock-based compensation expense determined underfair
                    value based method for all awards
              
              
              (175,595
              )Net
                  loss - pro forma
              
              $
              (8,622,402
              )Earnings
                  loss per share - basicAs
                  reported
              
              $
              (0.34
              )Pro
                  forma
              
              $
              (0.34
              )





The
      fair
      value of each option is estimated on the date of grant using the Black-Scholes
      option pricing model with the following weighted-average assumptions used for
      grants in 2005: risk-free interest rates of 3.4%; expected lives of 1.0,
      dividend yield of 0% and expected volatility of 75%. The
      expected average life represents the period of time that options granted are
      expected to be outstanding giving consideration to vesting schedules, historical
      exercise and forfeiture patterns. The expected dividend yield is based on
      historical information and management’s plan. Expected volatility is based on
      analysis of historical volatilities of companies which are considered YTB
      International, Inc.’s peer group.





Earnings
      (loss) per share




Basic
      earnings (loss) per share are based on the weighted-average number of common
      shares outstanding. Diluted earnings (loss) per share assumes that outstanding
      common shares are increased by common shares issuable upon the exercise of
      stock
      options and warrants, and by the conversion of preferred stock using the
      treasury stock method, where such exercise or conversion would be dilutive.
      For
      the years ended December 31, 2006 and 2005, the effects any assumed exercise
      of
      stock options and warrants on the 2006 and 2005 loss per share would be
      anti-dilutive and, therefore, are not included in the calculation of the
      Company’s basic loss per share for the years ended December 31, 2006 and
      2005.




F-12


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




New
      accounting pronouncements




The
      Company adopted SFAS No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* ,
      effective January 1, 2006. The amendments made by SFAS No. 151 clarify that
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      materials (spoilage) should be recognized as current-period charges and require
      the allocation of fixed production overheads to inventory based on the normal
      capacity of the production facilities. The adoption of SFAS No. 151 did not
      have
      a material impact on the consolidated financial statements of the
      Company.





The
      Company adopted SFAS No. 154, *Accounting
      Changes and Error Corrections—a replacement of APB Opinion No. 20* (Accounting
      Changes) and FASB Statement No. 3 ( *Reporting
      Accounting Changes in Interim Financial Statements* ),
      effective January 1, 2006. SFAS No. 154 provides guidance on accounting for
      and
      reporting of accounting changes and error corrections. It requires retrospective
      application to prior periods’ financial statements, unless it is impracticable
      to determine either the specific period effects or the cumulative effect of
      the
      change. The adoption of SFAS No. 154 did not have a material impact on the
      Company’s consolidated financial statements.





In
      July
      2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
      income taxes recognized in the financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosures, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. As a result of the Company’s net operating
      losses, this statement will have minimal impact on its consolidated financial
      statements. The Company will reassess the impact of this statement when the
      Company becomes profitable.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
      157 defines fair value, establishes a framework for measuring fair value and
      expands disclosures about fair value measurements. SFAS 157 applies under other
      accounting pronouncements that require or permit fair value measurement. SFAS
      157 does not require any new fair value measurement and the Company is currently
      evaluating the impact, if any, of SFAS 157 on its financial position, results
      of
      operations and cash flows. SFAS 157 requires prospective application for fiscal
      years beginning after November 15, 2007.





In
      September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R) (“SFAS 158”)." SFAS 158 requires
      employers to recognize the funded status of a defined benefit postretirement
      plan as an asset or liability in its statement of financial position and to
      recognize changes in that funded status in comprehensive income in the year
      in
      which the changes occur. Under SFAS 158, employers are required to measure
      plan
      assets and benefit obligations at the date of their fiscal year-end statement
      of
      financial position. SFAS 158 is effective for the Company at the end of the
      2006
      fiscal year. The Company does not currently have any plans under the scope
      of
      this statement.





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
      "Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was
      issued to provide interpretive guidance on how the effects of the carryover
      or
      reversal of prior year misstatements should be considered in quantifying a
      current year misstatement. The provisions of SAB 108 must be applied to annual
      financial statements no later than the first fiscal year ending after November
      15, 2006. The adoption of SAB 108 had no impact on the Company's
      consolidated financial position, results of operations and cash
      flows.





The
      Company does not believe that there are any other new accounting pronouncements
      that the Company is required to adopt that are likely to have at least some
      effect on the Company’s future financial statements.




F-13


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




NOTE
      3
      - INVENTORY




Inventory
      consists of the following materials available for sale to IMRs:


2006
              
              2005"Success
                  From Home" magazines
              
              $
              906,600
              
              $
              -Printed
                  marketing materials
              
              
              110,090
              
              
              -Inventory
              
              $
              1,016,690
              
              $
              -
 NOTE
        4
        - NOTES RECEIVABLE





As
      of
      December 31, 2006 the Company had $1,233,624 of notes receivable outstanding.
      Interest income recorded on these notes during 2006, calculated at 7.5%,
      totaled $19,995 was included as a component of Other Income (Expenses) in the
      accompanying consolidated statement of income. Notes receivable are generally
      issued to certain IMRs at interest rates that approximate the current market
      interest rates and have terms of 1 year or less. The notes receivable are
      guaranteed by sales directors with at least 2,000 people in their organization,
      against the future earnings of the sales directors, and thus no reserve has
      been
      recorded against the notes receivable in 2006. The terms call for no payments
      to
      be received on these notes in 2006. There was no allowance for doubtful accounts
      recorded at December 31, 2006 as management has a high level of assurance of
      the
      collectibility of these amounts.





NOTE
      5
      - PROPERTY AND EQUIPMENT




Property
      and equipment at December 31, 2006 and 2005 consists of the
      following:




2006
              
              2005Equipment
              
              $
              1,105,005
              
              $
              266,025Furniture
                  and fixtures
              
              
              436,369
              
              
              187,745Capitalized
                  software
              
              
              1,555,003
              
              
              1,378,711Vehicles
              
              
              168,908
              
              
              168,908Building
                  and improvements
              
              
              3,085,519
              
              
              -Land
              
              
              1,538,693
              
              
              -Leasehold
                  improvements
              
              
              116,522
              
              
              110,6298,006,019
              
              
              2,112,018Less:
                  Accumulated depreciation
              
              
              (1,814,611
              )
              
              (1,480,026
              )Property
                  and equipment, net
              
              $
              6,191,408
              
              $
              631,992
 
  Depreciation
      and amortization expense on property and equipment was $334,585 and $223,839
      for
      the years ended December 31, 2006 and 2005, respectively. Depreciation on
      leasehold improvements was accelerated during the fourth quarter of 2006 in
      anticipation of the planned move of the headquarters office to the new facility.
      As of December 31, 2006, all leasehold improvements are fully
      depreciated.





As
      of
      December 31, 2006 and 2005, capitalized software development costs, net of
      accumulated amortization, totaled $235,299 and $105,539, respectively. For
      the
      years ended December 31, 2006 and 2005, the Company recorded amortization of
      capitalized software development costs of $46,532 and $129,680,
      respectively.





F-14


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements





NOTE
      6
      - INTANGIBLE ASSETS, NET





The
      following tables present the components of the Company’s intangible assets as of
      December 31, 2006 and 2005:


At
                  December 31, 2006
              
              At
                  December 31, 2005Accumulated
              
              
              
              
              
              AccumulatedCost
              
              Amortization
              
              Net
              
              Cost
              
              Amortization
              
              NetAmortized
                  intangible assets (1)Non-compete
                  agreement
              
              $
              360,000
              
              $
              106,060
              
              $
              253,940
              
              $
              360,000
              
              $
              54,620
              
              $
              305,380RTA
                  agreements
              
              
              690,000
              
              
              690,000
              
              
              -
              
              
              690,000
              
              
              690,000
              
              
              -Vendor
                  agreements
              
              
              220,000
              
              
              45,360
              
              
              174,640
              
              
              220,000
              
              
              23,360
              
              
              196,640Total
                  amortized intangible assets
              
              
              1,270,000
              
              
              841,420
              
              
              428,580
              
              
              1,270,000
              
              
              767,980
              
              
              502,020Unamortized
                  intangible assetsDomain
                  names
              
              
              2,040,000
              
              
              -
              
              
              2,040,000
              
              
              2,040,000
              
              
              -
              
              
              2,040,000Total
                  unamortized intangible assets
              
              
              2,040,000
              
              
              -
              
              
              2,040,000
              
              
              2,040,000
              
              
              -
              
              
              2,040,000Total
              
              $
              3,310,000
              
              $
              841,420
              
              $
              2,468,580
              
              $
              3,310,000
              
              $
              767,980
              
              $
              2,542,020
  (1)
                  The estimated useful lives of non-compete agreements, RTA agreements
                  and
                  vendor agreements are seven years, one year and 10 years,respectively.Amortization
                  expense was $73,440 and $720,780 for the years ended December 31,
                  2006 and
                  2005, respectively. The estimated amortizationexpense
                  related to intangible assets as of December 31, 2005 over the next
                  five
                  years follows, assuming no subsequent impairment of theunderlying
                  assets, is as follows:
 
 2007
              
              $
              73,4292008
              
              
              73,4292009
              
              
              73,4292010
              
              
              73,4292011
              
              
              70,249


NOTE
      7 - GOODWILL





The
      Company has elected to perform the annual impairment test on goodwill during
      the
      fourth quarter of each year, unless circumstances arise that require more
      frequent testing. During the fourth quarter of 2006, the Company completed
      the
      annual impairment test of goodwill and concluded goodwill was not
      impaired.





NOTE
      8
      - BONUS ACCRUAL




During
      the 4th quarter of 2005, the Company began a program to award bonuses to its
      IMRs to recognize certain IMRs for outstanding contributions made to the growth
      and success of the Company and to encourage all IMRs to fulfill specific goals
      or targets for sales levels, recruiting of new referring travel agents or other
      business-critical functions. The awards offered are in the form of Company
      stock, based upon a predetermined calculation. The bonuses that are to be
      awarded in Company stock are recorded at their fair value at each balance sheet
      date. Total bonus expense included in marketing commissions expense for the year
      ended December 31, 2006 and 2005 was $4,083,306 and $3,751,826, respectively.
      Accrued bonuses as of December 31, 2006 and 2005 totaled $7,435,132 and
      $3,451,826, respectively.


F-15


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements







NOTE
      9
      - FINANCING ARRANGEMENTS




Notes
      Payable





The
      Company financed one vehicle in 2006 and four in 2005, payable in monthly
      installments ranging from approximately $1,000 to $1,477, at the rate of
      approximately 6.25%. The loans were payable through March 2008; however, the
      Company paid the final loan remaining balance of $22,225 on December 13, 2006.
      The balance due on these vehicle loans as of December 31, 2006 and 2005 totaled
      $0 and $122,055, respectively.




Short-Term
        Debt
 
 On
        July
        26, 2006, the Company purchased 12 acres of land which included a 100,000
        square
        foot building (the “Property”) for $2.5 million to house their new corporate
        headquarters in Wood River, Illinois. The Company financed the purchase of
        the
        Property with a note in the amount of $2.5 million with an interest rate
        of
        Prime, less 0.50% floating daily from Meridian Bank, a local bank. Interest
        only
        is payable monthly for the first two years of the note after which the entire
        principal will be paid or the note will be refinanced. Although the scheduled
        balloon principal payment is due July 26, 2008, the Note is payable upon
        demand
        per the terms thereof, however, no demand has been made to date. The Note
        is
        collateralized by the first mortgage on the Property and a $500,000 Certificate
        of Deposit. The Certificate of Deposit will be released after the Company
        makes
        $625,000 of improvements to the Property. There are no other restrictive
        covenants included in the Note. Through the use of working capital funds,
        we
        have completed a $2.5 million renovation of 20,000 square feet of the building
        for our current operations. As a result of those renovations, as of December
        31,
        2006, we believe that we had met the requirements for the release of the
        certificate of deposit, although due to procedural requirements imposed by
        Meridian Bank, it has not actually been released yet. The Company is planning
        an
        $8.0 million renovation project to the Property. The outstanding loan balance
        at
        December 31, 2006 is $2,500,000.


Long-Term
      Debt





On
      January 11, 2002, as a result of a decrease in demand for travel related
      services due to the events of September 11, 2001, the Company borrowed $324,000
      from the United States Small Business Administration (“SBA”) under its disaster
      relief program. Payments were to have initially commenced in January 2003.
      However, the SBA extended the commencement date into November 2003. The loan
      is
      repayable via a monthly installment of $2,607, including interest at 4% per
      annum, through October 2017. The loan was guaranteed by the President of the
      REZconnect subsidiary. On December
      27, 2006, the board of directors guaranteed the debt releasing the President
      of
      the REZconnect subsidiary. The outstanding loan balance as of December 31,
      2006
      and 2005 was $262,815 and $283,611, respectively.




Minimum
      principal payments of long-term debt as of December 31, 2006 are as
      follows:




Year
                  endingDecember
                  31,2007
              
              $
              21,1562008
              
              
              22,0182009
              
              
              22,9152010
              
              
              23,8492011
              
              
              24,821Thereafter
              
              
              148,056Total
              
              $
              262,815


F-16


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements





During
      January 2005, the Company entered into an agreement with an investor to raise
      an
      additional $2,000,000 of capital via a convertible term note (“the Note”). The
      Note had a principal balance of $2,000,000, and interest was payable monthly
      at
      prime plus 3%, subject to an 8% floor. The Note was superior to the SBA loan
      of
      approximately $300,000. The terms of the Note provided for interest payments
      only during the first six months, with payments of $66,667 of principal plus
      interest monthly beginning in August 2005. The note was required to be paid
      in
      full by January 2008, unless it was converted by the investor into shares of
      common stock. The Note agreement contained several features, which are discussed
      below:





·
            Interest
                Rate Adjustment Feature - The interest rate stated in the Note could
                subsequently be adjusted downward if the Company maintained an effective
                registration statement and the market price of the Company’s common stock
                exceeded certain targets.





·
            Initial
                Conversion Ratio - The Note was convertible into shares of the Company’s
                common stock at a rate of $0.80 per share for the first $1 million
                of Note
                principal, and $1.25 per share for any amounts in excess of the first
                $1
                million.





·
            Contingent
                Conversion Ratio Adjustment Feature - If the Company were to obtain
                subsequent equity financing at per share prices less than those obtained
                by the investor, the conversion rate would be lowered to that
                amount.





·
            Prepayment
                penalty - The Note could be prepaid at the Company’s option, with a 30%
                prepayment penalty.





·
            Warrant
                Coverage - The Note contained 800,000 detachable stock warrants,
                which
                have a 7 year term, and are exercisable for the first 400,000 warrants
                at
                $1.58 per share, and the second 400,000 warrants at $1.72 per
                share.





·
            Additional
                Loan Option - The investor, at its sole option, had the ability to
                loan an
                additional $1,000,000 to the Company on the same terms as the original
                Note, including proportional warrant
                coverage.





·
            Registration
                Rights - As part of the Note agreement, the Company agreed to file
                a
                registration statement covering the warrants and potential shares
                to be
                issued upon conversion of the Note. The registration statement was
                to be
                filed within 30 days of the agreement, and declared effective within
                120
                days. The registration statement was to be continuously effective
                until
                the investor had sold all of the underlying shares. The registration
                rights agreement provides for a penalty of 2% per month. The Company
                treated this item as an additional derivative and in failing to satisfy
                the registration rights requirement and accrued $860,820 as of November
                30, 2006 and $280,000 as of December 31, 2005, in penalties under
                the
                terms of the agreement. Such amounts were reflected as a current
                liability
                in the Company’s balance sheet. On November 30, 2006, this obligation was
                settled by the issuance of 200,000 shares of common stock and a settlement
                gain of $460,820 was recognized in the fourth quarter
                2006.








Because
      the Note was potentially convertible into an unlimited number of shares of
      common stock, the Company accounted for the Note under the provisions of SFAS
      No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and
      Emerging Issues Task Force (“EITF”) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock.* Accordingly, the interest rate adjustment feature, conversion feature, and
      additional loan option were, collectively, considered an embedded derivative,
      which was bifurcated from the host debt instrument. The initial allocation
      of
      the gross proceeds of $2,000,000 is as follows:





Embedded
                  Derivative
              
              $
              1,923,201Stock
                  Warrants
              
              
              16,192Term
                  Note
              
              
              60,607$
              2,000,000





The
      embedded derivative was initially recorded at fair value, and adjusted to fair
      value at each subsequent balance sheet date. The net decrease in the embedded
      derivative liability recognized at the conversion of the Note to equity during
      the year ended December 31, 2005 was $312,143 and is recorded as Other Income
      in
      the Consolidated Statement of Operations.


F-17








YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements





The
      difference between the stated principal of the Note of $2,000,000 and its
      allocated carrying value was amortized as debt discount using the effective
      interest rate method over the term of the Note.





In
      addition to the items noted above, the Company incurred debt issuance costs
      related to the Note of $174,020, of which $148,020 was paid in cash, and $26,000
      was settled by issuing stock warrants. These costs were amortized over the
      term
      of the Note.





On
      October 12, 2005, the investor converted the remaining principal balance at
      that
      time of $1,866,666 into 1,800,000 shares of common stock. On October 31, 2005,
      the investor exercised its option for the additional loan, at which time the
      Company received cash proceeds of $1,000,000. As provided in the agreement,
      the
      investor also received 400,000 additional stock warrants, exercisable at $1.25
      per share, the fair value of which was recorded at $215,812. The investor
      immediately converted the additional loan into common stock, receiving 800,000
      shares.




Total
        interest incurred during the years ended December 31, 2006 and 2005 was $174,843
        and $2,986,052, respectively, of which $81,226 was capitalized in 2006 and
        $0 in
        2005.




NOTE
      10 - COMMITMENTS AND CONTINGENCIES





Leases





The
      Company leases office space (which housed its previous headquarters offices)
      in
      two buildings in Edwardsville, Illinois under separate commercial lease
      agreements with Meridian Land Company, Inc. (“ Meridian
      Land ”),
      the
      owner of such buildings (see Note 12, “Related Party Transactions”). The
      combined rental cost of both spaces is $15,000 per month. In addition, each
      lease contains an addendum which includes a two-year warrant to purchase shares
      of our common stock in exchange for the deed to the related property,
      unencumbered. The first lease, which covers approximately 13,000 square feet,
      expires on June 30, 2010 and includes an addendum with a two-year warrant that
      is exercisable for 500,000 shares of our common stock at a price equal to (i)
      $1.00 (in the aggregate), plus (ii) unencumbered title to the property.
      Separately, we have the option to purchase the property for a cash price of
      $1,850,000. Correspondingly, the second lease, which covers approximately 5,000
      square feet and expires on October 31, 2010, includes an addendum with a
      two-year warrant that is exercisable for 625,000 shares of our common stock
      at a
      price equal to (i) $1.00 (in the aggregate), plus (ii) unencumbered title to
      the
      property. Separately, we have the option to purchase the second property for
      a
      cash price of $2,350,000. The Company plans on re-locating a portion of its
      travel staff to the leased space in Illinois during the second quarter of
      2007.





The
      Company is also obligated under an operating office lease for the offices in
      New
      Jersey which expires on April 30, 2008, to pay minimum annual rentals, currently
      at $49,916 per year plus real estate taxes and operating cost charges. In
      addition, the Company has entered into various operating lease agreements with
      Wal-Mart Stores, Inc. (Wal-Mart) for eight locations pursuant to a master lease
      agreement. The term of the individual location leases is two years with two
      options to extend the lease for one consecutive term of three years followed
      by
      one consecutive term of five years. The Company has also entered into
      sub-lease agreements with franchisees at these Wal-Mart locations. The subleases
      with the franchises also have a two year term with options that mirror the
      master lease renewal options.





The
      Company also leases certain office equipment and one vehicle under
      noncancellable operating lease agreements with initial terms in excess of one
      year and expiring at various dates through fiscal year 2011.




Following
        is a summary of net rental expense for the years ended December 31, 2006
        and
        2005:
  2006
                
                2005Rental
                    expense
                
                $
                377,662
                
                $
                278,481Less
                    sublease rental income
                
                
                110,434
                
                
                135,384Net
                    rental expense
                
                $
                267,228
                
                $
                143,097


F-18


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements







Minimum
      future rental payments under non-cancelable operating leases (including the
      Wal-Mart location leases), having remaining terms in excess of one year as
      of
      December 31, 2006 are as follows:




Office
              
              SubleaseYear
                  ending
              
              
              
              Wal-Mart
              
              
              
              Equipment
                  /
              
              Rental
              
              Net
                  RentalDecember
                  31,
              
              NJ
                  Office
              
              Locations
              
              IL
                  Offices
              
              Vehicle
              
              Income
              
              Expense2007
              
              $
              50,470
              
              $
              31,252
              
              $
              209,800
              
              $
              45,923
              
              $
              31,922
              
              $
              305,5232008
              
              
              17,068
              
              
              23,789
              
              
              269,300
              
              
              34,048
              
              
              25,230
              
              
              318,9752009
              
              
              -
              
              
              5,947
              
              
              274,300
              
              
              32,048
              
              
              6,496
              
              
              305,7992010
              
              
              -
              
              
              -
              
              
              172,000
              
              
              24,142
              
              
              -
              
              
              196,142Total
              
              $
              67,538
              
              $
              60,988
              
              $
              925,400
              
              $
              136,161
              
              $
              63,648
              
              $
              1,126,439




Employment
      agreements




The
      Company has entered into a long-term employment agreement with each of Mr.
      J.
      Scott Tomer, (Chief Executive Officer), Mr. J. Kim Sorensen, (President and
      former Treasurer), Mr. Michael Y. Brent, (former President), Mr. Derek J. Brent,
      (former Secretary), and Mr. John D. Clagg, (Chief Financial Officer and
      Treasurer). All employment agreements expire December 31, 2009 and subject
      each
      officer to confidentiality provisions, as well as non-raid and non-compete
      provisions for an additional 2 years following termination of
      employment.





Each
      of
      Messrs. J. Kim Sorensen, J. Scott Tomer and Michael Y. Brent receives a base
      annual salary of $134,832 (effective January 1, 2007), increasing annually
      at a
      rate of 6%. They each receive an override on RTA sales and monthly fees
      generated by a certain override representative position within the YTB
      compensation program of the YourTravelBiz.com sales organization equal to 33
      1/3% of the monthly commissions and overrides earned by such representative
      position, paid monthly. Additionally, each of Messrs. J. Kim Sorensen, J. Scott
      Tomer and Michael Y. Brent receives a cash bonus based on the net pre-tax income
      of the Company equal to 2% if net pre-tax income is between $500,000 and
      $1,500,000, 2.25% if net pre-tax income is between $1,500,000 and $3,000,000
      and
      2.5% if net pre-tax income is at least $3,000,000. They each receive a car
      allowance and health and medical insurance provided by the Company. The Company
      has also taken out a term life insurance policy on the lives of Messrs. J Kim
      Sorensen, J. Scott Tomer and Michael Y. Brent in an amount equal to three times
      their respective annual base salary, payable to beneficiaries designated by
      each.





Mr.
      John
      D. Clagg, whose contract became effective December 1, 2005, receives a base
      salary of $180,000 increasing annually in $30,000 increments. Mr. Clagg also
      receives health, life, and medical insurance provided by the
      Company.




Mr.
      Derek
      J. Brent receives a base annual salary of $210,000, increasing annually in
      $30,000 increments. Additionally, Mr. Derek J. Brent receives a cash bonus
      based
      on the net pre-tax income of the Company equal to 2% if net pre-tax income
      is
      between $500,000 and $1,500,000, 2.25% if net pre-tax income is between
      $1,500,000 and $3,000,000 and 2.5% if net pre-tax income is at least $3,000,000.
      In addition, Mr. Derek J. Brent receives a car allowance and health and medical
      insurance provided by the Company.


F-19


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




NOTE
      11 - STOCK OPTIONS




In
      December 2004, stockholders approved the YTB International, Inc. 2004 Stock
      Option and Restricted Stock Plan (the “ 2004
      Plan ”).
      The
      2004 plan is administered by the compensation committee of the board of
      directors which determines the employees, officers, directors and consultants
      subject to receive awards and the terms and conditions of these awards. The
      purpose of the plan is to make available to our key employees and directors
      certain compensatory arrangements related to the growth in the value of our
      stock so as to generate an increased incentive to contribute to the Company’s
      financial success and prosperity; to attract and retain exceptionally qualified
      individuals whose efforts can affect the Company’s financial growth and
      prosperity; and align in general the interests of our employees and directors
      with the interest of our stockholders. The 2004 Plan includes 5,000,000 common
      shares authorized for issuance under the plan. As of December 31, 2006,
      4,350,000 shares remain available for future grants under the 2004
      Plan.





Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), as
      discussed in Note 2, “Summary of Significant Accounting Policies” (“Note 2”).
      Pro forma information required under SFAS No. 123(R), for periods prior to
      fiscal year 2006, as if the Company had applied the fair value recognition
      provisions of SFAS No. 123 to options granted under the Company’s stock option
      plan is included in Note 2.




On
      April
      24, 2006, the Company’s Board of Directors granted 250,000 options to certain
      employees and directors and two outside consultants. These stock options vest
      in
      equal increments on the anniversary date over the next five years and expire
      six
      years from the date of the grant. Of the 250,000 options granted, 25,000 options
      were forfeited on September 30, 2006. The fair value of each option is estimated
      on the date of grant using the Black-Scholes option pricing model with the
      following weighted-average assumptions used for grants in 2006: risk-free
      interest rate of 4.90%; expected life of 6.0 years; dividend yield of 0% and
      expected volatility of 75%. The expected average life represents the period
      of
      time that options granted are expected to be outstanding giving consideration
      to
      vesting schedules, historical exercise and forfeiture patterns. The expected
      dividend yield is based on historical information and management’s plan.
      Expected volatility is based on analysis of historical volatilities of companies
      which are considered YTB International, Inc.’s peer group. The
      Company adjusts share-based compensation on a quarterly basis for changes to
      the
      estimate of expected equity awarded for forfeitures based on a review of recent
      forfeiture activity and expected future employee turnover. The effect of
      forfeiture adjustments in 2006 was insignificant.Accordingly, the
      Company recognized $198,027, or ($0.01) per share, for the year ended
      December 31, 2006 in compensation expense for stock options. Unrecognized
      expense related to unvested options as of December 31, 2006 is
      $98,882.





The
      following table provides additional information with respect to stock option
      plan activity:




Shares
              
              Weighted-Average
                  Exercise Price
              
              Weighted-Average
                  Fair ValueOptions
                  outstanding, beginning of period
              
              
              940,000
              
              $
              1.15
              
              $
              0.290For
                  the period from January 1 to December 31, 2006:Granted
              
              
              250,000
              
              
              1.20
              
              
              0.600Forfeited
              
              
              (25,000
              )
              
              1.20
              
              
              0.600Expired
              
              
              (240,000
              )
              
              1.58
              
              
              0.120Exercised
              
              
              (300,000
              )
              
              1.00
              
              
              0.005Options
                  outstanding, end of period
              
              
              625,000
              
              $
              1.07
              
              $
              0.630Options
                  exercisable, end of period
              
              
              400,000
              
              $
              1.00
              
              $
              0.650


F-20


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements







The
      following table summarizes information about options outstanding at December
      31,
      2006:




Options
                  Outstanding
              
              Options
                  ExercisableWeighted-Average
              
              Weighted-
              
              
              
              Weighted-Number
              
              Remaining
              
              Average
              
              Number
              
              AverageRange
                  of Exercise Prices
              
              Outstanding
              
              Life
                  (years)
              
              Exercise
                  Price
              
              Outstanding
              
              Exercise
                  Price$0.00
                  - $1.00
              
              
              400,000
              
              
              0.15
              
              
              1.00
              
              
              400,000
              
              
              1.00$1.01
                  - $1.20
              
              
              225,000
              
              
              5.32
              
              
              1.20
              
              
              -
              
              
              -Total
              
              
              625,000
              
              
              2.01
              
              $
              1.07
              
              
              400,000
              
              
              1.00


Prior
      to
      January 1, 2006, compensation expense for stock options was recognized over
      the
      vesting period only to the extent that the grant date market price of the stock
      exceeded the exercise price of the options. For the years ended December 31,
      2006 and 2005, the Company recognized $0 and $89,980 in compensation expense
      related to options granted with an exercise price less than the fair value
      of
      the underlying stock at the date of the grant. In addition, FASB Interpretation
      No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Based
      Compensation - an Interpretation of APB No. 25,” requires variable accounting
      for compensation expense when stock options have been cancelled and re-issued
      with a change in strike price. The variable compensation associated with these
      types of stock options for the years ended December 31, 2006 and 2005 was
      $0 in 2006 and a reduction in compensation expense in 2005 of
      $84,000.





NOTE
      12 - INCOME TAXES




The
      Company accounts for income taxes under SFAS No. 109, “Accounting for Income
      Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
      liabilities for both the expected impact of differences between the financial
      statements and tax basis of assets and liabilities and for the expected future
      tax benefit to be derived from tax loss and tax credit carry forwards. SFAS
      No.
      109 additionally requires the establishment of a valuation allowance to reflect
      the likelihood of realization of deferred tax assets.




As
      a
      result of the Company’s operating losses in 2006 and 2005, and loss carry
      forwards available in 2006, there is no provision for current income
      taxes.




SFAS
      No.
      109, Accounting for Income Taxes, requires a valuation allowance to reduce
      any
      deferred tax assets to their net realizable amounts if, based on the weight
      of
      evidence, it is more likely than not that all or some portion of such deferred
      tax assets will not be realized. As of December 31, 2006 and 2005, the Company
      is uncertain if it will realize any future tax benefit of its deferred tax
      assets. Accordingly, a full valuation allowance has been established as a
      reserve against the Company’s deferred tax assets and, therefore, no deferred
      income tax credits have been recognized in the statements of operations for
      the
      years ended December 31, 2006 and 2005.




At
      December 31, 2006 the Company had approximately $13,285,000 of federal and
      state
      net operating losses that may be available to offset future taxable income.
      The
      net operating loss carry forwards, if not utilized, will expire from 2019 to
      2021 for federal and state purposes. The net operating losses may be subject
      to
      a substantial limitation under the “Change of Ownership” section 382 of the
      Internal Revenue Code.







F-21


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements


A
      reconciliation of income taxes, with the amounts computed at the statutory
      federal rate, is as follows:


As
                    of December 31,2006
                
                2005Computed
                    tax at federal statutory rate
                
                $
                (2,031,968
                )
                $
                (2,873,948
                )Other,
                    net
                
                
                (446,032
                )
                
                61,948Change
                    in valuation allowance
                
                
                2,478,000
                
                
                2,812,000Total
                
                $
                -
                
                $
                -


Deferred
      tax assets and liabilities consist of the following:




As
                    of December 312006
                
                2005Deferred
                    tax assetsAllowance
                    for doubtful accounts
                
                $
                3,000
                
                $
                9,000Depreciation
                
                
                4,000
                
                
                -Capitalized
                    consulting
                
                
                -
                
                
                23,000Accrued
                    vacation
                
                
                28,000
                
                
                8,000Capital
                    losses
                
                
                9,000
                
                
                9,000Accrued
                    compensation
                
                
                3,081,000
                
                
                1,281,000Net
                    operation loss carry-forward
                
                
                4,916,000
                
                
                4,233,0008,041,000
                
                
                5,563,000Deferred
                    tax liabilities
                
                
                -
                
                
                -Net
                    deferred tax assetBefore
                    valuation allowance
                
                
                8,041,000
                
                
                5,563,000Less
                    valuation allowance
                
                
                (8,041,000
                )
                
                (5,563,000
                )Net
                    Deferred Tax Asset
                
                $
                -
                
                $
                -





F-22


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




NOTE
      13 - RELATED PARTY TRANSACTIONS




Certain
      members of management of the Company also own a company that YTB Marketing
      utilizes for printing much of its sales materials. During 2006 and 2005, the
      Company expended $1,467,402 and $512,392, respectively for printing sales
      materials. In addition, at December 31, 2006 and 2005, the Company has a
      pre-paid asset of $136,553 and $212,027, respectively, reflected on the balance
      sheet for payments related to work not yet completed.




The
      Company leases office space (which housed our previous headquarters office)
      in
      two buildings under separate commercial lease agreements. The buildings are
      owned and controlled by company of which a certain members of the Company’s
      Board of Directors are principals. In addition, each lease contains an addendum
      which grants to the landlord a two-year common stock purchase warrant to
      purchase Company stock in exchange for the deed to the property, unencumbered.
      The first lease, which covers approximately 13,000 square feet, commenced July
      1, 2005 and expires June 30, 2010. This lease includes an addendum with a
      two-year common stock purchase warrant, which expires June 30, 2007, to purchase
      500,000 shares of Company stock for a total exercise price of $1.00 and the
      deed
      to the property, unencumbered, in which the space is leased. Separately, the
      Company has the option to purchase the property for a cash price of
      $1,850,000.





Correspondingly,
      the second lease, which covers approximately 5,000 square feet, commenced
      November 1, 2005 and expires on October 31, 2010. This lease includes an
      addendum with a two-year common stock purchase warrant, which expires October
      31, 2007, to purchase 625,000 shares of Company stock for the total price of
      $1.00 and the deed to the property, unencumbered, in which the space is leased.
      Separately, the Company has the option to purchase the property for a cash
      price
      of $2,350,000.





The
      combined rental cost of both spaces is $15,000 per month. Combined rent expense
      for these two leases was $180,000 and $65,000 for December 31, 2006 and 2005,
      respectively. As
      of
      December 31, 2006, neither of the common stock warrants has been
      exercised.




In
      July
      2006, the Company borrowed $2.5 million in connection with the land and building
      which will house their new corporate headquarters in Wood River, Illinois.
      The
      chairman of the bank is also a director of the Company. This transaction was
      approved by the independent members of the Company’s board of
      directors.




NOTE
      14 - STOCKHOLDERS’ EQUITY




On
      February 8, 2005, the Company commenced a Private Placement Offering for the
      issuance of up to 1,000,000 shares at a price of $0.80 per share. Pursuant
      to
      the terms of the offering, the minimum investment was $15,000 to purchase an
      investment unit consisting of (a) 18,750 shares of common stock and (b) 18,750
      common stock purchase warrants. Each warrant is exercisable to purchase one
      share of common stock at an exercise price of $1.75, exercisable for three
      years
      from date of issuance.




On
      April 5, 2005, the Company executed a warrant agreement with a consultant.
      The
      warrant agreement provided for the issuance of warrants to purchase up to
      200,000 shares of the Company’s common stock at a price of $1.73 per share. The
      warrant was exercisable as to 66,666 shares upon execution of the agreement
      and
      the warrants to purchase the remaining 133,334 shares were to be exercisable
      upon the following vesting schedule; an additional 66,666 shares vest on August
      5, 2005 and the final 66,668 shares vest on December 5, 2005. Shares issuable
      upon exercise of the warrant will be subject to customary demand and piggyback
      registration rights. Expense is recognized over the vesting period. For the
      year
      ended December 31, 2005, the Company recorded consulting expense of $311,028
      based on the estimated fair value of the vested warrants using the Black-Scholes
      pricing model, with an offsetting adjustment to additional paid in capital.
      As
      of December 31, 2006, none of the warrants have been exercised.





During
      the fourth quarter of 2006, equity compensation in the amount of $294,460 was
      recorded as a result of 184,194 shares issued as compensation for services
      to
      non-employees with an offsetting adjustment to common stock in the amount of
      $184 and additional paid in capital in the amount of $294,276.


F-23


YTB
      INTERNATIONAL, INC.


Notes
      to
      Consolidated Financial Statements




NOTE
      15 - SEGMENT INFORMATION




The
      Company operates in the following three business segments: marketing of online
      travel stores including the development of a sales network (“Marketing”); sales
      of travel through online travel stores (“Travel”); developing and
      commercializing Internet-based technology programs used in supporting online
      travel stores (“Technology”). The Company’s business segments operate primarily
      in the United States, but are structured for potential international growth.




Summarized
      financial information concerning the Company’s reportable segments is shown in
      the following tables. The “parent” column includes corporate items not
      specifically allocated to the segments.




Year
                  EndedDecember
                  31, 2006
              
              Marketing
              
              Travel
              
              Technology
              
              Parent
              
              Elimination
              
              TotalExternal
                  and inter-segment revenue
              
              $
              43,079,472
              
              $
              7,971,942
              
              $
              127,073
              
              $
              -
              
              $
              (281,757
              )
              $
              50,896,730Segment
                  profit (loss)
              
              
              (3,276,925
              )
              
              1,681,687
              
              
              85,849
              
              
              (4,466,988
              )
              
              -
              
              
              (5,976,377
              )Assets
              
              
              20,750,647
              
              
              4,381,686
              
              
              -
              
              
              10,531,821
              
              
              (6,773,765
              )
              
              28,890,389Depreciation
                  and amortization
              
              
              314,585
              
              
              -
              
              
              -
              
              
              93,440
              
              
              -
              
              
              408,025Capital
                  expenditures
              
              
              1,269,787
              
              
              -
              
              
              -
              
              
              4,624,214
              
              
              -
              
              
              5,894,001
  Year
                  EndedDecember
                  31, 2005
              
              
              Marketing
              
              
              Travel
              
              
              Technology
              
              
              Parent
              
              
              Elimination
              
              
              TotalExternal
                  and inter-segment revenue
              
              $
              16,244,918
              
              $
              5,157,763
              
              $
              237,741
              
              $
              -
              
              $
              (47,105
              )
              $
              21,593,317Segment
                  profit (loss)
              
              
              (3,676,254
              )
              
              800,964
              
              
              73,139
              
              
              (5,650,636
              )
              
              -
              
              
              (8,452,787
              )Assets
              
              
              5,992,397
              
              
              1,703,476
              
              
              165,413
              
              
              4,845,102
              
              
              1,131,479
              
              
              13,837,867Depreciation
                  and amortization
              
              
              100,024
              
              
              -
              
              
              103,815
              
              
              740,780
              
              
              -
              
              
              944,619Capital
                  expenditures
              
              
              502,784
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              502,784
  NOTE
        16 - BENEFIT PLANS




The
      Company maintains a 401(k) benefit plan for its employees, which generally
      allows participants to make contributions via salary deductions up to allowable
      Internal Revenue Service limits on a tax-deferred basis. Discretionary
      contributions made by the Company are dependent upon the length of service
      of
      each employee. Such contributions by the Company were $159,650 in 2006 and
      $101,861 in 2005.




NOTE
      17 - SUBSEQUENT EVENTS




On
      February 19, 2007, the Board of Directors of the Company granted shares of
      restricted stock, effective January 2, 2007, to certain Sales Directors
      under a Restricted Stock Award agreement in satisfaction of bonuses previously
      earned but not paid during the year ended December 31, 2006 and the fourth
      quarter of 2005.





In
      January 2007, the Company moved its headquarters offices to a new location
      in
      Wood River, Illinois. The Company is planning to relocate some departments
      to
      the Edwardsville, Illinois location.




On
      February 18, 2007, the board of YTB authorized the payment of $1 per
      monthly license renewal to be paid to J. Lloyd Tomer, Chairman of the Board
      of
      the Company, once the Company reaches 75,000 RTAs, continuing
      indefinitely.




On
      March
      28, 2007, the Board of Directors authorized the Company to issue up to 500,000
      five-year warrants to purchase shares of common stock to a certain vendor at
      an
      exercise price of $3.59 (market price less $1.50 per share), contingent upon
      certain conditions being met.


F-24